Econ Midterm 1: Chapter 3

Prices of related goods produced

- A substitute in production for a good is another good that can be produced using the same resources. - The supply of a good increases if the price of a substitute in production falls because the supplier of the substitute good is unable to supply at the lowered price of the substitute good. If price of coffee decreases, cafes would like to sell tea. - Goods are complements in production if they must be produced together. - The supply of a good increases if the price of a complement in production rises.

Technology

- Advances in technology create new products and lower the cost of producing existing products. - So advances in technology increase supply and shift the supply curve rightward.

Prices of Factors of Production

- If the price of a factor of production used to produce a good rises, the minimum price that a supplier is willing to accept for producing each quantity of that good rises. - So a rise in the price of a factor of production decreases supply and shifts the supply curve leftward.

Law of Supply

- Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied. - The law of supply results from the general tendency for the marginal cost of producing a good or service to increase as the quantity produced increases (Chapter 2, page 35). - Producers are willing to supply a good only if they can at least cover their marginal cost of production.

The Law of Demand

- Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and ... - the lower the price of a good, the larger is the quantity demanded.

Why does a change in the price change the quantity demanded?

- Substitution effect - Income effect

The State of Nature

- The state of nature includes all the natural forces that influence production—for example, the weather. - A natural disaster decreases supply and shifts the supply curve leftward.

Change in Supply

- When some influence on selling plans other than the price of the good changes, there is a change in supply of that good. - The quantity of the good that producers plan to sell changes at each and every price, so there is a new supply curve.

If a firm supplies a good or service, then the firm

1. Has the resources and the technology to produce it, 2. Can profit from producing it, and 3. Has made a definite plan to produce and sell it.

Six main factors that change supply of a good are:

1. The prices of factors of production (labor, Capital, and other inputs ) 2. The prices of related goods produced 3. Expected future prices 4. The number of suppliers 5. Technology 6. State of nature

Six main factors that change demand

1. The prices of related goods 2. Expected future prices 3. Income 4. Expected future income and credit 5. Population 6. Preferences

Steps of Demand

1. Want it, 2. Can afford it, and 3. Have made a definite plan to buy it.

The table above indicates the demand schedules for four types of consumers: A, B, C, and D and the number of consumers in each group (top row). The quantity demanded by each type of consumer (QA, QB, QC, and QD) is shown for market prices ranging from $10 down to $4. What is the combined quantity demanded at a market price of $4?

10,400

When you think of an arrangement or institution that brings buyers and sellers of a good or service together, what are you thinking of?

A market

Which of the following will cause an outward (rightward) shift in supply?

A technological improvement.

Which of the following is consistent with the law of supply?

An increase in the market price of MP3 players causes an increase in the production of MP3 players.

Assume the cost of aluminum used by soft-drink companies increases. Which of the following correctly describes the resulting effects in the market for canned soft drinks? I. The demand for soft drinks decreases. II. The quantity of soft drinks demanded decreases. III. The supply of soft drinks decreases. IV. The quantity of soft drinks supplied decreases.

II and III

Expected Future Prices

If the price of a good is expected to rise in the future, current demand for the good increases and the demand curve shifts rightward.

Expected Future Prices

If the price of a good is expected to rise in the future, supply of the good today decreases and the supply curve shifts leftward.

Preferences

People with the same income have different demands if they have different preferences.

*KEY* When the price of a substitute for an energy bar rises or when the price of a complement of an energy bar falls, the demand for energy bars increases.

Prices of related goods

The Number of Suppliers: Supply

The larger the number of suppliers of a good, the greater is the supply of the good. An increase in the number of suppliers shifts the supply curve rightward.

Population

The larger the population, the greater is the demand for all goods.

Washington state had a bumper apple crop this year, significantly increasing the supply of apples in the U.S. Given this information, choose the statement that correctly describes the effect on the U.S. apple market.

The quantity of apples demanded will increase as the price of apples falls.

Which of the following represents an inferior good?

When consumer income increases, the demand for bologna decreases.

Income

When income increases, consumers buy more of most goods and the demand curve shifts rightward.

Expected Future Income and Credit

When income is expected to increase in the future or when credit is easy to obtain, the demand might increase now.

Change in Demand

When some influence on buying plans other than the price of the good changes, there is a change in demand for that good.

Income Effect

When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded of the good or service decreases.

Substitution Effect

When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded of the good or service decreases.

Money Price

a good is the amount of money needed to buy it.

Quantity Demanded

a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price

*Quantity Supplied*

a good or service is the amount that producers plan to sell during a given time period at a particular price.

Competitive market

a market that has many buyers and many sellers so no single buyer or seller can influence the price

Equilibrium

a situation in which opposing forces balance each other. Equilibrium in a market occurs when the price balances the plans of buyers and sellers.

Other things remaining equal, the law of demand says that higher prices will lead to:

a smaller quantity demanded and lower prices to a larger quantity demanded.

The condition that exists when quantity supplied exceeds quantity demanded at the current price is known as

a surplus or excess supply

All of the following will decrease the supply of airline flights except:

a technological change that makes airplanes safer and more fuel-efficient.

Economists assume that when there is a change in demand and/or supply, that prices reach a new equilibrium:

after an adjustment period that varies

What is a Market?

any arrangement that enables buyers and sellers to get information and do business with each other.

"wants"

are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy.

Market price is determined by _________.

both supply and demand

*Resources* and *Technology*

determine what it is possible to produce. Supply reflects a decision about which technologically feasible items to produce.

Given linear demand curves, if demand increases and supply decreases, then __________.

he equilibrium price will increase but the effect on the equilibrium quantity will be ambiguous

Inferior Good

is a good for which demand decreases as income increases.

Substitute

is a good that can be used in place of another good.

Complement

is a good that is used in conjunction with another good

Substitute Example:

margarine and butter, tea and coffee, beer and wine.

Relative Price

of a good—the ratio of its money price to the money price of the next best alternative good—is its opportunity cost.

Normal Good

one for which demand increases as income increases.

Complement Example:

printers and ink cartridge

At the market equilibrium price:

quantity demanded equals quantity supplied

Demand

refers to the entire relationship between the price of the good and quantity demanded of the good

Supply

refers to the entire relationship between the quantity supplied and the price of a good.

In a price system:

relative prices change constantly to reflect changes in supply and demand.

Demand Curve

shows the relationship between the quantity demanded of a good and its price when all other influences on consumers' planned purchases remain the same.

Supply Curve

shows the relationship between the quantity supplied of a good and its price when all other influences on producers' planned sales remain the same.

When Demand decreases

the demand curve shifts leftward.

When Demand increases

the demand curve shifts rightward.

Given linear demand curves, if demand and supply both increase but demand increases by a greater amount than supply, then:

the equilibrium price and quantity both increase.

Given linear demand curves, if demand and supply increase by identical amounts, then:

the equilibrium price stays the same and the equilibrium quantity rises

Equilibrium Price

the price at which the quantity demanded equals the quantity supplied.

All of the following scenarios depict the characteristics of complements except:

the price of coffee increases and the demand for cream increases.

All of the following scenarios depict the characteristics of substitutes except:

the price of coffee increases and the demand for tea increases

Equilibrium Quantity

the quantity bought and sold at the equilibrium price. - Price regulates buying and selling plans. - Price adjusts when plans don't match.

When supply decreases?

the supply curve shifts leftward

When supply increases?

the supply curve shifts rightward