Lesson 3: Where Prices Come From

Change in demand (Shift in the entire demand curve)

1) Changes in income 2) Changes in tastes (preferences) 3) Changes in expectations of future prices 4) Changes in the number of buyers (change in population) Shift to right = increase in demand Shift to left = decrease in demand

Change in supply (Shift in the entire supply curve)

1) Changes in input (raw material) prices 2) Changes in technology 3) Changes in expectations 4) Changes in the number of firms Shift to right = increase in supply Shift to the left = decrease in supply

The Labor Market

1) Demand curve: Represents firms. Firms demand labor services. Demand is inversely related to the wage. 2) Supply curve: Represents households/workers. Households supply labor services. Supply is positively related to the wage.

Arguments against raising the the minimum wage

1) Firms will hire fewer workers. 2) Firms will increase their prices. 3) Workers will be replaced by machines.

Arguments for raising the minimum wage

1) Move poor Americans above poverty line ($15,000). 2) Would increase demand for goods and services. 3) Higher wage would reduce worker turnover costs and raise worker productivity. 4) Increase the wage to keep up with inflation.

Shortage

A change in market equilibrium due to change in demand. An increase in demand results in an increase in the equilibrium price and the equilibrium quantity. Occurs when the quantity demanded exceeds the quantity supplied. This happens when the price is below equilibrium. They shouldn't last as sellers will increase the price to increase revenue. Consumers (households) will bid up the price. As prices rises, we move leftward along demand curve (decrease in quantity demanded) and rightward along the supply curve (increase in quantity supplied). Reasons: Increase in demand or a decrease in supply.

Surplus

A change in market equilibrium due to change in supply. An increase in supply results in a decrease in the equilibrium price and an increase in the equilibrium quantity. Occurs when the quantity supplied exceeds the quantity demanded. This happens when the price is above equilibrium. Thus, the goods start piling, which shouldn't last. Thus, the sellers will decrease the price of the good. Firms cut their prices. As prices fall, we move leftward along the supply curve (decrease in quantity supplied) and rightward along the demand curve (increase in quantity demanded). Reasons: decrease in demand or an increase in supply.

Changes in technology

Almost always, it's a linear relationship, that is, increase in technology = increase in supply = supply curve shifts towards right. decrease in technology = decrease in supply = supply curve shifts towards left.

Change in expectations of future prices

An expected increase in the price of a good in the future will cause the consumers to buy the good now rather than later = demand of that good increases = demand curve shifts to the right.

Changes in income

An increase in income = an increase in buying goods = demand curve shifts to the right.

Changes in input (raw material) prices

An input is anything used in the production of a good or service. If input price of a good decreases, the supply of the good will increase, thereby, shifting the supply curve towards right.

Change in quantity demanded (movement along the demand curve)

Caused by a change in the price of the given good. So, as the price of the given good increases, the quantity demanded will decrease.

Change in quantity supplied (Movement along the supply curve)

Caused by change in the price of the given good. eg: To take advantage of high prices for snow shovels during a snowy​ winter, Alexander​ Shovels, Inc., decides to increase output.

Minimum wage

Compare costs and benefits. Applies to low-skilled workers. Creates job loss and higher unemployment.

Supply curve

Firms supply goods and services.

Demand curve

Households purchase goods and services.

Changes in expectations

If a firm expects that the price of its product will be higher in the future than it is today, it has an incentive to decrease supply now and increase it in the future. Thus, currently, supply curve shifts to the left.

The product market equilibrium

Occurs the point where the supply curve and the demand curve intersect => quantity demanded = quantity supplied.

Changes in the number of buyers (change in population)

Population changes and demand shifts are positively related to each other.

Changes in taste (preferences)

Refers to the many subjective elements that can enter into a consumer's decision to buy a product. An increase in the taste for a good will lead to consumers buying large quantity of that good at any given price = demand for that good increases = demand curve shift towards right.

With an annual production of​ 100,000 metric​ tons, SteelWorld​ Inc., is one of the major producers of steel in its country. When the government of this country recently hiked the minimum wage for​ labor, the media predicted a considerable decline in national production. As one of the core industries in the​ economy, steel production was expected to be hit particularly badly. Although the supply of steel by SteelWorld did​ decline, the fall was much lower than anticipated. Which of the​ following, if​ true, would explain this​ phenomenon?

SteelWorld implemented new technology that automated their process and increased production efficiency.

If demand decreases and supply​ increases, what will definitely​ occur?

The equilibrium price will decrease.

If demand and supply both​ increase, what will definitely​ occur?

The equilibrium quantity will increase.

Law of supply

There is a direct relation between the price of a good and the quantity sellers are willing to offer, for sale in a defined time period, ceteris paribus. Thus, the slope of a supply curve is always positive.

Law of Demand

There is an inverse relation between the price of a good and the quantity demanded, ceteris paribus. This is because when the price of a good​ increases, consumers' purchasing power​ falls, and they cannot buy as much of the good as they did prior to the price change. Hence, the slope of a demand curve is always negative.

Change in the number of firms

When new firms enter a market, the supply curve shifts to the right and when existing firms leave, or exit, a market, the supply curve shifts to the left. eg: The success of the Apple iPhone leads more firms to begin producing smartphones = supply curve shifts to the right.

An unexpected frost in the orange groves of California would cause:

a decrease in the supply of orange​ juice, increasing the equilibrium price.

A journalist wrote the following about the effects of falling gasoline​ prices: ​"With lower​ prices, demand rises and people consume​ more." Briefly explain whether you agree with the​ journalist's analysis. The​ journalist's statement is

not true because a decrease in the price of gasoline would result in an increase in quantity demanded​, not an increase in demand​, for gasoline.