Macro - The Market Forces of Supply and Demand (Ch 04)

PRACTICE QUIZ CHAPTER 4

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shift in demand curve example

-Anything that causes discretionary income to increase will shift the demand curve up and to the right -Ex: consumers income increases, government lowers tax rates, or consumers lower savings rates; all lead to consumers spending more -Decreases down and to the left

Three steps to analyzing changes in equilibrium

1. Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves 2. Decide whether the curve shifts to the right or to the left 3. Use the supply-and-demand diagram • Compare the initial and the new equilibrium • Effects on equilibrium price and quantity

variables that influence buyers

1. Price of good- movement along demand curve 2. Income- shifts the demand curve 3. Prices of related goods- shifts the demand curve 4. Tastes- shift the demand curve 5. Expectations- shifts the demand curve 6. Number of buyers- shifts the demand curve

shifts in supply curve

1. input prices: To produce their output of ice cream, sellers use various inputs: cream, sugar, flavoring, ice-cream machines, the buildings in which the ice cream is made, and the labor of workers who mix the ingredients and operate the machines. When the price of one or more of these inputs rises, producing ice cream becomes less profitable, and firms supply less ice cream. If input prices rise substantially, a firm might shut down and supply no ice cream at all. Thus, the supply of a good is negatively related to the prices of the inputs used to make the good. 2. technology: To produce their output of ice cream, sellers use various inputs: cream, sugar, flavoring, ice-cream machines, the buildings in which the ice cream is made, and the labor of workers who mix the ingredients and operate the machines. When the price of one or more of these inputs rises, producing ice cream becomes less profitable, and firms supply less ice cream. If input prices rise substantially, a firm might shut down and supply no ice cream at all. Thus, the supply of a good is negatively related to the prices of the inputs used to make the good. 3. expectations: The amount of ice cream a firm supplies today may depend on its expectations about the future. For example, if a firm expects the price of ice cream to rise in the future, it will put some of its current production into storage and supply less to the market today. 4. number of sellers: In addition to the preceding factors, which influence the behavior of individual sellers, market supply depends on the number of these sellers. If Ben or Jerry were to retire from the ice-cream business, the supply in the market would fall.

Shifts in Curves versus Movements along Curves

A shift in the supply curve is called a change in supply. A movement along a fixed supply curve is called a change in quantity supplied. A shift in the demand curve is called a change in demand. A movement along a fixed demand curve is called a change in quantity demanded.

increase and decrease in demand

Any change that increases the quantity demanded at every price, such as our imaginary discovery by the American Medical Association, shifts the demand curve to the right and is called an increase in demand. Any change that reduces the quantity demanded at every price shifts the demand curve to the left and is called a decrease in demand.

Some markets have only one seller, and this seller sets the price.

EXAMPLE OF MONOPOLY

chapter in a nutshell

Economists use the model of supply and demand to analyze competitive markets. In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price. The demand curve shows how the quantity of a good demanded depends on the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward. In addition to price, other determinants of how much consumers want to buy include income, the prices of substitutes and complements, tastes, expectations, and the number of buyers. When one of these factors changes, the quantity demanded at each price changes, and the demand curve shifts. The supply curve shows how the quantity of a good supplied depends on the price. According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward. In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers. When one of these factors changes, the quantity supplied at each price changes, and the supply curve shifts. The intersection of the supply and demand curves represents the market equilibrium. At the equilibrium price, the quantity demanded equals the quantity supplied. The behavior of buyers and sellers naturally drives markets toward their equilibrium. When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise. To analyze how any event influences the equilibrium price and quantity in a market, we use the supply-and-demand diagram and follow three steps. First, we decide whether the event shifts the supply curve or the demand curve (or both). Second, we decide in which direction the curve shifts. Third, we compare the new equilibrium with the initial equilibrium. In market economies, prices are the signals that guide decisions and allocate scarce resources. For every good in the economy, the price ensures that supply and demand are in balance. The equilibrium price then determines how much of the good buyers choose to consume and how much sellers choose to produce.

Movement along the demand curve represents a change in demand.

FALSE

The law of supply represents a relationship between price and quantity from a buyer's perspective.

FALSE

Supply and demand together

Having analyzed supply and demand separately, we now combine them to see how they determine the price and quantity of a good sold in a market.

perfectly competitive market

In this chapter, we assume that markets are perfectly competitive. To reach this highest form of competition, a market must have two characteristics: -the goods offered for sale are all exactly the same, and -the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.

how to find demand curves

Notice that we sum the individual demand curves horizontally to obtain the market demand curve. That is, to find the total quantity demanded at any price, we add the individual quantities demanded, which are found on the horizontal axis of the individual demand curves. Because we are interested in analyzing how markets function, we work most often with the market demand curve. The market demand curve shows how the total quantity demanded of a good varies as the price of the good varies, while all other factors that affect how much consumers want to buy are held constant.

17. Suppose a frost destroys much of the Florida orange crop. At the same time, suppose consumer tastes shift toward orange juice. What would we expect to happen to the equilibrium price and quantity in the market for orange juice?

Price will increase; quantity is ambiguous (double meaning, open to multiple possibilities).

19. Suppose both buyers and sellers of wheat expect the price of wheat to rise in the near future. What would we expect to happen to the equilibrium price and quantity in the market for wheat today?

Price will increase; quantity is ambiguous.

extra market info

Some markets are highly organized, such as the markets for agricultural commodities like wheat and corn. In these markets, buyers and sellers meet at a specific time and place. Buyers come knowing how much they are willing to buy at various prices, and sellers come knterm-2owing how much they are willing to sell at various prices.

Supply and Demand

Supply and demand are the two words economists use most often—and for good reason. Supply and demand are the forces that make market economies work. They determine the quantity of each good produced and the price at which it is sold. If you want to know how any event or policy will affect the economy, you must think first about how it will affect supply and demand.

A change in supply is represented by a shift in the supply curve.

TRUE

Equilibrium occurs when the quantity supplied equals the quantity demanded.

TRUE

*NEED TO KNOW*

The demand curve slopes downward because, other things being equal, a lower price means a greater quantity demanded.

16. Which of the following statements is true about the impact of an increase in the price of lettuce?

The equilibrium price and quantity of salad dressing will fall.

note about equilibrium

The equilibrium price is sometimes called the market-clearing price because, at this price, everyone in the market has been satisfied: Buyers have bought all they want to buy, and sellers have sold all they want to sell.

18. Suppose consumer tastes shift toward the consumption of apples. Which of the following statements is an accurate description of the impact of this event on the market for apples?

There is an increase in the demand for apples and an increase in the quantity supplied of apples.

7. Which of the following shifts the demand for watches to the right?

a decrease in the price of watch batteries if watch batteries and watches are complements

normal good

a good for which an increase in income raises the quantity demanded

inferior good

a good for which, other things being equal, an increase in income leads to a decrease in demand

demand curve

a graph of the relationship between the price of a good and the quantity demanded

supply curve

a graph of the relationship between the price of a good and the quantity supplied note: the supply curve slopes upward because, other things being equal, a higher price means a greater quantity supplied.

market

a group of buyers and sellers of a particular good or service

competitive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price analogy: each seller of ice cream has limited control over the price because other sellers are offering similar products. A seller has little reason to charge less than the going price, and if he charges more, buyers will make their purchases elsewhere. Similarly, no single buyer of ice cream can influence the price of ice cream because each buyer purchases only a small amount.

monopoly

a market in which there are many buyers but only one seller. example: local cable television, for instance, is a monopoly if residents of the town have only one company from which to buy cable service.

shortage

a situation in which quantity demanded is greater than quantity supplied -sometimes called excess demand

equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

13. A decrease (leftward shift) in the supply for a good will tend to cause

an increase in the equilibrium price and a decrease in the equilibrium quantity.

12. An increase (rightward shift) in the demand for a good will tend to cause

an increase in the equilibrium price and quantity.

8. All of the following shift the supply of watches to the right except

an increase in the price of watches

5. If an increase in consumer incomes leads to a decrease in the demand for camping equipment, then camping equipment is

an inferior good

Which of the following factors could cause a change in the quantity demanded?

change in price

An inferior good is one for which an increase in income causes a(n)

decrease in demand.

3. The law of demand states that an increase in the price of a good

decreases the quantity demanded for that good.

14. Suppose there is an increase in both the supply and demand for personal computers. In the market for personal computers, we would expect the

equilibrium quantity to rise and the change in the equilibrium price to be ambiguous.

15. Suppose there is an increase in both the supply and demand for personal computers. Furthermore, suppose the supply of personal computers increases more than demand for personal computers. In the market for personal computers, we would expect the

equilibrium quantity to rise and the equilibrium price to fall.

4. The law of supply states that an increase in the price of a good

increases the quantity supplied of that good.

1. A perfectly competitive market has

many buyers and sellers

6. A monopolistic market has

only one seller

because buyers and sellers in perfectly competitive markets must accept the price the market determines, they are said to be

price takers.

what is true about the equilibrium

see picture

2. If an increase in the price of blue jeans leads to an increase in the demand for tennis shoes, then blue jeans and tennis shoes are

substitutes

quanitity demanded

the amount of a good that buyers are willing and able to purchase

quantity supplied

the amount of a good that sellers are willing and able to sell

law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

law of demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

law of supply

the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

demand curve summary

the demand curve shows what happens to the quantity demanded of a good as its price varies, holding constant all the other variables that influence buyers. when one of these other variables changes, the quantity demanded at each price changes, and the demand curve shifts.

equilibrium price

the price that balances quantity supplied and quantity demanded

11. If the price of a good is equal to the equilibrium price,

the quantity demanded is equal to the quantity supplied and the price remains unchanged.

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

market demand

the sum of all the individual demands for a particular good or service

10. If the price of a good is below the equilibrium price,

there is a shortage and the price will rise

9. If the price of a good is above the equilibrium price,

there is a surplus and the price will fall

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other example: complements are often pairs of goods that are used together, such as gasoline and automobiles, computers and software, and peanut butter and jelly.