Microeconomics: Chapter 3

Important supply shifters include changes in:

1. input prices 2. the prices of related goods or services 3. technology 4. expectations 5. the number of producers

Shifts of the supply curve

An increase in supply - means a rightward shift of the supply curve A decrease in supply - means a leftward shift of the supply curve

Changes in Number of Producers

As producers enter and exit the market, the overall supply changes Entry - implies more sellers in the market, increasing upply Exit - implies fewer sellers in the market, decreasing supply

Changes in Number of Consumers

As the population of an economy changes, the number of buyers of a particular good also changes (thereby changing its demand)

Changes in technology

Better technology makes sellers willing to offer more at a given price or sell their quantity at a lower price. Technology innovation: lower costs, increases supply

Which of the following will cause an increase in the demand for autos: a) price of car tires increases because of a Malaysian rubber shortage b) concrete steel reinforcing rods are replaced by aluminum along the Atlantic coast to prevent rusting c) gasoline prices drop by 50% when OPEC nations increase production d) McDonald's incases its hamburger production in response to consumer trends

C) gasoline prices drop by 50% when OPEC nations increase production

Change in Demand vs. Change in Quantity Demanded (Graphically)

Change in demand = the entire curve shifts Change in quantity demanded = move from one point to another along the same demand curve.

What happens to the demand for diapers in Russia as birth rates drop?

Decrease

Simultaneous shifts of supply and demand: large decrease in supply, large increase in demand

Decrease in supply dominates increase in demand New equilibrium point: higher price, lower quantity

Changes in Input Prices

Decrease in the price of an input (all else equal) increases profits - and encourages more supply (and vice versa) Decrease in price of input: increase profits

Change in Demand vs. Change in Quantity Demanded

Demand and quantity demanded is not the same.

key elements of the supply and demand model

Demand curve Supply curve Set of factors that cause the demand to shift and the set of factors that cause the supply curve to shift The market equilibrium - which includes the equilibrium price and equilibrium quantity The way the market equilibrium changes when the supply curve or demand curve shifts

Inferior good

Demand decreases when income increases (and vice versa) Ex: ramen, mac and cheese, etc.

When income rises (affect on normal good)

Demand for a normal good increases

When income falls (affect on inferior good)

Demand for an inferior good increases

When the price of a complement falls

Demand for the original good increases

When the price of a substitute rises

Demand for the original good increases

Normal good

Demand increases when income increases (and vice versa) Ex: restaurant meals

If garden gnomes regain popularity, what will happen?

Equilibrium price and quantity both rise

How do changes in expectations affect reactions?

Ex: gas will double in price by Monday --> people will go out to buy it, thus demand increases. --> the business owner will most likely raise prices

Change in Demand

The entire relationship between price and quantity has changed. Change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position - denoted by a new demand curve.

Changes in Expectations (Supply Curve)

The expectation of a higher price for a good in the future decreases current supply of the good if they can store the good (and vice versa) Sellers will adjust their current offerings in anticipation of the direction of future prices in order to obtain the highest possible price Ex: logging companies - hear next spring, wood is going to skyrocket in price - if you're smart you'll withhold wood to wait to sell when the price increases

If cost of wood falls, what will happen to equilibrium price and market in the violin market?

This would affect supply - increase supply. Price falls and quantity rises.

Changes in Price of Related Goods: Complements

Two good are complements if a decrease in the price of one goods leads to an increase in the demand for the other (or vice versa) Consumers often have to buy goods together Complements = go together instead of competing against each other

Changes in Price of Related Goods: Substitutes

Two goods are substitutes if a decrease in the price of one leads to a decrease in demand for the other (or vice versa) Price of one goes up, demand for other will go up.

competitive market

has many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold

Individual Demand Curve

illustrates between quantity demanded and price for an individual consumer

When the price of petroleum goes up, the demand for natural gas ____, the demand for coal ______, and the demand for solar power _____. (Assume these goods are substitutes for petroleum.)

increase, increase, increase

If the price of cotton drops, the supply of blue jeans _____.

increases

Shifts of the Demand Curve: Increase in demand

rightward shift If they want to keep the same price, they can sell more (increase horizontally) Don't want to change the amount they sell, they can sell for a higher price (increase vertically)

Supply Schedule

shows how much of a good or service would be supplied at different prices Upward sloping curve: as price goes up, the more quantity is supplied

Market demand curve

shows the combined quantity demanded by all consumers depends on the market price of the good Market demand = horizontal sum of the individual demand curves of all consumers in that market (sum of quantity demanded for each person at that price)

Supply curve

shows the quantity supplied at various prices (the entire relationship between quantity and price)

Quantity supplied

the quantity that producers are willing and able to sell at a particular price (a specific quantity at a specific price)

What will happen to the number of new businesses if the government reduce the fees and red tape associated with new business licenses? What happens if the fees rise?

Reduced fees - businesses will go up Fees rise - reduction in businesses

Demand

Represents the behavior of buyers: relation between market price and quantity demanded. If the market price is this much, how much will people buy or want to buy

Changes in the Price of Related Goods or Services

Sellers will supply less of a good if its profitability falls (and vice versa). There are substitutes and complements in production processes.

Shortage

Shortage when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level. Shortages do not last: sellers will increase price to increase revenue.

Consumers in Mayville consider houses and apartments to be substitutes. There is an increase in the price of houses in Mayville at the same time three new apartment buildings open there. In the market for apartments in Mayville: Equilibrium price and quantity will fall or rise?

Supply increases, Demand increases Equilibrium quantity will increase.

Supply

Supply represents the behavior of sellers

Surplus

Surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equiibrium. Surpluses do not last: sellers will reduce price so they can move goods of the shelves.

Changes in tastes

Tastes and preferences are subjective and vary among consumers Seasonal changes or fads have a predictable effects on demand. Ex: demand for boots in October increases.

Changes in income

The effect of changes in income on demand depends on the nature of the good in question. A normal good vs. an inferior good.

when the price of a substitute falls

demand for the original good decreases

when income falls (affect on normal good)

demand for a normal good decreases

when income rises (affect on inferior good)

demand for an inferior good decreases

when tastes change against a good

demand for the good decreases

when the price is expected to fall in the future

demand for the good decreases today

When tastes change in favor of a good

demand for the good increases

Important Demand Shifters

1. Changes in the prices of related goods or services 2. Changes in income 3. Changes in tastes 4. Changes in expectations 5. Changes in the number of consumers

Changes in Producers' Expectations

A change in producers' expectations about profitability will affect supply curves. Windmill production increases as producers expect sales and profitability to increase.

An increase in supply

A movement along the supply curve is not the same thing as a shift of the supply curve.

Changes in Expectations (Demand curve)

If consumers have a choice about the timing of a purchase they buy according to expectations. Buyers adjust current spending in anticipation of the direction of future prices in order to obtain the lowest possible price. Ex: if prices for Xbox 360 consoles are expected to drop right before Christmas, what will happen to sales during November? - they will decrease; they will wait to buy them.

How to tell if it will be a change in demand or a change in quantity demanded?

If it is the PRICE of the product that changes first - then it is a movement along demand curve: it is going to be a change in QUANTITY DEMANDED If it is anything else that has changed (other than price) - it is going to be a change in DEMAND or a shift in your curve.

How do you know what caused a price change? Demand change vs. supply change?

If the price and quantity move together - it was a demand change. If they move in opposite directions, a supply change.

When you do your analysis of simultaneous moves:

If your supply and demand move in OPPOSITE DIRECTIONS - you can always know for sure what happens to price but not quantity. When your supply and demand move in SAME DIRECTION - you can always know for sure what happens to quantity not price.

Ex: what happens to the demand for travel in Hawaii if the (perceived) safety cost of traveling to Mexico increases?

Increases. -- they are substitutes. Cost of travel to Mexico increases, the demand to travel to Hawaii will increase.

Individual Supply Curve vs. Market Supply Curve

Individual supply curve - supply curve of an individual seller. Market supply curve - sum of all individual market supplies (quantities) Ex: Mr. Silva's individual supply curve - @ $1 - 2 lbs, $2 - 3 lbs. Mr. Liu's individual supply curve - @ $1 - 1 lbs, $2 - 2 lbs. Market supply curve: $1 - 3 lbs, $2 - 5 lbs.

Supply Curve Shifts: A decrease in supply

Leads to a movement along the demand curve due to a higher equilibrium price and lower equilibrium quantity.

Demand Curve Shifts: An increase in demand

Leads to a movement along the supply curve due to a higher equilibrium price and higher equilibrium quantity.

Finding the Equilibrium Price and Quantity (graph)

Market equilibrium occurs at point E, where the supply curve and the demand curve intersect

Simultaneous shifts of supply and demand: small decrease in supply, large increase in demand

Two opposing forces determining equilibrium quantity. The increase in demand dominates the decrease in supply. Therefore: equilibrium increases in price and quantity.

Change in Quantity Demanded

Usually along same demand curve; the point has changed. A change in the quantity demanded of a good arising from a change in the good's price.

Supply, Demand, and Market Equilibrium

When Qs = Qd at a certain price, the market is in equilibrium. That is, the amount consumers would purchase at this price is matched exactly by the amount producers wish to sell.

Law of Demand

a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good When something is cheaper, more people will want to buy it.

Demand curve

a line on the graph that shows the quantity demanded at various prices

when the price is expected to rise in the future

demand for the good increases today

when the price of a complement rises

demand for the original good decreases

Quantity demanded

a single point in that single market (versus demand which looks at all of it/entire relationship) The actual amount of a good or service consumers are willing to buy at some specific price

Demand schedule

a table showing how much of a good or service consumers will want to buy at different prices

Ex: gasoline and SUVS

an increase in price of gasoline will decrease the demand for SUVs -- COMPLEMENTS. When one of them becomes more expensive, people demand both less.

Shifts of the Demand Curve: Decrease in demand

leftward shift. Decrease vertically: with the same quantity demanded, price will go down (lower willingness to pay for the same quantity) Decrease horizontally: if the sellers do not change the price, then the quantity they can sell will go down (less quantity demanded at the same price)

when the number of consumers falls

market demand for the good decreases

when the number of consumers rises

market demand for the good increases

supply and demand model

model of how a competitive market behaves

Complements

two goods are complements if a rise in the price of one good leads to a decrease in the demand for the other good - complements are usually goods that are consumed together Ex: computers and software, cappuccinos and cookies, cars and gasoline

Substitutes

two goods are substitutes if a rise in the price of one of the goods leads to an increase in the demand for the other good Ex: Calzones and Pizza (replace each other), coffee and tea, muffins and doughnuts, train rides and air flights