Ch 3 Demand and Supply

Changes in Quantity Demanded

A change in quantity demanded refers to a movement along a given demand curve caused by a change in price (Figure 3-6)

Market Demand

The demand of all consumers in the marketplace for a good or service and found by summing the quantity demanded by each individual at each price (Figure 3-3)

Changes in Quantity Supplied

A change in quantity supplied refers to a movement along a given supply curve caused by a change in price.

Shifts in Supply

A change in supply is a shift of the entire supply curve so that at each price the quantity supplied changes. A leftward shift of the supply curve means that the quantity supplied at each price decreases and is called a decrease in supply, while a rightward shift if the supply curve means that quantity supplied at each price increases and is called an increase in supply (Figure 3-10)

Changes in Supply

A change in supply refers to a shift of the entire supply curve to the right or left caused by a change in a non price determinant of supply

Demand

A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being equal

Supply

A schedule showing the relationship between price and quantity supplied at different prices in a specified time period, other things being equal

Shifts in Demand

A shift of the entire demand curve so that at each price the quantity demanded changes. A leftward shift of the demand curve means the quantity demanded at each price decreases, while a rightward shift of the demand curve means the quantity demanded at each price increases. (Figure 3-4)

Shortages

A shortage is a situation in which quantity demanded is greater than quantity supplied at a price below the market-clearing price. Shortages and scarcity are not the same thing. A shortage is corrected when price increases. Quantity demanded will fall, and quantity supplied will increase until equilibrium is reached. (Figure 3-11)

Equilibrium

A stable point. When equilibrium is reached, there is no tendency for change unless supply and/or demand change. Equilibrium is a situation where quantity supplied equals quantity demanded at a particular price. Occurs where the supply and demand curved intersect (Figure 3-11) Eq quantity ^ then Eq price v Eq quantity v then Eq price ^

Surpluses

A surplus is a situation in which quantity demanded is less than quantity supplied at a price above the market-clearing price. A surplus is corrected when price decreases. Quantity demanded will rise, and quantity supplied will fall until equilibrium is reached

The Supply Schedule

A table that shows a direct relationship between price and quantity supplied at each price in a given time period (Figure 3-7a)

Individual Demand

Shows the quantity demanded of a good or service by an individual consumer at different prices. (Figure 3-2)

The Demand Curve

The demand curve is a graphic representation of the demand schedule. It is a negatively sloped line showing the inverse relationship between the price and the quantity demanded, other things being equal.

The Demand Schedule

The demand schedule is a numerical representation of the inverse relationship between specific prices and quantities demanded of a good measured in terms of constant quality units in a given time period

Supply Curve

The graphical representation of the supply schedule, which is a curve that generally slopes upward ( has a positive slope), other things being equal (Figure 3-7b)

Putting Demand and Supply Together

The intersection of demand and supply determines the prices that prevail in the US economy and other economics

The Law of Supply

The observation that the higher the price of a good, the larger the quantity sellers will make available over a specified time, other things being equal.

The Law of Demand

The observation that there is a negative or inverse relationship between the price of any good and the quntity demanded, holding other factors constant

Relative Price

The price of a good or service in terms of another. It is the money price of one commodity divided by the price of another or the number of units of one commodity that must be sacrificed to purchase on unit of another commodity

Money Price

The price that is observed in terms of today's dollars

Other Determinants of Supply

These are factors other than price that determine how much will be produced and are held constant when identifying supply. A change in one of these factors will cause the supply curve to shift. 1. Technology and Productivity - An improvement in technology will cause an increase in supply 2. Cost of Inputs Used to Produce the Product - An increase (decrease) in the price of one or more inputs will cause a decrease (increase) in supply 3. Price Expectations - An expected increase (decrease) in relative price of a good can lead to a decrease (increase) in supply 4. Taxes and Subsidies - increases (decreases) in indirect taxes have the same effect as raising (lowering) costs and thus decreases (increases) supply. A subsidy is a negative tax. 5. Number of Firms in the Industry - if the number of firms increases (decreases), supply will increase (decrease)

Other Determinants of Demand

These are nonprice factors that determine how much will be bought, other things held constant. A change in any one of these factors will cause a change in demand. 1. Income - For a normal good, an increase in income leads to an increase in demand, while a decrease in income leads to a decrease in demand. for an inferior good, an increase in income leads to a decrease in demand, while a decrease in income leas to an increase in demand. 2. Tastes and Preferences - If consumer tastes change in favor of a good, then there is an increase in demand for it. If consumer tastes move against the good, then there is a decrease in demand for it. 3. Prices of Related Goods: Substitutes and Complements - When two goods are related, a change in the price of one of them changes the demand for the other. Substitutes are goods that can be used to satisfy a similar want. If the price of one changes, demand for the other changes in the same direction. Complements are goods that are consumed together. If the price of one changes, the demand for the other changes in the opposite direction. 4. Expectations - Expectations of future increases in the price of a good, increases in income, and reduced availability lead to an increase in demand now. Expectations of future decreases in the price of a good, decreases in income, and increases availability lead to a decrease in demand now. 5. Market Size (# of Potential Buyers) - An incrrease in the number of buyers in the market causes an increase in demand. A decrease in the number of buyers causes a decrease in demand.

Demand and Supply Schedules Combined

When the supply and demand schedules are combined, and equilibrium or market-clearing price is determined. This is a price at which quantity demanded equals quantity supplied. There is neither an excess quantity supplied (surplus) nor an excess quantity demanded (shortage). (Figure 3-11)

The Market Supply Curve

a market supply curve is the sum of the supply curves of all individual producers in the market. summing the quantity supplied at each price by each producer (horizontal summing of the individual supply curves) derives the market supply curve (Figure 3-8, 3-9)