Chapter 2 Econ- Market Forces: Demand and Supply

Producer Surplus

The amount producers receive in excess of the amount necessary to induce them to produce the good.

What leads to changes in quantity supplied

Changing ONLY PRICE.

Competitive markets, operating free of price restraints, will be analyzed when:

demand changes; supply changes; demand and supply simultaneously change.

Market Equillibrium

Qx^s= Qx^d

CS= TCV-TEX

look at graph on ch 2-16

2. Prices of Related goods or services: Complements (tennis racket and tennis ball) ^, decreases -If the price of the ball rises... -If the price of the ball falls...

...the demand for the racket decreases ...the demand for the racket increases

2. Changes in Technology (iphone) ^,^ -If the technology used to produce the iphone improves...

...the supply of the iphone increases (because everyone wants it)

Government Restrictions: -Price Ceilings -Price Floors

-Price Ceilings- Rent control, gas prices without oil shock -Price Floors- minimum wage

Changes in the WHOLE demand curve

-increase in demand = shift to the right (ex. income increases --> demand will increase) -decrease in demand = shift to the left (ex. income decreases --> demand will decrease)

Change in Supply

-increase in supply: shift the curve to the right -decrease in supply: shift the curve to the left

1. Changes in Income: (steak vs top ramen) ^,decreases -If top ramen is an inferior good and income rises... -If top ramen is an inferior good and income falls...

... the demand for top ramen decrease ...the demand for top ramen increases

1. Input Prices (if the cost rises, has to charge a higher price) (intel computer chip and apple computer) ^P, supply decreases -If the price of the intel computer chip used to produce the apple computer... -if the price of the intel computer chip used to produce the apple computer...

... the supply of the apple computer will decrease ...the supply of the apple computer will increase

4. Changes in the prices of related goods or services: Complements in Production ^,^ -If A & B are complements in production and price of B increases... -If A & B are complements in production and price of B falls...

...Supply of A increases ...Supply of B decreases

5. Consumer Changes in expectations (nice work clothes) Normal Good ^,^ -If business clothes is a normal good and income is expected to rise in the future.... -if business clothes is a norma good and income is expected to fall in the future

...demand for nice work clothes may rise today ...demand for nice work clothes may decrease today

5. Consumer Changes in expectations (top ramen) Inferior Good, ^, decreases - if top ramen is an inferior good and income is expected to rise in the future... -if top ramen is an inferior good and income is expected to fall in the future...

...demand for top ramen may decrease today ...demand for top ramen may increase today

3. Change in the number of Producers (entry and exit) (fidget spinners) ^,^ -if the number of producers of fidget spinners rises... -if the number of producers of fidget spinners falls...

...market supply of A increases ...market supply of fidget spinners decreases

4. Changes in the prices of related goods or services: Substitutes in Production ^, decreases -if A & B are substitutes in production and price of B increases... -if A & B are substitutes in production and the price of B falls...

...supply of A decreases ...supply of A increases

6. Changes in Expectations ^, decreases -If the price of A is expected to rise in the future... -If the price of A is expected to fall in the future...

...supply of A decreases today. ...supply of A increases today.

3. Advertising and Consumer tastes (ex. Juicy Couture) ^,^ -if taste changes in favor of Juicy Couture -if tastes changes against of Juicy Couture

...the demand for Juicy increases ...the demand for Juicy decreases

5. Consumer Changes in expectations (ex. Louis Vuitton) ^,^ -if the price of Louis is expected to rise in the future -if the price of Louis is expected to fall in the future

...the demand for Louis increases today ...the demand for Louis decreases today

4. Changes in the number of consumers (ex. lots of babies = lots of diapers ---> baby boomers) ^,^ -if the number of babies rise -if the numbers of babies fall

...the demand for diapers increases ...the demand for diapers decreases

2. Prices of Related goods or services: Substitutes (pepsi vs coke) ^,^ -If pepsi and coke are substitutes and the price of coke rises... -If the price of coke falls...

...the demand for pepsi increases ...the demand for pepsi falls

1. Changes in Income: Normal Good (steak vs top ramen) ^,^ -If steak is Normal Good and income rises... -If steak is a Normal Good and increase falls...

...the demand for steak increases ...the demand for steak falls

Demand shifters

1. Income 2. Prices of Related Goods 3. Advertising and consumer tastes 4. Population 5. Consumer Expectations 6. Other factors (ex. natural disasters = demand will decrease)

Supply Shifters

1. Input Prices 2. Technology or government regulation 3. Number of Firms 4. Substitutes in production 5. Taxes 6. Producer expectations

What changes quantity demanded?

Changing ONLY PRICE. This type of change is graphically represented by a MOVEMENT along a given demand curve, holding other factors that impact demand constant.

Market demand curve

Illustrates the relationship between the Total Quantity and Price Per Unit of a good all consumers are WILLING and able to purchase, holding other variables constant

Price Restrictions

In a competitive market equilibrium, price and quantity freely adjust to the forces of demand and supply

Full economic price= dollar price + non-pecuniary price

Pf= Pc + [ Pf +Pc)

ex. Price Ceiling consider both equations: Qd= 10-2P Qs= 2+2P Suppose a $1.50 price ceiling is imposed on the market

Qd= 10-2(1.5) Qd=7 units Qs= 2+2(1.5) Qs=5 units *Shortage* b/c Qd>Qs of 2 units Full economic price of 5th unit is 5 = 10- 2P(full)

ex. Price Floor consider both equations: Qd=10-2P Qs=2 +2P Suppose a $4 price floor is imposed on the market

Qd= 10-2(4) Qd= 2 units Qs= 2+ 2(4) Qs= 10 units *Surplus* b/c Qs>Qd of 8 units The cost of the government of purchasing the surplus is $4 x 8= $32

The Linear Demand Function

Qx^d= a0 +aPx + ayPy + amM + ahH Qx^d= the number of units of good X demanded Px= the price of good X. (a negative number would = a negative relation (-)) Py= the price of a related good Y (substitute= +number, compliment = -number) M= income (normal good = +number, inferior good= -number) H= the value of any other variable affecting demand

The Linear Supply Function

Qx^s- Bo + BxPx + BwW + BrPr + BhH Qx^s= the number of units of good X produced; Px= the price of good X W= the price of an inout Pr= the price of technology related goods H= the value of any other variable affecting supply (subsitutes = (-)) (compliments = (+))

Market Supply Curve

Summarizes the relationship between total quantity of a good that all producers in a competitive market are willing and able to produce at alternative prices, holding other factors affecting supply constant.

Law of Demand

The quantity of a good consumers are willing and able to purchase increases (decreases) as the price falls (rises)

Comparative Static Analysis

The study of the movement from one equilibrium to another

Law of supply

as the price of a good rises (falls), the quantity supplied of a good rises (falls), holding other factors affecting supply constant (Positive relationship)

Consumer Surplus

is the extra value that consumers derive from a good but do not pay extra for

Total Expenditure

is the per-unit market price times the number of units consumed

Total Consumer Value

is the sum of the maximum amount of a consumer willing to pay at different quantities

Market Demand Curve

negative relationship as price falls, quantity demanded increases