Chapter 3 ECO

What happens to graph when there's an increase in demand?

(1) The demand curve shifts to the right. (2) The equilibrium price rises, and the equilibrium quantity also rises. (3) When demand decreases, the demand curve shifts to the left. (4) The equilibrium price falls, and the equilibrium quantity also falls.

A decrease in demand

A decrease in both equilibrium price and equilibrium quantity

An increase in supply leads to:

A decrease in equilibrium price but an increase in equilibrium quantity

Inferior goods

-A good for which demand decreases when income rises and increases when income falls. Ex: Ramen noodles. As college students income increase, the demand for ramen noodles will decrease.

Normal goods

-A good for which demand increases when income rises and decreases when income falls. Ex: Shoes & clothing

Substitute

-A good that has many of the same characteristics as, and can be used in place of, another good. -Demand for a good will increase if the price of a substitute for the good rises, and the demand for a good will decrease if the price of a substitute falls.

Complement

-A good that usually is consumed or used together with another good. Ex: Charging stations and electric vehicles (EVs) are complements. As the availability of charging stations increases and the price of charging a vehicle at a station falls, there is an increase in the demand for EVs.

Demand curve

-A graph of demand showing the downward-sloping relationship between price and quantity demanded. -Slopes downward from left to right because the quantity demanded is negatively related to the price.

Supply curve

-A graph of supply showing the upward-sloping relationship between price and quantity supplied. Ex: If the price of the bicycles goes up from $180 to $280, then you can earn $100 more for each bicycle you produce and sell. Given your production costs, if you earn more from each bicycle, you will have a greater incentive to produce and sell more bicycles. However, the incentive for firms to sell bicycles declines as the price falls (this is why a positive relationship exists between price and quantity supplied).

Shifts vs Movements along demand curve

-A movement along the demand curve occurs when the quantity demanded changes as a result of a change in the price of the good. -A shift of the demand curve occurs when a change in something (other than the good's own price) affects the quantity of a good that consumers are willing to buy.

Supply

-A relationship between price and quantity supplied. -A relationship between two variables: (1) the price of a particular good and (2) the quantity of the good that firms are willing to sell at that price (referred to as "quantity supplied"), all other things being the same.

Shortage (Excess demand)

-A situation in which quantity demanded is greater than quantity supplied. Ex: With a shortage of bicycles, buyers who really need a bicycle will start to offer to pay more to acquire a bicycle, while firms that are faced with an abundance of potential customers wanting to buy their bicycles will begin to charge higher prices. Thus, $160 cannot last as the market price. Observe that as the price rises above $160, the quantity demanded falls and the quantity supplied rises. Thus, as the price rises, the shortage begins to decrease.

Surplus (excess supply)

-A situation in which quantity supplied is greater than quantity demanded. Ex: With a surplus of bicycles, buyers who really need a bicycle have an abundance of sellers who are eager to sell them a bicycle, while firms have to compete with one another to entice buyers for their products. Therefore, the price of bicycles will fall: Firms that are willing to sell bicycles for less than $260 will offer to sell to consumers at lower prices.

Supply schedule

-A tabular presentation of supply showing the price and quantity supplied of a particular good, all else being equal. Ex: If the price of bicycles rises from $180 to $200, the quantity supplied increases from 7 to 9 million bicycles.

Shifts in demand curve

-An increase in demand shifts the demand curve to the right—at every price, quantity demanded will increase. -A decrease in demand shifts the demand curve to the left—at every price, quantity demanded will decrease.

Demand

-Demand is a negative relationship between the price of a good and the quantity demanded, all other things being equal. -A relationship between price (of a particular good) and quantity (of that good that consumers are willing to buy at that price during a specific time period) demanded

Shift along supply curve

-Occurs when a change in something (other than the price) affects the amount of a good that firms are willing to supply -Occurs if a change is caused by any source except a change in price Ex: An unexpected winter freeze in California will mean that farmers will be able to produce fewer oranges at any given price. This means that the supply curve of oranges will shift to the left.

Movement along supply curve

-Occurs when the quantity supplied changes as a result of a change in the price of the good. Ex: if a copper mine in Zambia increases its production because the price of copper has increased on the world market, then that indicates a movement along the supply curve. -Economists refer to a movement along the supply curve as a change in the quantity supplied.

Law of supply

-The higher the price, the higher the quantity supplied and vice versa. -States that the price and the quantity supplied are positively related, all other things being equal

Law of demand

-The higher the price, the lower the quantity demanded in the market. -The tendency for the quantity demanded of a good in a market to decline as its price rises. -Claims that the price and the quantity demanded are negatively related, with all other things being equal

Market price

-The price at which quantity supplied equals quantity demanded is the market price -Market price is determined by supply and demand Ex: The quantity that consumers are willing to buy is shown to decline with the price, whereas the quantity that firms are willing to sell is shown to increase with the price.

Equilibrium price

-The price at which quantity supplied equals quantity demanded, and the price has no tendency to change. -At the intersection of the supply and demand curve.

Equilibrium quantity

-The quantity traded at the equilibrium price. Ex: The quantity bought and sold at the equilibrium price is 9 million bicycles.

Market equilibrium

-When the price equals the equilibrium price and the quantity bought and sold equals the equilibrium quantity, economists call this a market equilibrium

What are some things that cause the supply curve to shift?

-technology -weather conditions -the price of inputs used in production Ex: Raw materials, labor, capital -the number of firms in the market -expectations of future prices -government taxes, subsidies, and regulations

Eliminating a surplus

A lower price increases the quantity demanded and decreases the quantity supplied to eliminate the surplus.

In economics, the term supply refers to:

A set of price and quantity supplied combinations, all else being equal.

Demand schedule

A tabular presentation of demand showing the price and quantity demanded for a particular good, all else being equal.

What is one thing that can lead to a rightward shift of the demand curve?

An expectation of an increase in the good's price in the future.

An increase in demand leads to:

An increase in both equilibrium price and equilibrium quantity

An increase in both demand and supply leads to:

An increase in equilibrium quantity

Why does the demand curve slope down?

Because when the price of a good rises, consumers are less likely to use their scarce resources to buy that good. Conversely, when the price of a good falls, some consumers who previously had not chosen to buy the good because the price was too high may decide to buy the good.

Why does the supply curve slope upward?

Because, all else equal, a higher price offers greater incentive for a firm to produce and sell more goods.

All else being equal, if the demand curve shifts to the right:

Both the equilibrium price and the equilibrium quantity will rise

The demand curve for iPhones is

Downward sloping because if the price of iPhones increases, people will buy fewer iPhones.

Complete the following statement

If a market price is higher than equilibrium price, a SURPLUS exists as the quantity demanded is LOWER than the quantity supplied, and there is a tendency for the market price to FALL

The law of supply states that:

Price and quantity supplied are positively related

Right vs leftward shift in supply curve

Right: An increase in supply is a shift to the right of the supply curve. Left: A decrease in supply is a shift to the left of the supply curve.

Example of shift in supply curve

Shift to the right: Suppose a new machine is invented that makes it possible to produce bicycle frames at less cost; then firms would have more incentive at any given price to produce and sell more bicycles. Supply would increase, and the supply curve would shift to the right. Shift to the left: Supply would decrease if bicycle-producing firms suddenly found that their existing machines would break down unless they were oiled with an expensive lubricant each time a bicycle was produced. This would raise costs, lower supply, and shift the supply curve to the left.

Which of the following is NOT held constant when constructing a supply curve for good A?

The price of good A

Eliminating a shortage

When a shortage exists, a higher price reduces the quantity demanded and increases the quantity supplied to eliminate the shortage.

What's the difference between a shift and movement along the demand curve?

When the quantity demanded changes as a result of a price change, we have a movement along the demand curve. When a change in demand is brought about by something other than a price change, we have a shift of the demand curve.