Econ 101 - Chapter 3

Technology

Any technological innovation that decreases the amount of inputs needed per unit of output reduces production costs and hence will increase the profits that can be earned at any given price of the products

The quantity supplied of a product is influenced by the following key variables:

-Product's own price -Prices of inputs -technology -some government taxes or subsidies -prices of other products -number of suppliers

Quantity demanded may be influenced by

-product's own price -consumers' income -prices of other products -tastes -population -expectation about the future

Tastes

Tastes have a powerful effect on people's desired purchases.

Government taxes or subsidies

Taxes make production and sale of some goods less profitable. The result is that the supply shifts to the left Subsidy increases the profitability of production and shifts the supply curve to the right

A basic economic hypothesis is that the price of a product and the quantity demanded are related negatively, other things being equal.

That is, the lower the price, the higher the quantity demanded; the higher the price, the lower the quantity demanded.

Quantity demanded

The amount of a good or service that consumers want to purchase during some time period.

Quantities supplied

The amount of commodity that producers want to sell during some time period. The amount that producers are willing to offer for sale; it is not necessarily the amount that they succeed in selling, which is expressed by quantity sold or quantity exchanged

Absolute Price

The amount of money that must b spent to acquire one unit of commodity Also called money price

Shifts in the demand curve

The demand curve is drawn with the assumption that everything except the product's own price is being held constant. A rise in income that causes more to be demanded at each price shifts the demand curve to the right.

If less is desired at each price

The demand curve shifts leftward so that each price corresponds to a lower quantity than it did before

If more is desired at each price

The demand curve shifts rightward so that each price corresponds to a higher quantity than it did before.

Comparative Statics

The derivation of predictions by analyzing the effect of a change in some exogenous variable on the equilibrium We derive predictions about how the endogenous variables (equilibrium price and quantity) will change following a change in some exogenous variable (the variable whose changes cause shifts in the demand and supply curves).

Demand

The entire relationship between the quantity of a commodity that buyers want to purchase the price of that commodity, other things being equal.

Supply

The entire relationship between the quantity of some commodity that producers wish to sell and the price of that commodity, other things being equal

Demand curve

The graphical representation of the relationship between quantity demanded the price of a commodity, other things being equal.

Supply curve

The graphical representation of the relationship between quantity supplied and the price of a commodity, other things being equal.

Prices of input

The higher the price of any input used to make a product, the less will be the profit from making the product

Higher the price of inputs

The less the firm will produce and offer for sale at any given price of the product

Prices of other goods

The lower its prices, the cheaper the product becomes relative to to other products that can satisfy the same needs or desires.

Equilibrium Price

The price at which quantity demanded equals quantity supplied. Also called the market-clearing price

Normal goods

The quantity demanded increases when income rises

Relative Price

The ratio of the money price of one commodity to the money price of another commodity; that is, a ratio of two absolute prices

Quantities demanded refers to a flow of purchases

Therefore, must be expressed as so much per period of time

Because increased profitability leads to increased willingness to produce

This shifts the supply curve to the right.

To analyze the distinct effect of changes in one variable

We must hold all but one of them constant

Steps to comparative statics

We start from a position of equilibrium and then introduce the change to be studied. We then determine the new equilibrium position and compare it when the original one. The difference between the two positions of equilibrium must result from the change that was introduced, because everything else has been held constant.

A decrease in demand causes

a decrease in both the equilibrium price and the equilibrium quantity exchanged 1) decrease in demand creates surplus at initial equlibrium price 2) unsuccessful sellers bid the price down 3) Less product is supplied and offered for sale 4) At new equilibrium both price and quantity exchanged are lower than they were Demand curve shifts to the left

An increase in demand means that the whole demand curve shifts to the right;

a decrease in demand means that the whole demand curve shifts to the left

An increase in demand means that the whole demand curve shifts to the right;

a decrease in demand means that the whole demand curve shifts to the left.

An increase in supply causes

a decrease in the equilibrium price and an increase in the equilibrium quantity exchanged 1) Increase supply creates a surpflus at inital equilibrium price 2) unsuccessful suppliers force the price down 3) drop in price increases the quantity demanded 4) new dquilibrium price is at a lower price and a higher quantity supply curve shifts to the right

Ceteris Paribus

holding all other variables constant, "other things being equal"

The supply curve represents the relationship between quantity supplied and price, other things being equal;

its positive slope indicates that quantity supplied increases when price increases

The demand curve represent the relationship between

quantity demanded and price, other things being equal.

What matters for demand and supply is the price of the product in question

relative to the price of other products; that is, what matters is the relative price

A change in any of the variables (other than the product's own price) that affects the quantity supplied will

shift the supply curve to a new position

A taste against

shifts demand curve to left

A taste in favour

shifts demand curve to right

Individual markets differ in

the degree of competition among the various buyers and sellers

A rise in the price of a substitute for a product shifts

the demand curve for the product to the right.

The price in which the quantity demanded equals the quantity supplied is called

the equilibrium rice, or the market-clearing price

When there is a change in demand and a change in the price, the overall change in quantity demanded is the net effect of

the shift in the demand curve and the movement along the new demand curve

A fall in the price of inputs makes production more profitable and therefore shifts

the supply curve to the right.

For any general desire or need,

there are almost always man different products that will satisfy it.

Input

things that a firm uses to produce its outputs ex: materials, labour, machines etc.

A rise in the price of input therefore shifts the supply curve

to the left less will be supplied at any given price

Excess demand causes

upward pressure on price

If price of carrots rise while the price of other vegetables are constant,

we expect consumers to reduce their quantity demanded of carrots as they substitute toward the consumption of other vegetables relative price of carrots has increased.

In microeconomics, whenever we refer to a change in the price of one product,

we mean a change in that product's relative price; that is, a change in the price of the product relative of all other goods

An increase in demand causes an increase in quantity demanded,

whereas a decease in demand causes a decrease in quantity demanded.

At any given price, an increase in demand causes in increase in quantity demanded,

whereas a decrease in demand causes a decrease in quantity demanded

Disequilibrium Price

A price at which quantity demanded does not equal quantity supplied

Shifts in the supply cureve

A shift in the supply curve means that at each price there is a change in the quantity supplied. An increase in quantity supplied at each price shifts the curve to the right A decrease in the quantity supplied at each price shifts the curve to the left

Quantity supplied

A single point on the supply curve

Disequilibrium

A situation in a market in which there is excess demand or excess supply. Market price will change

A change in quantity demanded can result from a shift in the new curve with the price constant;

from a movement along a given demand curve due to a change in the price; or from a combination of the two.

Movements along the curve versus shifts of the whole curve

"demand" refers to entire demand curve whereas "quantities demanded" refers to the quantity that is demanded at a specific price.

Quantity supplied and price

A basic hypothesis of economics is that the price of the product and the quantity supplied are related positively, other things being equal. That is, the higher the product's own price, the more its producers will supply; the lower the price, the less its producers will supply

A demand curve is drawn with the assumption that everything except the product's own price is held constant.

A change in any of the variables previously held constant will shift the demand curve to a new position

Change in demand

A change in the quantity demanded at each possible price of the commodity, represented by a shift in the whole demand curve.

Change in supply

A change in the quantity supplied at each possible price of the commodity, represented by a shift in the whole supply curve

Change in quantity demanded

A change in the specific quantity of the good demanded, represented by a change from one point on a demand curve to another point, either on the original demand curve or on a new one.

Change in quantity supplied

A change in the specific quantity supplied, represented by a change from one point on a supply curve to another point, either on the original supply curve or on a new one

Because complements tend to be consumed together,

A fall in the price of one will increase the quantity demanded of both products and vice versa Thus, a fall in the price of a complement for a product will shift that product's demand curve to the right.

A change in quantity supplied can result from a change in supply, with the price constant;

A movement along a given supply curve because of a change in the price; or a combination of the two

Excess demand

A situation in which, at the given price, quantity demanded exceeds quantity supplied.

Excess supply

A situation in which, at the given price, quantity supplied exceeds quantity demanded

demand schedule

A table showing the relationship between quantity demanded and the price of a commodity, other things being equal.

Supply schedule

A table showing the relationship between quantity supplied and the price of a commodity, other things being equal

Four possible shifts in demand or supply curve

An increase in demand ( a rightward shift in the demand curve) A decrease in demand (a leftward shift in the demand curve) An increase in supply (a rightward shift in the supply curve) A decrease in supply (a leftward shift in the supply curve)

Population

An increase in population will shift the demand curve for most products to the right

Number of suppliers

An increase in the number of suppliers shifts the supply curve to the right A reduction in the number of suppliers shifts the supply curve to the left

Market

Any situation in which buyers and sellers can negotiate the exchange of goods or services

Expectations about the future

Changes in people's expectation about the future values of variables may change demand

Prices of other products

Changes in the price of one products may lead to changes in the supply of some other products because two products are either substitutes or complements in the production process

Long-lasting Taste shift

Ex: Typewriters to computers or VCRs to DVDs

Short-lived fads

Ex: video games such as Super Mario or Need for Speed

Substitutes in consumption

Goods that can be used in place of another good to satisfy similar needs or desires.

Complements in consumption

Goods that tend to be consumed together

Conversely, as the price goes down,

Households will demand more of it

Consumers income

If average income rises consumers as a group can be expected to desire more of most products, other things being equal.

If prices rise, ceteris paribus

Net effect is that less will be demanded of the product.

A single ponit on a demand schedule or curve is the

Quantity demanded at that point.

Inferior goods

Quantity demanded falls when income rises

An increase in demand causes

an increase in both the equilibrium price and the equilibrium quantity exchanged 1) increase in demand causes shortage at initial equilibrium price 2) unsatisfied buyers bid up price 3) rise in price causes larger quantity to be supplied 4) At new equilibrium more is exchanged at a higher price Demand curve shifts right

A decrease in supply causes

an increase in the equilibrium price and a decrease in the equilibrium quantity exchanged 1) decrease in supply creates a shortage at inital equilibrium price 2) causes the price to be bid up 3) Rise in price reduced the quatity deanded 4) new equilibrium is at a higher price and a lower quantity exchanged the supply curve shifts to the left

A change in the distribution of income can also lead to

changes in demand

Excess supply causes

downward pressure on price