Economics Chapter 3

change in technology

(allows suppliers to use fewer resources, reducing costs, increased profit) *direct relationship when technology increases, supply does too (vice versa)

determinants of supply

(factors other than price that determine quantities supplied of a good/service) 1) resource prices 2) technology 3) # of sellers 4) taxes/subsidies 5) prices of other goods produced with similar resources 6) producer expectations

determinants of demand

(factors other than price that determine the quantities demanded -constant when d1 is drawn) 1) consumer tastes/preferences 2) # of buyers in market 3) consumer income 4) price of related goods 5) customer expectations

law of supply

(other things =) producers will offer more when a product is at a high price (vice versa) (think in terms of profits: as price rises, more profits=more goods/services supplied)

law of demand

(principle that, other things =) as prices fall, the quantity demanded increases (vice versa)

demand curve

a curve showing how price is associated with a specific quantity demanded (shift left= decreasing demand shift right= increasing demand downsloping curve)

demand schedule

a table of #'s showing amounts of a good/service buyers are willing/able to purchase (at various prices over a period of time)

supply schedule

a table of numbers showing the amounts of a good/service producers are willing/able to make available for sale

rationing function of prices

ability of competitive market to find a price at which there is equilibrium

price ceiling

an established maximum price for a good/service set by gov -set below equilibrium price *designed to help customers *result: persistent shortage (extreme cases: black market) *a price below ceiling=legal (ex): on rent

price floor

an established minimum price set by gov -set above equilibrium price -designed to help producers -result: chronic surplus (gov may restrict supply, may purchase supply) (at taxpayers expense) -a price above floor=legal (ex: minimum wage)

substitution effect

as prices rise/incomes decrease, consumers will replace more costly items with less costly alternatives (vice versa)

normal goods

brand, high end as income increases, demand increases (Vice versa)

law of diminishing marginal utility

buyers will derive less satisfaction from each successive unit of a product consumed THEREFORE: buyer is only willing to buy more if price is reduced

change in number of sellers

direct relationship -as number of sellers increase, so does supply

change in number of buyers

direct relationship increased buyers/increased demand

change in customer tastes

direct relationship increased taste/increased demand

characterization of markets

don't have to be physical (online) local, national, international price: discovered in the interactions of buyers/sellers (ex: stock markets)

income effect

lower price increases the purchasing power of a buyer's income (vice versa) (results from a change in demand price, income is fixed)

equilibrium price

price at which quantity demanded=quantity supplied (@ equilibrium)

equilibrium

price at which the quantity supplied= quantity demanded market "clears" (-no tendency to change once in equilibrium -must put in equilibrium price and equilibrium quantity -no shortage/surplus)

change in prices of other goods that can be produced with similar resources

price of other products made with similar resources increase, supply decreases (vice versa) (suppliers will want to produce something else if it's sold at a higher price)

productive efficiency

producing products in least costly way

allocative efficiency

producing the right amount of a product relative to other products

supply

what producers are willing to offer in a market (at each possible price during a specific period)

demand

what products consumers are WILLING and ABLE to purchase

change in supply

when other things equal changes, determinants of supply change *entire supply curve moves

changes in quantity supplied

only when product price changes

change in taxes/subsidies

(taxes=indirect relationship: higher taxes, less people buying, less sellers wanting to supply) as taxes increase, supply decreases (vice versa) (subsidies: direct relationship, gov giving money to business) as subsidies increase, supply does too (vice versa)

why is supply a direct relationship?

1-price=incentive 2-at a point cost will rise so prices must rise to cover costs 3- with more money, more supply (only way you're going to supply more is to raise $)

inferior goods

generic, second hand as income increases, demand decreases (vice versa)

change in consumer expectations: demand

if consumers expect a price to decrease in future, the demand will drop today because consumers will buy later (vice versa)

supply curve

illustrates supply of a product by showing how each possible price is associated with a specific quantity supplied (*shift to the right/outward= direct relationship *shift to the left/inward= indirect relationship *upsloping curve)

any changes in demand/supply affect eq price/quantities

increase demand: increase eq price/eq quantity decrease demand: decrease eq price/eq quantity increase supply: decrease eq price/increase eq quantity decrease supply: increase eq price/decrease eq quantity

when changes occur in both supply and demand simulatenously (COMPLEX CASES)

increases in supply and demand= eq price indeterminate/ eq quantity increases decreases in supply and demand= eq price indeterminate/ eq quantity decreases increase in supply, decrease in demand= eq price decreases/ eq quantity indeterminate decrease in supply, increase in demand= eq price increases/ eq quantity indeterminate

change in resource prices: supply

indirect relationship when resource prices increase, supply decreases (vice versa)

change in producer expectations

indirect relationship= if sellers expect a lower price in the future, they will supply more now (vice versa)

change in demand

movement of entire demand curve changes in determinants of demand new demand schedule shifts to a new curve

change in income ((NOT INCOME EFFECT))

normal goods: direct relationship inferior goods: indirect relationship -price remains constant, income changes

changes in quantity demanded

occurs when product price changes, movement from one point to another point on curve, same demand schedule

floors and ceilings

only occur when gov wants to intervene and floor is set above a ceiling

why is the law of demand an inverse relationship?

product at low price=ideal, diminishing marginal utility, income/substitution effect (1- product at low price= ideal 2- from each successive unit of product consumed, each buyer will derive LESS satisfaction *diminishing marginal utility 3- income effect/substitution effect)

complementary goods

product/service that are used together -when the price of one falls, the demand for the other increases ex: peanut butter and jelly (as the price of jelly increases, the demand for peanut butter decreases)

equilibrium quantity reflects...

productive and allocative efficiency

substitute good

products/service that can be used in place of another -when the price of one falls, the demand of the other product falls (vice versa) ex: coke and pepsi (as the price for pepsi increases, the demand for coke increases)

equilibrium quantity

quantity at which the intentions of buyers/sellers match at the price where quantity demanded=quantity supplied

surplus

quantity demanded < quantity supplied

shortage

quantity demanded > quantity supplied

change in prices of related goods

substitute good: direct relationship complementary good: indirect