Economics Test- Chapter 3 sections 4-9

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supply schedule

How much firms are willing to sell at various prices

Future Expectations of Price

If a seller expects the price of a good to rise in the future, the seller will store the goods now in order to sell more in the future

Changes in the number of competitors and supply

If more suppliers enter the market, the market supply of a good will rise and the supply curve will shift right

Impact of Ending Rent Control

If rents allowed to rise to market equilibrium to $900 a month, quantity of apartments would rise to 30,000 - people who could afford $900 a month would have easier time finding vacant apartments

Disequilibrium

If the market price or quantity supplied is anywhere but at equilibrium, the market is in a state of disequilibrium

Surplus

If the price is too high, the market will face the problems of surplus (excess supply)

Prices help consumers

choose among similar products

As a consumer you have the power to

choose what price to buy an item at

email allows people to

communicate in an instant

resources go to uses that

consumers value most highly

If a heat wave is forecast,

consumers will purchase more air conditioners-> price of air conditioners would increase

Government is unable to

control all the supply of goods passing through the economy

excise taxes increase the

cost and decrease the supply, supply curve shifts to the left

production costs

costs associated with the actual production of goods or services

Market benefits

In any market, supply and demand will be equal at only one price and one quantity- at equilibrium, buyers will purchase exactly as much of a good as firms are willing to sell

WWII US example

Instituted temporary price controls and shortages at home to ensure enough resources were available for the military

effects of rent control

Long waiting lists, discrimination by landlords, lottery system, bribery used to allocate them- must be lucky or inherit one rom family

Price Ceiling

Maximum price that can be legally charged for a good or service

Price Floors

Minimum price, set by the government, that must be paid for a good or service

The immediate effects of a shortage are

People stand in line up at stores or storm the internet to buy the hard to find item... price goes up!

equilibrium

Point where demand and supply come together- point of balane at which the quantity demanded equals the quantity supplied- market for a good is stable

Flexibility

Prices can be easily increased to solve a problem of a shortage, and they can just as easily be decreased to eliminate a problem of surplus

what creates the law of supply?

Two movements of individual firms changing their level of production and firms entering or exiting the market

The supplies of imported goods are affected by changes in other countries

US imports carpets from India; An increase in the wages if Indian workers would decrease the supply of carpets to the US market, shifting the supply curve to the left

fixed costs

a cost that does not change, no matter how much of a good is produced

variable cost

a cost that rises or falls depending on how much is produced

excise taxes

a government can reduce the supply of some goods by placing an excise tax on them

In a free market, prices offer

a number of advantages to both consumers and producers

when a factor other than the price affects output,

a whole new schedule must be made

supply

amount of goods available

input costs

any change in the cost of an input used to produce a good such as raw materials, machinery, or labor will affect supply

They will continue to sell at that price until there are changes to the demand/supply curve which

creates pressures to raise or lower prices and eventually, a new equilibrium

very responsive to change

elastic

examples of variable costs

electricity bill, heating bill, cost of workers

In the case of a hot toy, the shortage appears as

empty shelves or long lines, search costs

by raising and lowering the costs of producing goods, the government can

encourage or discourage an entrepreneur or an industry within the country or abroad

the government dictated what

farmers should produce and the quantity

search costs

financial and opportunity costs that consumers pay in searching for a product or service

comparing these two helps us

find a common ground for the two sides

Buyers willing to purchase goods at the equilibrium price will

find ample supplies on store shelves- firms that sell equilibrium will find enough buyers for their goods

Businesses prosper when they

find out what consumers want and then provide it!

to find the best level of output

find the output level where marginal revenue is equal to marginal cost

elasticity of supply in the long run

firms are more flexible, so supply is more elastic; like demand, supply becomes more elastic over time

long run

firms are more flexible- elastic supply

short run

firms cannot easily change output levels- inelastic supply

the shutdown decision

firms should keep the factory open if the total revenue from the goods the factory produces is greater than the cost of keeping it open

when will a business replace a factor that is operating at a loss?

firms will build a new factory and stay in the market only if the market price of beanbags is high enough to cover all the costs of production including the cost of building a new factory

In short, prices help goods

flow through the economy without a central plan

supply graph is read

from left to right

subsidy

government payment that supports a business or market

1930s

great depression, government set minimum prices for commodities

supply graph moves toward

higher output levels and higher prices

sellers want

hope to sell at the highest possible price

Although markets trend toward equilibrium, the government may

intervene to control prices

when a firm is flexible

its responsive to market conditions

when people join the market to profit from a trend,

its the law of supply

increasing marginal returns

labor increases as number of workers increase

what will be used for their most valuable purposes?

land, labor, capital

Rent control limits

landlords' profits, so they cut costs- don't paint, no new garden, no repairs- if there is a waiting list, no incentive to work hard and attract renters

supply graph illustrates

law of supply

Unlike minimum wage, price floors have no

legal minimums set for buyers

if a price falls, firms produce

less and may leave market

advances in technology can

lower production costs in many industries

technology

lowers cost and increases supply at all price levels

Buyers always want to pay the

lowest possible price

High price encourages owners to

make more pizza but customers are discouraged from buying it- pizza is more expensive than other menu items

regulations increase the cost of

manufacturing cars and reduces supply; supply curve shifts to the left

firms enjoy increase

marginal returns

When the market is in disequilibrium and prices are flexible,

market forces will push the market toward equilibrium

the firm's goal is to

maximize profit

elasticity of supply

measure of the way quantity supplied reacts to a change in price

Free market pricing distributes goods through

millions of decisions made daily by consumers and suppliers

change in the good's prices

moves the seller from one row to another on the supply schedule, but does not change the supply schedule itself

Prices provided an easy way for you to

narrow your choices to a certain price range

does efficient resource allocation take place with central control?

no

On other hand, when rent control is ended, some people living in rent-controlled apartments may

no longer be able to afford higher rents- renters may be priced out of apartments by people able to pay

Whatever the cause, the hard-to-get item is

no longer so hard to get... and the shortage ends

do consumers realize they pay excise taxes?

no they are built into the cost of the good

what does a free market system cost to administer?

nothing

as prices rise, producers will

offer more of a good and more suppliers will enter the market to get a share of their profits

firms aim for

optimal number of workers

If the shortage continues,

other suppliers will seek to enter the market; Demand is up, prices are up

Sellers do not want to waste their resources on a surplus

particularly when goods cannot be stored long, like pizza

the black market allows consumers to

pay more so they can buy a product when rationing makes it otherwise unavailable

diminishing marginal returns

point at which labor decreases as number of workers increases

Prices as an incentive

prices communicate to both buyers & sellers whether goods or services are scarce or easily available; prices can encourage or discourage production

producers red light

produce less

producers green light

produce more

subsidies lower costs allowing the firm to

produce more goods

as prices of goods rise, firms will

produce more in order to earn additional revenue

law of supply

producers offer more of a good as its price increases and less as its price falls

excise taxes increase

production costs by adding an extra cost for each unit sold

market entry

profits appeal to producers in the market and prospective people

governments in developing countries subsidize manufacturers to

protect young growing industries from foreign competition

Based on your income, you will

purchase certain items for a specific price

surplus exists when

quantity supplied exceeds quantity demanded

law of supply

quantity supplied increases as the price increases

market supply curve is a graph of

quantity supplied of a good by all suppliers at various prices

Federal government sets a base level for minimum wage, but

states can make their own minimum wages higher

when the price goes down,

suppliers are discouraged from producing as much as before

When price rises enough to close the gap

suppliers have found the highest price the market can bear

when price goes up,

suppliers recognize the chance to make more money and produce more

As long as there is a shortage and the quantity demanded exceeds the quantity supplied,

suppliers will keep raising the price

what creates prices in a free market?

supply and demand

this lowers the cost, leading to

supply increases, supply curve shifts to the right

elasticity of supply in the short run

supply is inelastic because a firm cannot easily change its output level

market supply schedule resembles

supply schedule of a single firm since all will charge the same price in the same area within a same range, but supplied quantities are much larger because there are many firms in a community

Prices also allow producers to

target the audience they want with the products that will sell best to that audience

quantity supplied

the amount a supplier is willing and able to supply at a certain price

to find the level of output with the highest profit, we look for

the biggest gap between total revenue and total cost

law of supply develops from

the choices of both current and new producers of a good

marginal cost

the cost of producing one more unit of a good

behind all hiring decision's is

the firm's goal

when prices fell below a certain level,

the government, created demand by buying excess crops

Disequilibrium:

the market is thrown out of balance

There is a positive relationship between

the numbers of suppliers and the market supply of a good

Whether the cause is increase in demand or decrease in demand,

the result is the same

excise taxes are meant to discourage

the sale of some goods

total cost

the sum of fixed and variable costs

If suppliers stop producing a good and leave the market

the supply will decline

the information in a supply schedule could change based on

what other variables are considered

disequilibrium occurs

when quantity supplied is not equal to quantity demanded in a market

supply graph

when the data points in the supply schedule are graphed, they create a supply curve

Renters would have

wider selection of apartments, landlords would have greater incentive to maintain buildings, invest in new construction

a rise in the cost of an input

will cause a fall in supply at all price levels because the good has become more expensive to produce

a fall in the cost of an input

will cause an increase in supply at all price levels

negative marginal returns

workers often get in each other's way and disrupt production, so output decreases

Sellers can included

workers, who sell their labor

The available toys must be distributed

-limited quantities -first come first serve

Where do Firms Produce?

-Many firms choose to be located near transportation -Other firms choose to locate close to suppliers so they do not need to transport the inputs -Other firms will choose to locate close to consumers -Lastly some firms choose to locate near human capital (specialized workers) or certain cities

Cabbage patch dolls example

-Sudden increase in demand told suppliers that people wanted more of the doll -Consumers will pay higher price -Incentive for new firms to enter the market

the balance Can happen in two ways

-Fads end -New suppliers fill in the gap

Changes in the global economy

A large and rising share of goods and services are imported

The black market

A market in which goods are sold illegally, without regard for government controls on price of quantity

US imports oil from Russia

A new oil discovery in Russia could increase the supply of oil to the US market and shift the supply curve to the right

Rationing

A system of allocating scarce goods and services using criteria other than price

How does the market react to a shortage?

Disequilibrium:

Soviet Union example

Goods were often inexpensive, but people had to wait on long lines for hours for eggs or soap

regulation

Government intervention in a market that affects the price, quantity, or quality of a good

Rent Control

Governments will sometimes place price ceilings on goods that are considered "essential" and might become too expensive for consumers

To graph a combined graph

Graph both the supply schedule and the demand schedule and locate the point at which the supply curve and the demand curve intersect; At that point, quantity supplied equals quantity demanded

MINIMUM WAGE

Sets minimum price that an employer can pay a worker for one hour of labor

Shortage

Shortage occurs when the quantity demanded in a market is more than the quantity supplied

demand schedule

Shows much of a good consumers are willing to buy at various prices

advantages to both consumers and producers

Simple purchases would be much more complicated and inefficient without the price system

Supply shock example

Sudden shortage of wheat-> raise price resolves shortage as there is not enough time to plant a new crop

an excise tax is a tax on

The production or sale of a product

government has the power to

affects the supplies of many types of goods

All of the advantages of a free market allow prices to

allocate, or distribute, resources efficiently

Cost of rent control

although governments pass rent control laws to help those with greatest need, few actually benefit from rent control

in time, supply and demand will

balance out again

Consumers who can afford the higher price will

be the only consumers still in the markekt and the market will settle at a new equilibrium.

Price ceilings are set

below equilibrium prices

The end of rent control

benefits some people and hurts others- most economists agree that the benefits of ending rent control exceed the costs and suggest that there are better ways to help poor households find affordable housing

When a market is at equilibrium

both buyers and sellers benefit

consumers red light

buy less

Consumers Green light

buy more

automation

can save on labor costs

price floors ensure that

certain sellers receive at least a minimum reward for their efforts

marginal product of labor

change in output from hiring one more worker

the market is thrown out of balance

demand increases and supply decreases

The search for profit

drives supplier's decisions

Imperfect information

if buyers and sellers do not have enough information, they may not make the choice that is best for them

Imperfect competition:

if only a few firms are selling a product there might not be enough competition to lower market prices to the true equilibrium

price increase

incentive for new firms to enter the market to make their own profits

not responsive to change

inelastic

factors that shift the supply curve

input costs, technology, government policies and changes in supply, subsidies, excise taxes, regulations, changes in the economy, future expectations, changes in competitions

regulation is an indirect way of

raising or lowering supply of goods

When there is a shortage, profit-seeking sellers

realize they can raise prices to earn more profits- for these reasons, market prices move toward the equilibrium level

examples of fixed costs

rent, property taxes, cost of building

technology causes a shift in the supply curve to the

right

a change in the quantity supplied

rise or fall in price will cause quantity supplied to change but not supply schedule

effect of rising costs

rising costs increase costs and decrease supply at all price levels; supply curve will shift to the left

many rent-controlled apartment buildings become

run-down, renters have to wait months to have routine problems fixed

Voted out in 1996 since they

seemed to be in conflict with free market principles

If the price of a goods is expected to drop in the near future

sellers will earn more money by placing goods on the market immediately before the price falls

When actual price in a market is below equilibrium price,

shortages occurs because the low price encourages buyers and discourages sellers

horizontal axis

shows quantity of good supplied, not the quantity demanded

supply schedule

shows the relationship between price and quantity supplied for a specific good or how much of a good a supplier will offer at various prices

market supply schedule

shows the relationship between prices and the total quantity supplied by all firms in a market

Negative externalities

side effects of production that impose unintended costs (air and water pollution)

computers have

simplified tasks and cut costs in many fields

in france, government subsidies

small farms to protect the lifestyle and character of the French lifestyle

adding workers helps to

specialize in the tasks of output

supply, demand and prices will gradually move to

their equilibrium price

If a firm is already earning profit by selling a good,

then an increase in the price will increase the firm's profits and they will produce more

diminishing marginal returns is when

there are too many workers, not enough capital to be productive; workers have limited amount of capital

elasticity of supply and time

time determines whether the supply of a good is elastic or inelastic

Government requiring car manufacturers to install technology

to reduce pollution from auto exhaust

market supply schedules show

total supply of a city

Changes in supply and demand

upset market equilibrium and cause prices to change.


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