Micro Economics Chapter 3

Explain the law of Demand

"Supply is a schedule showing the relationship between price and quantity supplied for a specified period of time, other things being equal"

Decrease in Demand

Price decrease- quantity decrease

Decrease in Supply

Price increases- quantity decreases

Complex Case Supply and Demand decreases

decrease in price greater - quantity depends on the size of change in supply and demand - when supply increases then quantity increases but when demand decreases then quantity decreases.

Supply decrease and demand increase

price increase - quantity again indeterminant

Supply and demand increase

- price depends on size of change in supply and demand if supply increase > demand increase then price decrease if supply increase < demand increase then price increase -quantity will increase

Money incomes

1. Money incomes - normal goods - as income rises demand rises. - inferior goods - as income rises demand falls.

Other Determinants are

1. Money incomes - normal goods - as income rises demand rises. - inferior goods - as income rises demand falls. 2. Tastes or preferences - Campbell's versus no-name 3. Prices of related goods - substitute - same - coffee and tea - when the price of one rises, the demand for the other increases. - complement - goods go together - camera and film. - when the price of one rises, demand for both decreases. 4. Consumer expectations with respect to future prices (oranges and frost) & incomes (recession) 5. Population - the more people the more demand. Changes in demand - increase - shift to the right - decrease - shift to the left 1. Change in tastes increase in taste -> increase in demand -> shift right - (spinach - because it is healthy) decrease in taste -> decrease in demand -> shift left (oat bran - is not as healthy as previously thought) 2. Numbers of buyers change increase in numbers -> increase in demand -> shift right decrease in numbers -> decrease in demand -> shift left 3. Change in income for superior or normal goods increase in income -> increase in demand -> shift right decrease in income -> decrease in demand -> shift left for inferior or poor man's goods increase in income -> decrease in demand - as income increases- consumers will buy more superior goods (steak) instead of inferior goods (hamburger) 4. Prices of related goods substitute good - price of one good and the demand for the other are directly related. increase in fords price -> decrease in demand but dodges demand will increase complementary goods - jointly demanded lamp demand increases -> light bulb demand increases toys and batteries 5. Expectations if expect an increase in prices may buy now Changes in quantity demanded A change in demand is not a change in quantity demanded

Distinguish between a change in quantity demanded and a change in demand.

A change in quantity demanded is a movement along the demand curve. Usually happens when price changes. A change in demand is a shift to a whole new demand curve. When drawing the demand curve, the assumption is price is the major determinant and that all other factors are equal or constant.

Distinguish between a change in quantity supplied and a change in supply.

A change in quantity supplied is a movement along the supply curve. Usually this occurs when price changes. A change in supply is a whole new supply curve. Determinants of supply - assumes that price is the major determinant & other factors remain equal or constant Other major determinants 1. Costs of inputs used to produce the product 2. Technology and productivity 3. Taxes and subsidies 4. Price expectations 5. Number of firms in the industry Change in supply - increase in supply -> shift right - decrease in supply -> shift left 1 & 2. Change in technique and resource - decrease in production costs -> increase in supply 3. Taxes and subsidies - increase in sales taxes -> increase in cost -> decrease in supply - increase in subsidies ->decrease cost -> increase in supply 4. Price of other goods - increase in price of rice (other good) -> decrease in supply of potatoes ( supplier would want to produce rice instead) - decrease in price of rice (other good) -> increase in supply of potatoes ( would want to supply potatoes) 5. Expectations - expect the prices to increase - might hold on to product therefore -> supply will decrease (gold) 6. Number of sellers - the larger the number of sellers the greater the market supply Change in quantity supplied - movement up & down supply curve Change in supply - shifts to the left or right

Explain the law of Demand

A market refers to all the arrangements people have for exchanging things. "Demand is a schedule of how much of a good or service people will purchase at any price during a specified time period, other things being equal"

Increase in Demand

A. Increase in demand - price increase - quantity increases

Law of Demand

As prices fall the corresponding quantity demanded rises (inverse relationship) The relative price is the price in relation to other goods. Money or absolute price is the price in today's dollars. Individual demand is the demand of one consumer, market demand is the demand for all consumer's.

Law of Supple

As prices rise the corresponding quantity supplied rises Market supply - add all individual suppliers together

Increase in Supply

B. Price decreases- quantity increases

Describe how changes in demand and supply can change equilibrium price and quantity.

Changes in supply and demand We know both demand and supply can change for various reasons - how does this effect the equilibrium price

Explain how the forces of demand and supply interact to determine equilibrium price and quantity.

Equilibrium is where quantity demanded and quantity supplied are equal. - of the five possible alternatives which would prevail -> $6 market clearing or equilibrium price. Could any other price be sustained? - at $8 would have a surplus of 20 therefore suppliers would lower price to get rid of surplus - at $4 would have a shortage of 20 therefore sellers would get an increase in price

Supply and Demand Decrease

Supply and demand decrease - price again depends on size of change in supply and demand - quantity decreases