Microeconomics Ch. 4
the two sides of the market are:
1. buyers/ demanders 2. sellers/suppliers
change in the quantity demanded
a change in the quantity of a good that people plan to buy that results from a change in the price o the good with all other influences on buying plans remaining the same.
change in the quantity supplied
a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good.
change in demand
a change in the quantity that people plan to buy when any influence on buying plans other than the price of the good changes. -> this means that there is a new demand schedule and a new demand curve (ie. the demand curve shifts) -> demand can increase (the demand curve shifts rightward) or decrease (demand curve shifts leftward)
Change in supply
a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes. ( there is a new supply schedule and supply curve)
supply schedule
a list of the quantities supplied at each different price when all the other influences on selling plans remain the same.
to explain and predict changes in prices and quantities, only consider ....
changes in the equilibrium price and the equilibrium quantity.
market equilibrium
when the quantity demanded equals the quantity supplied- buyers' and sellers' plans are in balance
The law of market forces
when there is a surplus, the price falls; and when there is a shortage, the price rises.
changes in both demand and supply
you can find the resulting change in the equilibrium price and equilibrium quantity
An increase in productivity...
-> lowers the cost of producing the good and increase its supply. -technological change and the increased use of capital increase productivity
Supply can either increase or decrease
-> when the supply decreases, the supply curve shifts leftward (on supply curve S1, the quantity supplied at each price is smaller) -> when supply increases, the supply curve shifts rightward (on supply curve S2 the quantity supplied at each price is greater)
A decrease in productivity...
->has the opposite effect and decreases supply. -Natural events such as severe weather and earthquakes decrease productivity and decrease supply.
preferences
->tastes that influence demand - when preferences change, the demand for one item increases and the demand for another item(s) decreases. EX:preferences have changed as people have become better informed about the health hazards of tobacco. This change in preferences has decreased the demand for cigarettes and has increased the demand for nicotine patches.
expected future income and credit
->when income is expected to increase in the future, or when credit is easy to get and the cost of borrowing is low, the demand for some goods increases. ->and when income is expected to decrease in the future,or when credit is hard to get and the cost of borrowing is high, the demand for some goods decreases. ->changes in expected future income and the availability and cost of credit has the greatest effect on the demand for big ticket items such as homes and automobiles-> modest changes in expected future income or credit availability bring large swings in the demand for these items.
Why, other things remaining the same, does the quantity supplied increase if the price rises and decrease if the price falls?
1. Because factors of production are not equally productive in all activities, as more of a good is produced, the opportunity cost of increased production. 2. given cost: a higher price provides the incentive to bear the higher opportunity cost of increased production.
The three questions used to work out the effects of an event on a market:
1. Does the event influence demand or supply? 2. Does the event INCREASE or DECREASE demand or supply-shift the demand curve or the supply curve rightward or leftward? 3. What are the new equilibrium price and equilibrium quantity and how have they changed?
The main influences on buying plans that change demand are:
1. prices of related goods 2. expected future prices 3. income 4. expected future income and credit 5. number of buyers 6. preferences
the main influences on selling plans that change supply are:
1. prices of related goods 2. prices of resources and other inputs 3.expected future prices 4. number of sellers 5. productivity
related goods are either:
1. substitutes in production or 2. complements in production
Other things remaining the same, how does the quantity supplied of a good change as its price varies?
Answer: LAW OF SUPPLY
When thinking about the influences on demand, try to get into the habit of asking:
Does this influence change the quantity demanded or does it change demand? the test: - Did the price of the good change or did some other influence change? -> If the price changed, then quantity demanded changed. -> If some other influence changed and the price remained constant, then demand changed.
An example of inferior and normal good
If your income increases and you decide to buy more chicken and less pasta, for you, chicken is a normal good and pasta is an inferior good.
decrease in demand and increase in supply
a decrease in demand or and increase in supply lowers the equilibrium price, so combined, these changes LOWER THE PRICE. -> BUT a decrease in demand decreases the quantity, and an increase in supply increase the quantity . -> so... we need to know the magnitudes of the changes to know what happens. ->if demand decreases by more than supply increases the quantity decreases -> if supply increase by more than demand decreases the quantity increases
decrease in both demand and supply
a decrease in either decreases the equilibrium quantity ->decrease together= quantity decreases BUT the price falls when demand decreases and rises when supply decreases so-> when demand and supply decrease together we can't tell what happens to the quantity unless we know the magnitudes of the changes. -> if demand increases by more than supply decreases the quantity increases -> if the supply decreases by more than demand increases the quantity decreases.
Inferior good
a good for which demand decreases when income increases and demand increases when income decreases.
Normal good
a good for which demand increases when income increases and demand decreases when income decreases.
substitute
a good that can be consumed in places of another good. EX: chocolate cake is a substitute for cheesecake, and bottled water is a substitute for Gatorade. ->the demand for a good and the price of one of its substitutes move in the same direction. ->the demand for a good increases if the price of one of its substitutes rises and decreases if the price of one of its substitutes falls EX:the demand for cheesecake increases when the price of chocolate cake rises.
substitute in production
a good that can be produced in place of another good. EX: Skinny jeans are substitutes in production for boot cut jeans in a clothing factory.
complement
a good that is consumed with another good. EX: Wrist guards are a complement of in-line skates, and bottled water is a complement of fitness center services. ->the demand for a good and the price of one of its complements move in the opposite directions. -> the demand for a good decreases if the price of one of its complements rises and increases if the price of one of its complements falls. EX: the demand for wrist guards decreases when the price of in-line skates rises.
complement of production
a good that is produced along another good. EX: Cream is a complement of production of skim milk in a dairy.
demand curve
a graph of the relationship between the quantity demanded of a good and its price when all the other influences on buying plans remain the same. (for one person)
supply curve
a graph of the relationship between the quantity supplied of a good and its price when all the other influences on selling plans remain the same. ->the upward slope of the supply curve illustrates the law of supply -> along the supply curve, when the good RISES, the quantity supplied INCREASES. EX: When the price of a bottle of water rises from $1.50 to $2.00, the quantity supplied increases from 2,000 bottles a day to 3,000 bottles a day. -> When the price FALLS, the quantity supplied DECREASES. EX: When the price falls from $1.50 to $1.00 a bottle, the quantity supplied decreases from 2,000 bottles a day to 1,000 bottles a day.
demand schedule
a list of the quantities demanded at each different price when all the other influences on buying plans remain the same. (for one person)
expected future prices
a rise in the expected future price of a good increases the current demand for that good and a fall in the expected future price decreases current demand. EX: if you expect the price of noodles to rise next week, you buy a big enough stockpile to get you through the next few weeks. Your demand for noodles today has now increased. Now, if you expect the price of noodles to fall next week, you buy none now and plan to buy next week. Your demand for noodles today has decreased.
shortage
a situation in which the quantity demanded exceeds the quantity supplied. -> buyers must pay a higher price to get more. -> sellers are pleased to take the higher price, so the price rises -> bc. a shortage arises when the price is below the equilibrium price, a rising price is exactly what is needed to restore equilibrium
surplus
a situation in which the quantity supplied exceeds the quantity demanded. -> suppliers must cut the price to sell more -> buyers welcome lower price so the price falls -> bc. a surplus arises when the price is above the equilibrium price, a falling price is exactly what the market needs to restore equilibrium.
increase in both demand and supply
either increases the equilibrium quantity together-> the quantity increases -> can only tell what happens to the price if you know the magnitudes of the changes -> if demand increase by more than supply increases, the price falls.
Expected Future Prices
expectations about future prices influence supply.
productivity
is output per unit of input.
law of demand
other things remaining the same, if the price of a good rises, the quantity demanded of that good decreases; and if the price of a good falls, the quantity demanded of that good increases.
Law of Supply
other things remaining the same, if the price of a good rises, the quantity supplied of that good increases; and if the price of a good falls, the quantity supplied of that good decreases. EX: so the law of supply states that when all other things remain the same, if the price of bottled water rises, spring owners will offer more water for sale EX:if the price of a flat screen TV falls, Sony Corp. will offer fewer flat panel TVs fore sale.
quantity supplied
the amount of any good, service, or resource that people are wiling and able to sell during a specified period at a specified price. EX:when the price of spring water is $1.50 a bottle, a spring owner decides to sell 2,000 bottles a day. The 2,000 bottles a day is the quantity supplied of spring water by this individual producer. ( the quantity is supplied is measured as an amount per unit of time) -> ONE quantity at ONE price
quantity demanded
the amount of any good,service or resource that people are willing and able to buy during a specified period at a specified price. EX:spring water costs $1 a bottle, you decide to buy 2 bottles a day. The 2 bottles a day is your quantity demanded of spring water. Measured as an amount per unit of time
number of buyers
the greater the number of buyers in a market, the larger the demand. EX: the demand for parking spaces, bottled water, or just about anything is greater in New York City than it is in Boise, Idaho.
the greater the number of sellers in a market....
the larger is the supply
equilibrium price
the price at which the quantity demanded equals the quantity supplied.
supply changes when...
the price of a resource or other input used to produce the good changes-> influence the cost of production. -> the more it costs to produce a good, the smaller the quantity supplied of that good at each price (other things remaining the same) EX:if the wage rate of bottling-plant workers rises, it costs more to produce a bottle of water,so the supply of bottled water decreases.
equilibrium quantity
the quantity bought and sold at the equilibrium price
Demand
the relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same. -> the quantity demanded is ONE quantity at ONE price. -> demand is a list of quantities at different prices illustrated by a demand schedule and a demand curve.
Supply
the relationship between the quantity supplied and the price of a good when all other influences on selling plans remain the same. -> a list of quantities at different prices illustrated by a supply schedule and a supply curve,
market demand
the sum of the demands of all the buyers in the market.
Market supply
the sum of the supplies of all the sellers in the market. -> to find the quantity of a good supplied in the market, we sum the quantities supplied by the 2 sellers -> at a given price, the quantity supplied on the market supply curve equals the horizontal sum of the quantities supplied on the individual supply curves.
A change in the price of a substitute in production
the supply of a good DECREASES if the price of one of its substitutes in production RISES; and the supply of a good INCREASES if the price of one of its substitutes in production FALLS. ->ie.the supply of a good and the price of one of its substitutes in production move in opposite directions. EX: a clothing factory can produce cargo pants or button-fly jeans rises, the clothing factory switches production from cargo pants to buttons-fly jeans, so the supply of cargo pants decreases.
a change in the price of a complement in production
the supply of a good INCREASES if the price of one of its complements in production RISES; and the supply of a good DECREASES if the price of one of its complements in production FALLS. ->ie.the supply of a good and the price of one of its complements in production move in the SAME DIRECTION EX: When a dairy produces skim milk, it also produces cream, so these goods are complements in production, so the supply of cream increases.
Why does the quantity demanded increase if the price falls, all other things remain the same?
when faced with a limited budget, people always have an incentive to find the best deals available. EX:the price of bottled water fell from $1 a bottle to 25 cents a bottle, so by switching from Gatorade to water, they save 75 cents a bottle, which they can spend on other things they previously couldn't afford.