Chapter 3
Ceteris paribus conditions of demand include...
-Consumers' income -Tastes and preferences -The prices of related goods -Expectations regarding future prices and future incomes -Market size (number of potential buyers).
Ceteris paribus conditions of supply include...
-The prices of resources (inputs) used to produce the product, technology and productivity, taxes and subsidies -Producers' price expectations -The number of firms in the industry
Movement along the demand curve v. Shift of the demand curve.
A change in a good's own price lead to a change in quantity demanded for any given demand curve, other things held constant. This is a movement along the curve. A change in any of the ceteris paribus conditions for demand leads to a change in demand. This is a shift of the curve.
TASTES AND PREFERENCES
A change in consumer tastes in favor of a good can shift its demand curve outward to the right.
Movement along the supply curve v. Shift of the supply curve.
A change in price leads to a change in the quantity supplied, other things being constant. This is a movement along the curve. A change in any ceteris paribus condition for supply leads to a change in supply. This is a shift of the curve.
PRICE EXPECTATIONS
A change in the expectation of a future relative price of a product can affect a producer's current willingness to supply, just as price expectations affect a consumer's current willingness to purchase.
Changes in Supply versus Changes in Quantity Supplied
A change in the price of the good in question always (and only) brings about a change in the quantity supplied along a given supply curve. We move to a different point on the existing supply curve. This is specifically called a change in quantity supplied. When price changes, quantity supplied changes—there is a movement from one point to another along the same supply curve.
A change in demand comes about only because of a change in the (ceteris paribus / price conditions of demand). This change in demand is a shift in the demand curve to the left or to the right.
A change in the quantity demanded comes about when there is a change in the price of the good (other things held constant). Such a change in quantity demanded involves a movement along a given demand curve.
When you think of demand, think of the entire curve. Quantity demanded, in contrast, is represented by a single point on the demand curve.
A change or shift in demand is a movement of the entire curve. The only thing that can cause the entire curve to move is a change in a determinant other than the good's own price.
When you think of supply, think of the entire curve. Quantity supplied is represented by a single point on the supply curve.
A change, or shift, in supply is a movement of the entire curve. The only thing that can cause the entire curve to move is a change in one of the ceteris paribus conditions.
Demand curve
A graphical representation of the demand schedule. It is a negatively sloped line showing the inverse relationship between the price and the quantity demanded (other things being equal).
Subsidy
A negative tax; a payment to a producer from the government, usually in the form of a cash grant per unit.
Demand
A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant.
Supply
A schedule showing the relationship between price and quantity supplied for a specified period of time, other things being equal.
Shortage
A situation in which quantity demanded is greater than quantity supplied at a price below the market clearing price.
Surplus
A situation in which quantity supplied is greater than quantity demanded at a price above the market clearing price.
Market
All of the arrangements that individuals have for exchanging with one another. Thus, for example, we can speak of the labor market, the automobile market, and the credit market.
MARKET SIZE (NUMBER OF POTENTIAL BUYERS)
An increase in the number of potential buyers (holding buyers' incomes constant) at any given price shifts the market demand curve outward. Conversely, a reduction in the number of potential buyers at any given price shifts the market demand curve inward.
Another term for the market clearing price is...
Another term for the market clearing price is. the equilibrium price, the price at which there is no tendency for change. Consumers are able to get all they want at that price, and suppliers are able to sell all they want at that price.
There is usually a direct relationship between price and quantity supplied.
As the price rises, the quantity supplied rises. As the price falls, the quantity supplied also falls.
The law of supply, can be summarized as follows:
At higher prices, a larger quantity will generally be supplied than at lower prices, all other things held constant. At lower prices, a smaller quantity will generally be supplied than at higher prices, all other things held constant.
TAXES AND SUBSIDIES
Certain taxes, such as a per-unit tax, are effectively an addition to production costs and therefore reduce supply. A per-unit subsidy would do the opposite. Every producer would get a "gift" from the government for each unit produced.
EXPECTATIONS
Consumers' expectations regarding future prices and future incomes will prompt them to buy more or less of a particular good without a change in its current money price.
Demand curves are drawn with determinants other than the price of the good held constant. These other determinants, called ceteris paribus conditions, are (1) income/input prices, (2) technology and productivity/tastes and preferences, (3) taxes and subsidies/prices of related goods, (4) expectations about future prices and incomes/expectations of future relative prices, and (5) the number of potential buyers in the market/the number of firms in the industry at any given price. If any one of these determinants changes, the demand curve will shift to the right or to the left.
Demand curves are drawn with determinants other than the price of the good held constant. These other determinants, called ceteris paribus conditions, are (1) income, (2) tastes and references, (3) prices of related goods, (4) expectations about future prices and incomes , and (5) the number of potential buyers in the market at any given price. If any one of these determinants changes, the demand curve will shift to the right or to the left.
Ceteris paribus conditions
Determinants of the relationship between price and quantity that are unchanged along a curve. Changes in these factors cause the curve to shift.
INCOME
For most goods, an increase in income will lead to an increase in demand.
For substitutes, a change in the price of a product will cause a change in demand in the ________ direction for the other good. For complements, a change in the price of a product will cause a change in demand in the ________ direction for the other good.
For substitutes, a change in the price of a product will cause a change in demand in the same direction for the other good. For complements, a change in the price of a product will cause a change in demand in the opposite direction for the other good.
Inferior goods
Goods for which demand falls as income rises.
Normal goods
Goods for which demand rises as income rises. Most goods are normal goods.
COST OF INPUTS USED TO PRODUCE THE PRODUCT
If one or more input prices fall, production costs fall, and the supply curve will shift outward to the right. That is, more will be supplied at each and every price. The opposite will be true if one or more inputs become more expensive.
NUMBER OF FIRMS IN THE INDUSTRY
If the number of firms increases, supply will increase, and the supply curve will shift outward to the right. If the number of firms decreases, supply will decrease, and the supply curve will shift inward to the left.
Demand Schedule
Schedule of alternative quantities demanded per year at different possible prices.
Supply schedule
Supply schedule can also be referred to simply as supply. It is a set of planned production rates that depends on the price of the product.
Discuss the difference between money prices and relative prices.
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Distinguish between changes in the quantity supplied and changes in supply. (The following learning objective is listed twice to indicate that there will be two questions on this topic.)
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Explain the difference between changes in the quantity demanded and changes in demand. (The following learning objective is listed twice to indicate that there will be two questions on this topic.)
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Explain the law of demand.
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Explain the law of supply.
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Explain the process of determining market equilibrium quantity and equilibrium price.
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Illustrate the difference between changes in the quantity demanded and changes in demand.
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Illustrate the process of determining market equilibrium quantity and equilibrium price.
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List and explain the other determinants of demand besides the price of the good or service.
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List the determinants of supply.
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Market demand
The demand of all consumers in the marketplace for a particular good or service. The summation at each price of the quantity demanded by each individual.
Supply curve
The graphical representation of the supply schedule; a line (curve) showing the supply schedule, which generally slopes upward (has a positive slope), other things being equal.
The law of demand tells us...
The law of demand tells us that the quantity demanded of any commodity is inversely related to its price, other things being equal. In an inverse relationship, one variable moves up in value when the other moves down. The law of demand states that a change in price causes a change in the quantity demanded in the opposite direction.
The law of supply states...
The law of supply states that there is a positive relationship between the price and the quantity supplied.
The market demand for a normal good decreases if the incomes of the consumers decrease, or if the price of a complement increases or if the price of substitute decreases. The market demand for a normal good increases if the number of consumers in the market increases.
The market demand for a normal good decreases if the incomes of the consumers decrease, or if the price of a complement increases or if the price of substitute decreases. The market demand for a normal good increases if the number of consumers in the market increases.
Relative price
The money price of one commodity divided by the money price of another commodity; the number of units of one commodity that must be sacrificed to purchase one unit of another commodity.
Law of supply
The observation that the higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal.
Law of demand
The observation that there is a negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant.
Money price
The price expressed in today's dollars; also called the absolute or nominal price.
Market clearing, or equilibrium, price
The price that clears the market, at which quantity demanded equals quantity supplied; the price where the demand curve intersects the supply curve.
Equilibrium
The situation in which quantity supplied equals quantity demanded at a particular price. The equilibrium point occurs where the supply and demand curves intersect.
The supply curve is drawn with other things held constant. If these ceteris paribus conditions of supply change, the supply curve will shift. The major ceteris paribus conditions are (1) input prices, (2) technology and productivity, (3) taxes and subsidies, (4) expectations of future relative prices, and (5) the number of firms in the industry.
The supply curve is drawn with other things held constant. If these ceteris paribus conditions of supply change, the supply curve will shift. The major ceteris paribus conditions are (1) input prices, (2) technology and productivity, (3) taxes and subsidies, (4) expectations of future relative prices, and (5) the number of firms in the industry.
Complements
Two goods are complements when a change in the price of one causes an opposite shift in the demand for the other.
Substitutes
Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change. For substitutes, a change in the price of a substitute will cause a change in demand in the same direction.
TECHNOLOGY AND PRODUCTIVITY
When the available production techniques change, the supply curve will shift. An improvement in technology or productivity will reduce the costs of production (more output for each unit of resource input). Producers will react by increasing the rate of production and offering more product at each and every price.
Associated with the concept of demand is the law of demand, which can be stated as follows:
When the price of a good goes up, people buy less of it, other things being equal. When the price of a good goes down, people buy more of it, other things being equal.
PRICES OF RELATED GOODS: SUBSTITUTES AND COMPLEMENTS
When we refer to related goods, we are talking about goods for which demand is interdependent. If a change in the price of one good shifts the demand for another good, those two goods have interdependent demands. There are two types of demand interdependencies: those in which goods are substitutes and those in which goods are complements.
Whenever there is a change in a ceteris paribus condition there will be a change in ________, which is represented by a ________.
Whenever there is a change in a ceteris paribus condition there will be a change in demand, which is represented by a shift in the entire demand curve.
Changes in Demand versus Changes in Quantity Demanded
Whenever there is a change in a ceteris paribus condition, there will be a change in demand—a shift in the entire demand curve to the right or to the left. A quantity demanded is a specific quantity at a specific price, represented by a single point on a demand curve. When price changes, quantity demanded changes according to the law of demand, and there will be a movement from one point to another along the same demand curve.
Shifts in the demand curve
You can avoid confusion about shifts in curves by always relating a rise in demand to a rightward shift in the demand curve and a fall in demand to a leftward shift in the demand curve.
Price per constant-quality unit
price per constant-quality unit
