Chapter 3

What are the Five Main Factors that Shift the Supply Curve? *

1) A change in input prices (Of making the product). 2) A change in the prices of related goods and services (Competition). 3) A change in technology (Improved technology, shifts right). 4) A change in expectations. 5) A change in the number of producers (More sellers, shifts right).

What are the Five Main Factors that Shift the Demand Curve? *

1) A change in the prices of related goods or services, such as substitutes or complements. 2) A change in income: when income rises, the demand for normal goods increases and the demand for inferior goods decreases. 3) A change in tastes. 4) A change in expectations (Future). 5) A change in the number of consumers. (More buyers, Demand shifts to right)

Shift of the Demand Curve *

A change in the demanded (increase or decrease) at any given price, represented by the shift of the original demand curve to a new position, denoted by a new demand curve. An increase in demand causes a rightward shift of the demand curve, likewise, a decrease in demand causes a leftward shift.

Movement Along the Demand Curve *

A change in the quantity demanded of a good arising from a change in the good's price.

Shift of the Supply Curve *

A change in the quantity supplied (increase or decrease) of a good or service at any given price. It is represented by the change of the original supply curve to a new position, denoted by a new supply curve. An increase in supply causes a rightward shift of the supply curve, likewise, a decrease in supply causes a leftward shift.

Movement Along the Supply Curve *

A change in the quantity supplied of a good arising from a change in the good's price.

Input

A good or service that is used to produce another good or service.

Demand Curve

A graphical representation of the demand schedule. It shows the relationship between quantity demanded and price.

Law of Demand

A higher price for a good or service, other things equal, leads to people to demand a smaller quantity of that good or service. The demand curve slopes downward. There is a negative (or inverse) relationship between the price of a good and its quality demanded (Holding other factors constant).

Competitive Market *

A market in which there are so many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold.

Supply and Demand Model

A model of how a competitive market behaves.

Markets

Established arrangements where buying and selling of goods takes place. Local versus national, daily and monthly, goods and factor markets.

Individual Demand Curve *

Illustrates the relationship between quantity demanded and price for an individual consumer.

Individual Supply Curve

Illustrates the relationship between quantity supplied and price for an individual producer.

How does a decrease in demand impact the equilibrium price and equilibrium quantity?

It decreases both.

How does an increase in demand impact the equilibrium price and equilibrium quantity?

It increases both.

How does a decrease in supply impact the equilibrium price and equilibrium quantity?

It increases the equilibrium price and decreases the equilibrium quantity.

How does an increase in supply impact the equilibrium price and equilibrium quantity?

It reduces the equilibrium price and increases the equilibrium quantity.

Principle of Substitution

Nearly every good/service has a substitute. Buyers have options. Ex) Travel by road vs air. Counter Ex) Has life threatening illness and needs a certain medicine.

The accompanying table (See Notes) gives the annual U.S. demand and supply schedules for pickup trucks. Plot the demand and supply curves using these schedules. Indicate the equilibrium price and quantity on your diagram.

See notes for graph, it was basic plotting. The supply curve is S1 and the demand curve is D1. The equilibrium in the market for pickup trucks is indicated by point E1 in the diagram, with an equilibrium price of $30,000 and and equilibrium quantity of 16 million trucks bought and sold.

Demand Schedule

Shows how much of a good or service consumers will want to buy at different prices. Shows the quantity demanded at each price and is represented graphically by a demand curve.

Supply Schedule

Shows how much of a good or service would be supplied at different prices. Shows the quantity supplied at each price and is represented graphically by a supple curve. Typically sloped upwards.

Supple Curve

Shows the relationship between quantity supplied and price.

What is the concept most closely behind the negative sloping demand curve?

Substitution

Equilibrium Quantity

Th quantity of the good or service bought and sold at that price.

Quantity Demanded *

The actual amount of a good or service consumers are willing to buy at some specific price. The amount people are prepared to buy under specified circumstances during a specified time period.

Quantity Supplied *

The actual amount of a good or service people are willing to sell at some specific price.

The accompanying table (See Notes) gives the annual U.S. demand and supply schedules for pickup trucks. Suppose the tires used on pickup trucks are found to be defective. What would you expect to happen in the market for pickup trucks? Show this on your diagram.

The announcement of a defect is likely to decrease the demand for pickup trucks. This is represented by a leftward shift of the demand curve, as shown by the shift from D1 to D2 and causes the equilibrium price and quantity to fall as the equilibrium changes from E1 to E2.

Market Demand Curve *

The horizontal summation (adding qualities) of individual demand.

Money Price *

The nominal price of a good is its value in terms of money, such as dollars, French francs, or yen. Macroeconomics focuses on money prices.

The accompanying table (See Notes) gives the annual U.S. demand and supply schedules for pickup trucks. Suppose that the U.S. Department of Transportation imposes costly regulations on manufacturers that cause them to reduce supply by one-third at any given price. Calculate and plot the new supply schedule and indicate the new equilibrium price and quantity on your diagram.

The one-third decrease in the quantity supplied at any given price is shown as a leftward shift of the supply curve from S1 to S2. It results in a new, higher equilibrium price, $40,000 per truck, and a lower equilibrium quantity, 12 million trucks, as shown by the change of the equilibrium from E1 to E3.

Equilibrium Price (Market-Clearing Price)

The price at which equilibrium takes place. There's not shortage or surplus. The price is stable, no rise/fall tendency.

Relative Price *

The relative or real price is its value in terms of some other good, service, or bundle of goods. The term "relative price" is used to make comparisons of different goods at the same moment of time. Microeconomics focuses on relative prices.

Complements

Two goods are this if a rise in the price of one good leads to a decrease in the demand for the other good.

Substitutes *

Two goods are this if a rise the price of one of the goods leads to an increase in the demand for the other good.

Inferior Good

When a rise in income decreases the demand for a good.

Normal Good

When a rise in income increase the demand for a good, the normal case.

When is a competitive market in equilibrium? *

When price has moved to a level at which the quantity of a good or service demanded equals the quantity of that good or service supplied.

Shortage of a Good or Service *

When the quantity demanded exceeds the quantity supplied. Occurs when the price is below its equilibrium level.

Surplus of a Good or Service *

When the quantity supplied exceeds the quantity demanded. Occurs when the price is above its equilibrium level.

Explain what happens when the demand curve and supply curve shift simultaneously.

When they shift in opposite directions, the change in equilibrium price is predictable but the change in equilibrium quantity is not. When they shift in the same direction, the change in equilibrium quantity is predictable but the change in equilibrium price is not. In general, the curve that shifts the greater distance has a greater effect on the changes in equilibrium price and quantity.