Chapter 4

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price takers

buyers and sellers in perfectly competitive markets because they must accept the price the market determines -At the market price, buyers can buy all they want, and sellers can sell all they want. -Ex. wheat market because no single buyer or seller can influence the price of wheat

quantity demanded

he amount of a good that buyers are willing and able to purchase -The goods price plays an essential role in determining quantity of demanded good

market demand curve

hows how the total quantity demanded of a good varies as the price of the good varies, while all other factors that affect how much consumers want to buy are held constant. -Worked with often -Because the market demand curve holds other things constant, it need not be stable over time

True or false? when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises.

true

true or false?Supply and demand are the forces that make market economies work. They determine the quantity of each good produced and the price at which it is sold.

true

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other -often pairs of goods that are used together, such as gasoline and automobiles, computers and software, and peanut butter and jelly. -Ex. Now suppose that the price of hot fudge falls. According to the law of demand, you will buy more hot fudge. Yet in this case, you will likely buy more ice cream as well because ice cream and hot fudge are often consumed together.

True or false? Price and quantity aren't determined by a single buyer or seller. Rather, price and quantity are determined by all buyers and sellers that interact in the market place

true

True or false? The actions of buyers and sellers naturally move markets toward the equilibrium of supply and demand.

true

True or false? To summarize, a shift in the supply curve is called a "change in supply," and a shift in the demand curve is called a "change in demand." A movement along a fixed supply curve is called a "change in the quantity supplied," and a movement along a fixed demand curve is called a "change in the quantity demanded."

true

decrease in demand

- Any change that reduces the quantity demanded at every price shifts the demand curve to the left

monopoly

Some markets have only one seller, and this seller sets the price. -Local cable television, for instance, is a monopoly if residents of the town have only one company from which to buy cable service. -Many other markets fall between the extremes of perfect competition and monopoly.

normal good

a good for which an increase in income raises the quantity demanded -Ex. What would happen to your demand for ice cream if you lost your job one summer? Most likely, your demand would fall. A lower income means that you have less to spend in total, so you would have to spend less on some—and probably most—goods. -If the demand for a good falls when income falls

inferior good

a good for which an increase in income reduces the quantity demanded -an example of an inferior good might be bus rides. As your income falls, you are less likely to buy a car or take a cab and more likely to ride a bus.

competitive market

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker -A seller has little reason to charge less than the going price, and if he charges more, buyers will make their purchases elsewhere.

shortage

a situation in which quantity demanded is greater than quantity supplied -Consumers are unable to buy all they want at the going price. -A shortage is sometimes called a situation of excess demand. -Ex. When a shortage occurs in the ice-cream market, buyers have to wait in long lines for a chance to buy one of the few cones available. With too many buyers chasing too few goods, sellers can respond to the shortage by raising their prices without losing sales. These price increases cause the quantity demanded to fall and the quantity supplied to rise. Once again, these changes represent movements along the supply and demand curves, and they move the market toward the equilibrium.

surplus

a situation in which quantity supplied is greater than quantity demanded -Producers are unable to sell all they want at the going price. -A surplus is sometimes called a situation of excess supply. -Ex. When there is a surplus in the ice-cream market, sellers of ice cream find their freezers increasingly full of ice cream they would like to sell but cannot. They respond to the surplus by cutting their prices. Falling prices, in turn, increase the quantity demanded and decrease the quantity supplied. These changes represent movements along the supply and demand curves, not shifts in the curves. Prices continue to fall until the market reaches the equilibrium.

Equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded -one point at which the supply and demand curves intersect. -Quantity supplied= quantity demanded

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded -Shows how this changes as a variable changes -Quantity is on horizontal axis and the price is on the vertical axis -The line relating the variables in the demand curve

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied -The supply curve slopes upward because, other things being equal, a higher price means a greater quantity supplied.

market supply

market supply is the sum of the supplies of all sellers. -The market supply is the sum of the two individual supplies.

Price gouging

occurs when a seller increases the prices of goods, services or commodities to a level much higher than is considered reasonable or fair. Usually, this event occurs after a demand or supply shock. Common examples include price increases of basic necessities after natural disasters.

Describe changes in supply

-As price increases, the sellers have an incentive to offer more for sale -If at the same price, suppliers are offering elss for sale, or in order ot offer ssame quantity they have to have a higher price -This results in the decrease in supply -Curve goes backward and upward

Describe changes in demand

-At same price, buyers are willing to buy or buyers are willing to pay higher price for same quantity, there is an increase in demand -Graph shifts out -Decrease in demand if at the same, price, people buy less or to get to same quantity , people demand a lower price

Describe highly organized markets:

-Ex. markets for agricultural commodities like wheat and corn -In these markets, buyers and sellers meet at a specific time and place. -Buyers come knowing how much they are willing to buy at various prices, and sellers come knowing how much they are willing to sell at various prices. -An auctioneer facilitates the process by keeping order, arranging sales, and (most importantly) finding the price that brings the actions of buyers and sellers into balance.

How do we analyze how some events affect the equilibrium in a market?

-First, we decide whether the event shifts the supply curve, the demand curve, or, in some cases, both. -Second, we decide whether the curve shifts to the right or to the left. -Third, we use the supply-and-demand diagram to compare the initial equilibrium with the new one, which shows how the shift affects the equilibrium price and quantity.

describe supply versus quantity supplied

-Supply refers to the position of the supply curve, -whereas the quantity supplied refers to the amount producers wish to sell. In this example, supply does not change because the weather does not alter firms' desire to sell at any given price. Instead, the hot weather alters consumers' desire to buy at any given price and thereby shifts the demand curve to the right. The increase in demand causes the equilibrium price to rise. When the price rises, the quantity supplied rises. This increase in quantity supplied is represented by the movement along the supply curve.

What are the characteristics of a market to reach its highest form of competition?

-The goods offered for sale are all exactly the same, and -the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.

Describe less organized markets

-What markets tend to be like -Buyers of ice cream do not meet together at any one time or at any one place. The sellers of ice cream are in different locations and offer somewhat different products. There is no auctioneer calling out the price of ice cream. -Price of ice cream is posted and people decide to buy it or not

Why do we assume that a market is perfectly competitive?

-easiest to analyze because everyone participating in them takes the price as given by market conditions. -Moreover, because some degree of competition is present in most markets, many of the lessons that we learn by studying supply and demand under perfect competition apply to more complex markets as well.

How do we obtain a market demand curve?

-we sum the individual demand curves horizontally -That is, to find the total quantity demanded at any price, we add the individual quantities demanded, which are found on the horizontal axis of the individual demand curves.

How do we obtain the market supply curve?

-we sum the individual supply curves horizontally -That is, to find the total quantity supplied at any price, we add the individual quantities, which are found on the horizontal axis of the individual supply curves. -The market supply curve shows how the total quantity supplied varies as the price of the good varies, holding constant all other factors that influence producers' decisions about how much to sell

Describe the role of an auctioneer in highly organized markets:

An auctioneer facilitates the process by keeping order, arranging sales, and (most importantly) finding the price that brings the actions of buyers and sellers into balance.

increase in demand

Any change that increases the quantity demanded at every price, such as our imaginary discovery by the American Medical Association, shifts the demand curve to the right

increase in supply

Any change that raises quantity supplied at every price, such as a fall in the price of sugar, shifts the supply curve to the right

decrease in supply

Any change that reduces the quantity supplied at every price shifts the supply curve to the left

What are some variables that can shift the supply curve?

Input prices -to produce their output of ice cream, sellers use various inputs: cream, sugar, flavoring, ice-cream machines, the buildings in which the ice cream is made, and the labor of workers who mix the ingredients and operate the machines. When the price of one or more of these inputs rises, producing ice cream becomes less profitable, and firms supply less ice cream. If input prices rise substantially, a firm might shut down and supply no ice cream at all. Thus, the supply of a good is negatively related to the prices of the inputs used to make the good. Technology -The technology for turning inputs into ice cream is another determinant of supply. The invention of the mechanized ice-cream machine, for example, reduced the amount of labor necessary to make ice cream. By reducing firms' costs, the advance in technology raised the supply of ice cream. Expectations -The amount of ice cream a firm supplies today may depend on its expectations about the future. For example, if a firm expects the price of ice cream to rise in the future, it will put some of its current production into storage and supply less to the market today. Number of sellers -In addition to the preceding factors, which influence the behavior of individual sellers, market supply depends on the number of these sellers. If Ben or Jerry were to retire from the ice-cream business, the supply in the market would fall.

What are some factors that can affect demand curves?

Taste -Perhaps the most obvious determinant of your demand for any good or service is your tastes. If you like ice cream, you buy more of it. Economists normally do not try to explain people's tastes because tastes are based on historical and psychological forces that are beyond the realm of economics. Economists do, however, examine what happens when tastes change. Expectations -Your expectations about the future may affect your demand for a good or service today. If you expect to earn a higher income next month, you may choose to save less now and spend more of your current income on ice cream. If you expect the price of ice cream to fall tomorrow, you may be less willing to buy an ice-cream cone at today's price. Number of buyers -market demand depends on the number of these buyers. If Peter were to join Catherine and Nicholas as another consumer of ice cream, the quantity demanded in the market would be higher at every price, and market demand would increase.

demand curve

a graph of the relationship between the price of a good and the quantity demanded -Relates price and quantity -The demand curve slopes downward because, other things being equal, a lower price means a greater quantity demanded.

supply curve

a graph of the relationship between the price of a good and the quantity supplied -The supply curve slopes upward because, other things being equal, a higher price means a greater quantity supplied.

market

a group of buyers and sellers of a particular good or service -determine the demand for the product, and the sellers as a group determine the supply of the product.

If at the same price, offer more for sale or at the same price, they offer more

increase

quantity supplied

the amount of a good that sellers are willing and able to sell -There are many determinants of quantity supplied, but once again, price plays a special role in our analysis.

law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance -The price of any good adjusts to bring the quantity supplied and quantity demanded of that good into balance.

law of demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises -when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises. -Price quantity relationship from a buyer perspective -The Lower the price is, the buyer has a greater ability and incentive to buy more -If we see price increasing, quantity decreases

law of supply

the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises -Price quantity relationship from a sellers perspective -As market price increases, sellers wants to increase the quantity supplied -Shown by upward sloping supply curve -Ex. When the price of ice cream is high, selling ice cream is quite profitable, and so the quantity supplied is large. Sellers of ice cream work long hours, buy many ice-cream machines, and hire many workers. By contrast, when the price of ice cream is low, the business is less profitable, so sellers produce less ice cream. At a low price, some sellers may even shut down, reducing their quantity supplied to zero. -when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well.

True or false? Once the market reaches its equilibrium, all buyers and sellers are satisfied, and there is no upward or downward pressure on the price.

true

equilibrium price

the price that balances quantity supplied and quantity demanded -the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell. -The equilibrium price is sometimes called the market-clearing price because, at this price, everyone in the market has been satisfied: Buyers have bought all they want to buy, and sellers have sold all they want to sell. -There is no surplus or shortage -Get this on the vertical access from the intersection point

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price -Where supply and demand interact horizontally

market demand

the sum of all the individual demands for a particular good or service. -Necessary in order to determine how markets work

True or false? Because the price is on the vertical axis, a change in price represents a movement along the demand curve. By contrast, income, the prices of related goods, tastes, expectations, and the number of buyers are not measured on either axis, so a change in one of these variables shifts the demand curve.

true

True or false? How quickly equilibrium is reached varies from market to market depending on how quickly prices adjust. In most free markets, surpluses and shortages are only temporary because prices eventually move toward their equilibrium levels.

true

True or false? In a perfectly competitive market, every seller takes the price of its product as set by market conditions

true

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other -often pairs of goods that are used in place of each other, such as hot dogs and hamburgers, sweaters and sweatshirts, and movie tickets and film streaming services.


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