ECON 705 - Fassil - Module 1

Define shortage

A situation in which quantity demanded is greater than quantity supplied

Scenario 1: The price of milk increases from $3.50 to $4.50 per gallon. Based on Scenario 1, movement occurs up or down the demand curve for milk?

An increase in the price of milk would cause movement up the demand curve for milk.

Scenario 1: The price of milk increases from $3.50 to $4.50 per gallon. Based on Scenario 1, there would be a change in the

An increase in the price of the milk would cause a change in quantity demanded.

Is the demand curve static?

No! The demand curve is dynamic, which means it changes over time. The demand curve will shift back and forth as conditions in the market change.

When you shift the demand curve to the left, what happens to the quantity demanded at any given price?

Quantity demanded decreases.

The law of supply describes the behavior of ___

Sellers (Think S's)

So, a decrease in demand will cause both the equilibrium price and the equilibrium quantity to ____.

decrease

For normal goods, a decrease in income results in a ___ in demand.

decrease. Likewise, we can assume that an increase in income would lead to an increase in demand for chocolate bars.

In general, people buy more of a good when its price is low than when its price is high. When this relationship between prices and quantities is graphed, the result is a _____.

demand curve

The upward slope of a supply curve means that there is a ______ relationship between price and the quantity supplied: When price increases, the quantity supplied increases, and when price decreases, the quantity supplied decreases.

direct or positive

The law of demand says that as the price of a good or service rises, the quantity demanded of that good or service _____.

falls

So, an increase in demand will cause both the equilibrium price and the equilibrium quantity to _____.

increase

Scenario 5: The price of cheese, which several milk-producing firms also produce, increases. Based on Scenario 5, the supply curve shifts to the

left If the price of cheese increased, firms would likely shift some production from milk to cheese as a result of the price change, shifting the milk supply curve to the left.

What are the only two variables in the law of demand?

price and quantity

The law of demand says that as the price of a good or service falls, the quantity of that good or service demanded _____.

rises

So, when a price is too high—that is, above its market equilibrium—a ___ will result.

surplus

Scenario 1: The price of milk increases from $3.50 to $4.50 per gallon. Based on Scenario 1, movement occurs up or down the supply curve for milk?

up the supply curve for milk. An increase in the price of milk would cause movement up the supply curve.

Discuss factors that shift the demand curve.

Change in the preference and taste of the consumer, the number of consumers available in the market, the income level of the consumer Shift to R: more demand Shift to L: less demand

What is a supply schedule?

supply schedule shows how much of a good or service producers will supply at different prices

What is the substitution effect?

when consumers react to an increase in a good's price by consuming less of that good and more of a substitute good

Define surplus

A situation in which quantity supplied is greater than quantity demanded

Define surplus and shortage.

Both surplus and shortage are market phenomenon. Both are market outcomes. When the demand for goods is higher than the quantity supplied, then you have a shortage. When there is a quantity supplied more than the quantity demanded, then you have surplus. When there is a shortage, the price tends to go up. The equilibrium price will be higher than what is currently available. When there is a surplus, price tends to go down and there is a decrease in the equilibrium.

What happens to price and quantity demanded when there is upward movement along the demand curve?

Price increases and quantity demanded decreases.

When you shift the demand curve to the right, what happens to the quantity demanded at any given price?

Quantity demanded increases.

Scenario 2: New technology decreases the cost of processing and shipping milk. Based on Scenario 2, the supply curve for milk shifts to the

Right New technology would cause the supply curve to shift to the right.

Suppose that the price of a chocolate bar is $.80. At this price, you'll likely buy four bars or more. If the price of a chocolate bar is $1.20, you'll likely buy three bars. But if the price of a chocolate bar is $2.00, you'll likely buy fewer bars—perhaps only one. This behavior is called the

law of demand

As you shift the supply curve to the right, what happens to the quantity supplied at any given price?

The quantity supplied increases.

When the demand curve shifts to the L, there is ___ demand.

less

Define market equilibrium

a situation in which quantity demanded equals quantity supplied Equilibrium price. Exists when there is no shortage and no surplus. This is the point where demand and supply intersect. It is a stable point. At the equilibrium price, you will have equilibrium quantities.

The law of demand describes the behavior of ______.

buyers

A change in price results in movement along the demand curve from one point to another and is called a _______. When other factors in the market change, the demand curve shifts to the left or the right. We call this a ________.

change in the quantity demanded change in demand

When you shift the supply curve to the left, what happens to the equilibrium price?

The price increases.

When supply _____, the curve shifts right, the equilibrium price decreases, and the quantity increases.

increases

Inferior goods are a less expensive alternative to normal goods. So, demand for inferior goods ____ as income decreases, and demand for inferior goods _____ as income increases.

increases; decreases

What are the two results of disequilibrium?

shortage and surplus

Prices for most goods and services are determined in markets by what economists call ______

supply and demand.

Scenario 5: A lower birth rate reduces the number of children, a key milk-drinking market. Based on Scenario 5, the demand curve for milk shifts to the

A lower birth rate would cause the demand curve for milk to shift to the left.

What are some reasons why the demand curve may shift?

1. A Change in Consumer Expectations: The fear of a chocolate bar shortage and rising prices in the future is a good example of a change in consumer expectations. Chocolate lovers would buy more chocolate bars now in an attempt to avoid possible higher prices in the future. And because people would buy more chocolate bars at each possible price now, the demand curve would shift to the right. This is called an increase in demand. 2. A Change in Consumer Tastes or Preferences If scientists discovered some new health benefits from eating chocolate, you can bet people would buy more chocolate bars at each possible price and the demand curve would shift to the right, indicating an increase in demand. Of course, if scientists discovered that chocolate is harmful to our health, people would buy fewer chocolate bars at each possible price and the demand curve would shift to the left, indicating a decrease in demand. 3. A Change in the Number of Consumers in the Market If a huge convention of candy lovers came to town, those people would want chocolate bars now and the demand curve would shift to the right, indicating an increase in demand. 4. A Change in Income During recessions people have smaller incomes and can't buy as many goods, including chocolate bars, at any price. This means that the demand curve for chocolate bars would shift to the left as people buy fewer chocolate bars.

What are some factors that could shift the supply curve?

A Change in the Costs of Inputs to the Production Process: The prices of resources used to make goods and produce services often change. For example, if cacao seed prices increased, Chuck's cost of producing chocolate bars would increase as well. This higher cost of production would cause Chuck to produce and sell fewer chocolate bars at every possible price, shifting the supply curve to the left. Let's say that before the supply curve shifted to the left, Chuck supplied 300 chocolate bars at $1.20 per bar but then supplied 200 chocolate bars at that same price. This decrease in the quantity supplied would hold for every possible price along the supply curve. A Change in Technology: Improvements in technology will lower production costs. For example, imagine Chuck invests in a new machine that wraps candy bars faster and uses fewer packaging materials. He would then be able to offer more chocolate bars to the market at each possible price. As other firms adopted the new technology and provided more bars at each possible price, the supply of chocolate bars would increase, shifting the supply curve to the right. Let's say that before the supply curve shifted to the right, Chuck supplied 300 chocolate bars at a price of $1.20 per bar (S1) but he now supplies 400 chocolate bars at that same price (S2). This increase in the quantity supplied would hold for every price along Chuck's supply curve. A Change in the Number of Producers in the Market: The supply curve for the entire chocolate bar industry is the sum of the supply curves of all individual chocolate bar producers. So, more producers in a given market will increase the supply of the good they produce. For example, if more firms start producing chocolate bars, there would be more chocolate bars available at each possible price. The market supply of chocolate bars would increase, shifting the supply curve to the right. Government Policies: Government policies, such as taxes, subsidies, and regulations, all affect the cost of producing goods and services and—as a result—firms' production decisions. For example, imagine the government taxed every chocolate bar that firms make; the result would be higher production costs. Faced with higher production costs, Chuck would produce fewer chocolate bars at each possible price. Other chocolate bar producers would likely do the same, shifting the supply curve to the left. On the other hand, if the government were to subsidize chocolate production, the result would be lower production costs. A subsidy is a government payment that supports a business or a market. In this case, a government payment to the chocolate producer would lower the overall cost of producing chocolate bars. Lower production costs would cause chocolate bar producers to increase the quantity of chocolate bars produced at each possible price. The supply of chocolate bars would increase, shifting the supply curve to the right. Expectations of Future Prices: If firms expect prices to change, their behavior today will likely change. For example, if chocolate bar prices were expected to increase in the near future, chocolate bar producers might store much of their current production of chocolate bars to take advantage of the higher future price. This would reduce the chocolate bar supply for the short term. So, the expectation that prices will rise in the future would cause the supply to decrease today, shifting the supply curve to the left. On the other hand, if chocolate bar prices were expected to decrease in the near future, chocolate bar producers would try to take advantage of the current price by selling any extra supply they might have in inventory. This would increase the supply for the short term. So, the expectation that prices will fall in the future would cause the supply to increase today, shifting the supply curve to the right. A Change in the Price of Other Goods Produced by a Firm: If firms produce more than one good or service, a change in the price of one can affect the supply of another. Say the Chuck's Chocolates company also produces caramel candies. If the price of caramel candies were to increase, Chuck might shift some of his production from chocolate bars to caramel candies, decreasing the supply of chocolate bars and shifting the chocolate bar supply curve to the left.

Scenario 4: The economy sinks into a recession, causing incomes of many Americans to decrease (assume milk is a normal good). Based on Scenario 4, which factor caused the change in demand for milk?

A change in consumer income A decrease in incomes would cause the demand for milk to decrease.

Scenario 3: A new health study shows reduced cancer risks for milk drinkers. Based on Scenario 3, which factor caused the change in demand for milk?

A change in consumer tastes or preferences Such a health study would change the preferences of consumers.

Scenario 2: New technology decreases the cost of processing and shipping milk. Based on Scenario 2, which factor caused the change in supply?

A change in technology New technology would increase the supply of milk, causing the supply curve to shift to the right.

Scenario 3: The price of feed for milk cows drops to a new low. Based on Scenario 3, which factor caused the change in supply?

A change in the costs of inputs to the production process Cheaper feed for milk cows, an input in the milk production process, would lower milk production costs and increase the supply of milk.

Scenario 5: A lower birth rate reduces the number of children, a key milk-drinking market. Based on Scenario 5, which factor caused the change in demand for milk?

A change in the number of consumers in the market A lower birth rate, would change the number of consumers in the market because children are key milk-drinkers.

Scenario 4: Farmers and ranchers switch from milk production (dairy cows) to beef production (beef cattle). Based on Scenario 4, which factor caused the change in supply?

A change in the number of producers in the market Farmers and ranchers switching from milk production (dairy cows) to beef production (beef cattle), is a change in the number of producers in the market.

Scenario 2: The price of breakfast cereal increases. Based on Scenario 2, which factor caused the change in demand for milk?

A change in the price of a complementary good Milk and breakfast cereal are complementary goods. An increase in the price of breakfast cereal would reduce the quantity demanded of breakfast cereal, decreasing the demand for milk.

Scenario 1: The price of milk increases from $3.50 to $4.50 per gallon. Based on Scenario 1, which factor caused the change in quantity demanded of milk?

A change in the price of milk caused a change in quantity demanded, not a change in demand.

Scenario 1: The price of milk increases from $3.50 to $4.50 per gallon. Based on Scenario 1, which factor caused the change in the quantity supplied of milk?

A change in the price of milk. The change in the quantity supplied of milk was caused by a change in the price of milk.

Scenario 5: The price of cheese, which several milk-producing firms also produce, increases. Based on Scenario 5, which factor caused the change in supply of milk?

A change in the price of other goods produced by a firm If the price of cheese increased, firms would likely shift some production from milk to cheese as a result of the price change, shifting the milk supply curve shift to the left.

Scenario 4: The economy sinks into a recession, causing incomes of many Americans to decrease (assume milk is a normal good). Based on Scenario 4, the demand curve for milk shifts to the ___

A decrease in incomes would cause the demand for milk to decrease, shifting the demand curve to the left.

What is a price ceiling?

A price ceiling is a legal barrier that holds a price below the equilibrium price. It is called a ceiling because it sets the highest legal price that can be charged for a good or service. To be effective, a price ceiling must be set below the equilibrium price. One example of a price ceiling is rent control, where local governments attempt to help those in poverty by requiring landlords to charge rent at a level below the equilibrium price.

What is a price floor?

A price floor is a legal barrier that holds a price above the equilibrium price. It is called a floor because it sets the lowest legal price that can be charged for a good or service. To be effective, a price floor must be above the equilibrium price. Minimum wage laws passed by state and federal governments are one example of a price floor. Remember that a wage is a price in a labor market. So, a minimum wage is an attempt to hold wages above the equilibrium price to benefit workers.

You may have noticed that the words "price" and "cost" are not used interchangeably. What's the difference?

A price is the amount of money a consumer pays for a good or service—the amount the supplier receives for the sale of a good or service. In the context of supply, cost refers to the amount the supplier pays to bring the good or service to market. In fact, to a producer, the difference between the price and the cost of producing the good is profit. Profit = Price - Cost

What is the difference between the quantity demanded and the demand curve?

Any point on the demand curve is the quantity demanded. Without changing the demand curve itself, if you go up and down the curve there is a change in the price and the quantity demanded. Demand is the whole graph. Everything connected—quantity, price relationship put into a graph is the demand curve. When there is a shift in the demand curve to the R or L. If there is any exogenous shock (for ex. change in consumer preferences, tastes or income). To have a change in the quantity demanded, we don't need anything else. The only way we can see the quantity demanded on the same demand curve going up and down is due to the fact that the price changes. When the price changes, the quantity demanded changes.

If the supply of a product decreases and the demand for that product simultaneously increases, then the equilibrium....

Best way to answer this question: think about it. Use a piece of paper and draw the graph. If the supply curve shifts to the left, and you keep the demand curve the same, we expect that the quantity available in the market goes down, but the price of goods goes up. At the same time, if the demand curve is simultaneously increasing, then you would expect for sure that the price is going up. It would be very difficult to determine the quantity available because it depends on the size of the shift of the demand curve. For sure you know, when the supply is increasing and at the same time the demand curve is increasing, then you would expect the price to go up, but the quantity would be undetermined. It would be determined by looking at how big the shift in the curve would be.

Scenario 2: The price of breakfast cereal increases. Based on Scenario 2, the demand curve for milk shifts to the ___

Cereal and milk are complementary goods. An increase in the price of breakfast cereal would cause the demand for milk to decrease, shifting the demand curve to the left.

Scenario 3: The price of feed for milk cows drops to a new low. Based on Scenario 3, the supply curve for milk

Cheaper feed for milk cows would cause the supply curve for milk to shift to the right.

Scenario 1: The price of milk increases from $3.50 to $4.50 per gallon. Based on Scenario 1, the supply curve for milk shifts to the ___

Does not shift! An increase in the price of milk would cause movement along the supply curve; the supply curve does not shift.

What is considered a "normal" good by economists?

Goods that when the income of a consumer goes up, the quantity demanded goes up and the demand curve is shifts to the right. Results in higher prices and higher quantity available in the market

Scenario 6: In an effort to lower the price of milk, the government provides a subsidy to milk producers. Based on Scenario 6, which factor caused the change in the supply of milk?

Government policies A government subsidy would increase the supply of milk. A government subsidy is a government policy.

Is the supply curve static?

No. The supply curve is dynamic, which means it changes over time. It shifts back and forth as conditions in the market change.

What happens to price and quantity demanded when there is downward movement along the demand curve?

Price decreases and quantity demanded increases.

When you move down the supply curve, what happens to the price and the quantity supplied?

Price decreases and the quantity supplied decreases.

When you move up the supply curve, what happens to the price and the quantity supplied?

Price increases and the quantity supplied increases.

The demand for chocolate has increased. While the market is in transition, will there be a shortage or surplus? Will the new equilibrium price be higher or lower? Will the new equilibrium quantity be higher or lower?

Shortage. The increase in demand will lead to the quantity demanded being greater than the quantity supplied. Competition among buyers will lead to rising prices for chocolate bars. As the price rises, quantity supplied will increase and quantity demanded will decrease until the shortage disappears. Higher. The increase in demand will result in a higher equilibrium price. Higher. The increase in demand will result in a higher equilibrium quantity.

The demand for chocolate has decreased. While the market is in transition, will there be a shortage or surplus? Will the new equilibrium price be higher or lower? Will the new equilibrium quantity be higher or lower?

Surplus. The decrease in demand will lead to the quantity supplied being greater than the quantity demanded. Competition among sellers will lead to falling prices for chocolate bars. As the price decreases, quantity supplied will decrease and quantity demanded will increase until the surplus disappears. Lower. The decrease in demand will result in a lower equilibrium price. Lower. The decrease in demand will result in a lower equilibrium quantity.

Discuss factors that shift the supply curve.

The cost of inputs being used for the production process. When labor, capital and other materials are expensive, the supply shifts to the left. The number of suppliers. When the number of suppliers are more, then you will have a higher supply and shift right. Less suppliers, shift left.

What are the two types of changes that can occur regarding demand?

The first is called a change in the quantity demanded, which results from a change in price. A change in the quantity demanded is illustrated by movement along the demand curve from one point to another. The second is called a change in demand. In this case, the demand for a good or service changes not because the price of the good changes, but because something else in the market changes. These could be changes in consumer expectations; consumer preferences; the number of consumers in the market; consumer income; or the prices of related goods, which can be either complementary or substitute goods. A change in demand is illustrated by shifting the demand curve left or right.

Regarding supply, what are the two types of changes that can occur?

The first is called a change in the quantity supplied, which results from a change in the price of the good or service. A change in the quantity supplied is illustrated by movement along the supply curve from one point to another. The second is called a change in supply, which is caused when something in the market for a good or service changes. This could be a change in production costs, technology, the number of suppliers, government policies, expectations of future prices, or the price of other goods produced by the firm. These market changes make the original supply curve irrelevant. A change in supply is illustrated by a shift in the supply curve to the left or right.

What is the law of demand?

The law of demand states that (when everything is constant) when the price of goods/services go up, the quantity demanded goes down. When the price of goods/services go down, the quantity demanded goes up. There is a negative/inverse relationship between price and quantity demanded.

What is the law of supply?

The law of supply states that (when everything is constant) when the price of goods/services go up, the quantity supplied will go up. (When the price goes up, there will be more people wanting to supply more quantity.)

What does the demand curve show?

The negative/inverse relationship between price and quantity.

When you shift the supply curve to the right, what happens to the equilibrium price?

The price decreases.

When you shift the supply curve to the left, what happens to the equilibrium quantity?

The quantity decreases.

When you shift the supply curve to the right, what happens to the equilibrium quantity?

The quantity increases.

As you shift the supply curve to the left, what happens to the quantity supplied at any given price?

The quantity supplied decreases.

What is the reason why the quantity demanded of a good increase when its price falls?

There is an inverse relationship. 1. Substitution effect: When things become expensive or cheaper, people tend to buy more of this good, not the other good. The demand for good increases when the price falls. Ex. When the price of tea goes up, if coffee is a substitute, then people will buy more of coffee. 2. Income effect: Say people have limited income. If you spend $100 of coffee in a month, when the price of goods go up, then $100 would buy less. The purchasing gowns down when it becomes more expensive. Or you could buy more of a good when the price is cheaper because the same amount of money would buy more.

What are the two components of demand?

a buyer's willingness to buy and ability to pay.

What is the income effect?

a change in quantity demanded caused by a change in consumer income

What is a demand curve?

a curve that shows the relationship between the price of a product and the quantity of the product demanded

What are inferior goods?

a less expensive alternative to normal goods. A normal good for one person might be an inferior good for someone else.

What are the two components of supply?

a supplier's willingness to produce and ability to produce and sell.

When supply _____, the curve shifts to the left, the equilibrium price increases, and the quantity decreases.

decreases

If the demand curve shifts to the left,

demand has decreased

If the demand curve shifts to the right,

demand has increased

A _________ shows how much of a good or service consumers are both willing and able to buy at different prices.

demand schedule

If the market price is above or below the equilibrium price, the market is in ______ . This occurs when the quantity supplied does not equal the quantity demanded. There are two conditions that are a direct result: a shortage and a surplus.

disequilibrium

Scenario 1: The price of milk increases from $3.50 to $4.50 per gallon. Based on Scenario 1, the demand curve for milk shifts to the...

it does not shift. An increase in the price of milk would cause movement along the demand curve, not a shift of the demand curve to the right or left.

Scenario 4: Farmers and ranchers switch from milk production (dairy cows) to beef production (beef cattle). Based on Scenario 4, the supply curve for milk shifts to the

left Farmers and ranchers switching from milk production (dairy cows) to beef production (beef cattle) would cause the supply curve for milk to shift to the left.

When you combine the supply and demand curves, there is a point where they intersect; this point is called _______. The price at this intersection is the _____, and the quantity is the ______. At the equilibrium price, there is no shortage or surplus.

market equilibrium equilibrium price equilibrium quantity

When the demand curve shifts to the R, there is ___ demand.

more

Generally speaking, sellers offer ___ of a good at higher prices than they do at lower prices. When this relationship is graphed, the result is an _____-sloping supply curve. A change in the price of the good or service results in movement along the supply curve from one point to another. This is called a _____. When factors in the market for the good or service change, the supply curve shifts to the left or the right. This is called a _____.

more upward change in the quantity supplied change in supply

Markets tend toward equilibrium unless there are barriers, called _____, that make it impossible to move to equilibrium.

price controls

What are the two types of price controls?

price floors and price ceilings.

Let's say you and many others normally buy the name-brand chip, but if incomes decreased, many of you would buy the generic brand instead. In this case, the demand curve for the generic brand of chips would shift to the ____.

right

Scenario 6: In an effort to lower the price of milk, the government provides a subsidy to milk producers. Based on Scenario 6, the supply curve for milk shifts to the

right A government subsidy would cause the milk supply curve to shift to the right.

Scenario 3: A new health study shows reduced cancer risks for milk drinkers. Based on Scenario 3, the demand curve for milk shifts to the

right If studies show that milk reduces cancer risks, the demand for milk will increase, shifting the demand curve to the right.

When a price is too low—that is, below its market equilibrium—a ____ will result.

shortage

Price ceilings cause ___ in the market.

shortages In the case of rent-controlled apartments, a shortage means there are fewer apartments available than the number of apartments people want, resulting in some people having to share housing or move farther away.

The second is called a change in demand. In this case, the demand for a good or service changes not because the price of the good changes, but because

something else in the market changes. These could be changes in consumer expectations; consumer preferences; the number of consumers in the market; consumer income; or the prices of related goods, which can be either complementary or substitute goods. A change in demand is illustrated by shifting the demand curve left or right.

Imagine Chuck's Chocolates, a firm that produces and sells chocolate bars. When the price of chocolate rises, Chuck will produce more chocolate bars. This is an example of the law of

supply

Of course, both price ceilings and price floors are policies enacted to benefit a particular segment of society. Both can, however, have negative effects. Price floors cause ____ in the market.

surpluses In the case of the minimum wage, a surplus means that workers will seek to supply a greater number of labor hours than employers will demand, resulting in an increase in unemployment.

Define demand

the quantity of a good or service that buyers are willing and able to buy at all possible prices during a certain time period.

Define supply.

the quantity of a good or service that producers are willing and able to offer for sale at each possible price during a certain time period.