Economics chapter 4
Supply Table
chart showing the behavior of producers in the market place.
When the demand curve shifts left
decrease in demand
The demand curve is
downward-sloping line that graphically shows the quantities demanded at each possible price
Shifts in either supply or demand change
equilibrium price
If there is an excess demand (a shortage)
quantity demanded is greater than quantity supplied
excess demand (shortage)
quantity demanded is greater than quantity supplied
As price increases
quantity supplied increases
If there is an excess supply (a surplus)
quantity supplied is greater than quantity demanded
excess supply (surplus)
quantity supplied is greater than quantity demanded
quantity demanded
refers to a specific amount that will be demanded per unit of time at a specific price, other things constant
quantity supplied
refers to a specific amount that will be supplied per unit of time at a specific price, other things constant
equilibrium quantity
the amount bought and sold at the equilibrium price
price adjusts
when quantity demanded is greater than quantity supplied, prices tend to rise; when quantity supplied is greater than quantity demanded, prices tend to fall
the law of supply is based on two phenomena
1. at higher prices, existing suppliers supply more 2. at higher prices, new suppliers enter the market
Limitations of supply/demand analysis
- Sometimes supply in demand are interconnected - The other things held constant assumption is not likely to hold when the goods represent a large percentage of the entire economy - The fallacy of composition is the false assumption that what is true for a part will also be true for the whole
An increase in demand or a decrease in supply
-Creates excess demand at the original equilibrium price -Excess demand increases price until a new higher equilibrium price is reached
The law of supply occurs because:
-When prices rise, firms substitute production of one good for another -Assuming firm's costs are constant, a higher price means higher profit
6 things to remember about a demand curve
1. A demand curve follows the law of demand: When prices rise, quantity demanded falls and vice versa 2. The horizontal axis-quantity-has a time dimension. 3. The quality of each unit is the same. 4. The vertical axis-price-assumes all other prices remain the same 5. The demand curve assumes everything else is held constant. 6. Effects of price changes are shown by movements along the demand curve. Effects of anything else or demand (shift factors) are shown by ships of the entire demand curve.
What equilibrium isn't
1. A state of the world 2. Inherently good or bad
For the market, the law of demand is based on two phenomena
1. At lower prices, existing demanders find more. 2. At lower prices, new demanders enter the market.
What equilibrium is
1. It is a characteristic of the model the framework you use to look at the world 2. A state in which dynamic pressures offset each other
Shift factors of supply are similar to those for demand
1. Prices of inputs. 2. Technology. 3. Expectations. 4. Taxes and subsidies.
Important shift factors of demand
1. Society's income 2. The prices of other goods 3. Tastes 4. Expectations 5. Taxes and subsidies
Upward pressure on price
1. an impending nuclear holocaust causes people to stock up on Twinkie's, a popular cake snake provided by many companies 2. "The Lion King" at the Disney store has 9 million orders for the DVD when the store in fact, only has 1 million copies. They told the public there would be 9 million copies 3. the flu vaccine was found to be contaminated and consequently recalled during fall and winter months
Change in anything other than price
Affects the demand curve changes the entire demand curve
Why does the demand curve slope downward?
Because prices and quantity demands are inversely related. As the price of a good rises, people switch to purchase other goods whose prices have not risen by as much.
A decrease in demand or an increase in supply
Creates excess supply at the original equilibrium price Excess supply decreases price until a new lower equilibrium price is reached
A change in the entire demand curve is a shift in
Demand
In the early 2000s car sales in China had slowed in part caused by the government's actions to limit businesses from lending funds to consumers. Assuming that car market in China can be analyzed with demand and supply curves, what's the best reflects the change in the market?
Demand curve shifts to the left with no change in supply
The uncertainty caused by the terrorist attacks of September 11, 2001, made customers reluctant to spend on luxury items. This reduced ________.
Demand for luxury goods. The other possibility, quantity of luxury of goods demanded, is used to refer to the movement along the demand curve
When quantity supplied equals quantity demanded, prices have a tendency to change
Equilibrium
When the demand curve shifts to the right
Equilibrium price and quantity will both increase
When the supply curve shifts right
Equilibrium prices decline and equilibrium quantity rises
In the free market, the forces of supply and demand interact to determine
Equilibrium quantity and equilibrium price
If market supply increases, equilibrium prices will
Fall, causing a movement along the demand curve
demand tells us
How much will be bought at various prices
Newton's Laws of Motion
INCLUDES 3 LAWS. 1. AN OBJECT AT REST WILL REMAIN AT REST UNLESS ACTED UPON BY AN (UNBALANCED) FORCE, AND AN OBJECT IN MOTION WILL CONTINUE TO STAY IN MOTION WITH THE SAME SPEED AND IN THE SAME DIRECTION UNLESS ACTED UPON BY AN (UNBALANCED) OUTSIDE FORCE. (THIS LAW IS ALSO CALLED "INERTIA") 2. ACCELERATION IS PRODUCED WHEN A FORCE ACTS ON MASS AND THE GREATER THE MASS OF THE OBJECT BEING ACCELERATED, THE GREATER THE AMOUNT OF FORCE NEEDED TO ACCELERATE THAT OBJECT. 3. FOR EVERY ACTION, THERE IS AN EQUAL AND OPPOSITE REACTION.
To derive a market demand curve from individual demand curves, it would be necessary to:
Sum the curves horozontially, adding quantities demanded to each price
Tuition and fees for four year colleges in the United States has risen over 5% per year in the recent past. One cause for the increase in price has been an increase in demand for college education. In the standard model, what could be a possible explanation for the increase in demand for college education?
Income in the United States has risen
Shift factors of demand include
Income, prices of other goods, taste, expectations, and taxes on subsidies to customers
A market demand curve is the horizontal sum of all
Individual demand curves
The law of supply in demand holds true because
Individuals can substitute
Equilibrium
Is a concept in which opposing dynamic forces cancel each other out
demand curve
Is a graphic representation of the relationship between price and quantity demanded
supply curve
Is the graphic representation of the relationship between price and quantity supplied
market supply curve
Is the horizontal sum of all individual supply curved
The quantity of a good demanded is inversely related to the goods price
Law of demand
downward pressure on price
Movements along the demand and supply curves; increase in quantity demanded; decrease in quantity supplied
Explain how the law of the man and the law of supply interact to bring about equilibrium
Other than price are called shiftfactors. Shift factors of the supply include income, prices of other goods, tastes, expectations, and taxes on and subsidies to customers
Existing firms conspire to limit a new competition by lobbying Congress to
Pass restrictive regulations and by devising pricing strategies to scare off new entrants
As prices change
People change how much they're willing to buy
When prices of a good rises
People substitute a way from a good 2 other goods
Quantity supplied raises as
Price rises
when quantity supplied is greater than quantity demanded
Prices tend to fall
when quantity demanded is greater than quantity supplied
Prices tend to rise
State the law of demand
Quantity demanded rises as price falls, other things constant. Quantity demanded falls as price rises, other things constant.
When supply shifts right and demand shifts right
Quantity increases Price increases OR decreases
What is not consistent with the law of supply
Quantity supplied of a good is inversely related to the good price
State the law of supply
Quantity supplied rises as price increases, other things constant. Quantity supplied falls as price decreases, other things constant.
supply
Refers to a schedule of quantities of a good a seller is willing to sell per unit of time at various prices, other things constant
demand
Refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant
The law of supply states
That the quantity of a good supplied is directly related to the goods price
movement along the demand curve
The graphical representation of the effect of a change in price on the quantity demanded
Shift factors of supply include
The price of inputs, technology, expectations, and taxes one subsidies to producers
equilibrium price
The price toward which the invisible hand drives the market
Supply of Labor
The relationship between the quantity of labor supplied and the real wage rate when all other influences on work plans remain the same.
Supply curve represents
The set of minimum prices in individual seller will accept for various quantities of goods
If social and political forces were included in the analysis
They'd provide a counter- pressure to the dynamic forces of supply and demand
The use of the phrase "other things constant" in supply and demand analysis indicates that
We are considering changes in just one factor
Interaction of supply and demand
What determines the price and the quantity produced of most goods?
In the real world, you must add political and social forces to supply/demand model.
When you do equilibrium is likely not going to be where quantity demand equals quantity supplied
change in demand
a shift of the demand curve, which changes the quantity demanded at any given price
Demand Table
a table that shows the relationship between the price of a good and the quantity demanded
Prices adjust
and tend to rise when there is excess demand and fall when there is excess supply to reach an equilibrium
A demand shift to the right generally leads to
higher prices and higher output
time dimension
identifies the point or points in time at which we would like to measure our variable
change in quantity demanded
movement along the demand curve showing that a different quantity is purchased in response to a change in price
Quantity supplied falls as
price falls
As price increases
quantity demanded decreases
fallacy of composition
the false assumption that what is true for a part will also be true for the whole
shift in demand
the graphical representation of the effect of anything other than price on demand
market demand curve
the horizontal sum of all individual demand curves
The supply curve is
upward-sloping line that graphically shows the quantities supplied at each possible price