Economics Chapter Three

Expectation of future prices shift

1. Expect the price to increase, demand increases 2. Expect the price to decrease, demand decreases

Law of demand represented

1. In words 2. In symbols 3. In a demand schedule 4. Demand curve

Why does QD go down as P goes up?

1. Substitute goods 2. Marginal Utility

Market

A place for trade; physical or virtual

Disequilibrium Price

A price other than equilibrium price; a price where QD does not equal QS

Disequilibrium

A state of either surplus or shortage in the market

Change in Demand versus Change in Quantity Demanded

Change in demand: shift from D1 to D2 Change in QD: Movement along D1 curve

Income shift for neutral goods

Demand does not change with income

Subsidy Effect on Supply

Directly Related

Shortage

Excess Demand; Quantity Demanded > Quantity Supplied; occurs at prices below equilibrium

Surplus

Excess Supply; Quantity Supplied > Quantity Demanded; occurs at prices above equilibrium

"If the price of apples rises, the supply of apples will rise."

False. If the price of apples rises, the quantity supplied of apples will rise-not the supply. We are talking about a movement from one point on a supply curve to a point higher up on the supply curve, not about a shift in the supply curve.

Marginal Utility

For a given time period, the additional utility or satisfaction gained by each unit will decline as the amount consumed increases; People are willing to pay more for first day (Disney tickets example)

Preferences

If people are in favor, demand increases If people go away from the good, demand decreases

Income shift for normal goods

Income and demand directly related

Income shift for inferior goods

Income and demand inversely related

5 Factors causing Shift in Demand Curve

Income, Preferences, Price of related goods, Number of Buyers, Expectations of future prices

Gov. Restrictions Effect on Supply

Inversely Related

Taxes Effect on Supply

Inversely Related

Expectations of Future Prices Effect on Supply

Inversely related; example: as oil prices rise for suppliers, the supply will go down. as oil prices decline for suppliers, supply will go up.

Subsidy

Monetary payments by gov to a producer of a good or service

Change in Quantity Supplied

Movement along a supply curve; only factor that causes change is the good's own price

Number of Buyers Shift

Number of Buyers and Demand directly related

Number of Sellers Effect on Supply

Number of Suppliers directly related with Supply

Demand Schedule

Numerical tabulation of quantity demanded of a good at different prices

Supply Schedule

Numerical tabulation of quantity supplied of a good at different prices; represents law of supply

Law of Demand

Price and Demand inversely related (ceteris paribus)

If Demand increases, and Supply stays the same

Price and Quantity Increase, Quantity Supplied increases

If Demand increase is more than the supply decrease

Price and Quantity decrease

If Demand decreases, and Supply stays the same

Price and Quantity decrease, and Quantity Supplied decreases

Law of Supply (& supply curve)

Price and Quantity directly related (c.p.)

If Supply increases, and Demand stays the same

Price decreases, Quantity increases, Quantity demanded increases

If Demand decrease equals the Supply Increase

Price decreases, Quantity stays the same

If Supply decreases, and Demand Stays the same

Price increases, Quantity Decreases

If Demand increase is less than the Supply decrease

Price increases, Quantity decreases

If Demand increase equals the Supply Decrease

Price increases, Quantity stays the same

7 Factors Cause Shift of Supply Curve

Price of Relevant Resources, Technology, Prices of Other Goods, Number of Sellers, Expectation of Future Prices, Taxes and Subsidies, Gov restrictions

Price of Relevant Goods (Resources) Effect on Supply

Prices directly related to supply

Decrease in Supply

Sellers willing and able to produce less of a good at all prices

Decrease in demand

Shifts demand curve to the left

Increase in demand

Shifts demand curve to the right

Price of Other Goods Effect on Supply

Supplier will shift to whatever is more profitable, has a higher selling price

Increase in Supply

Suppliers willing and able to produce and sell more at all prices

Quantity demanded

The # of units at particular price during particular time period people are willing to pay

Market Demand Curve

The price-quantity combo of a good for all buyers

Individual Demand Curve

The price-quantity combo of a particular single buyer

Market Equilibrium

The quantity combo where there is no tendency for buyers or sellers to move away; where supply and demand intersect

Prices of related goods; Complements

Two goods that are used jointly. Complements: the demand for one rises as the price of the other falls (and vice versa); e.g. Tennis ball and racket

Prices of related goods; Substitutes

Two goods that satisfy similar needs or desires. Substitutes: the demand for one rises as the price of the other rises (and vice versa); e.g. Pepsi and Coke

Substitute goods

Two or more goods that satisfy a similar need, so that one good can be used instead of the other. If two goods are substitutes, an increase in the price of one leads to an increase in the demand for the other.

Fixed Supply

Vertical line; used when quantity does not change

Demand

Willingness and ability of buyers 1. To purchase different quantities 2. At different prices 3. During specific time period

Supply

Willingness of sellers to produce a good at different prices at different times