Economics Today: The Macro View, 19/e - Chapter Three: Demand and Supply

Interdependent

(of two or more people or things) dependent on each other; mutual

Tastes and Preferences

A change in consumer tastes in favor of a good can shift its demand curve outward to the right.

Example of complements

A decrease in the price of digital devices leads to an increase in the demand for apps. An increase in the price of digital devices leads to a decrease in the demand for apps. Thus, for complements, a change in the price of a product will cause a change in demand in the opposite direction for the other good.

Demand curve

A graphical representation of the demand schedule. It is a negatively sloped line showing the inverse relationship between the price and the quantity demanded (all other things being equal)

Subsidy

A negative tax; a payment to a producer from the government, usually in the form of cash grant per unit

Demand

A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant

Supply

A schedule showing the relationship between the price and quantity supplied for a specified period of time, other things being equal

Shortage

A situation in which quantity demanded is greater than quantity supplied at a price below the market clearing price

Surplus

A situation in which quantity supplied is greater than quantity demanded at a price above the market clearing price

Quantity demanded

A specific quantity at a specific price, represented by a single point on a demand curve

Explain the law of supply

According to the law of supply, sellers will produce and offer for sale more units of a good at a higher price, and they will produce and offer for sale fewer units of the good at a lower price.

Income

An increase in income will lead to an increase in demand. That is, an increase in income will lead to a rightward shift in the position of the demand curve

Market Size (Number of Potential Buyers)

An increase in the number of potential buyers (holding buyers' incomes constant) at any given price shifts the market demand curve outward. Conversely, a reduction in the number of potential buyers at any given price shifts the market demand curve inward.

Inferior goods example

As households get richer, they tend to purchase fewer and fewer beans and purchase more and more fish.

Example of law of supply

At $5 per portable power bank, manufacturers would almost certainly be willing to supply a larger quantity than at $1 per portable power bank,

Ex of quantity demand

At a price of $3 per portable power bank, 6 million portable power banks per year are demanded. If the price falls to $1, quantity demanded increases to 10 million per year.

Why is the price toward which the market price will automatically tend to gravitate in an equilibrium?

Because there is no outcome more advantageous than this price for both consumers and producers.

How has a change in the quantity of cable TV subscriptions in response to a change in the price of these subscriptions accorded with the law of demand?

Between 2000 and 2017, the inflation-adjusted average nationwide price of a cable TV subscription rose from $30 per month to about $67 per month. Thus, consistent with the law of demand, a significant reduction in the number of cable TV subscriptions has taken place in response to a substantial increase in the inflation-adjusted price of cable TV subscriptions.

What happens during a shortage?

Cause the price to rise: Competing consumers will bid up the price, and suppliers will increase output in response

Tax and subsidies (supply)

Certain taxes, such as a per-unit tax, are effectively an addition to production costs and therefore reduce supply.

What can cause the entire supply curve to move?

Ceteris paribus conditions

What happens when there is a surplus?

Competing suppliers will cut prices and reduce output, and consumers will purchase more at these new lower prices

Example of expectation

Consumers getting wind of a scheduled 100 percent increase in the price of portable power banks next month will buy more of them today at today's prices. Today's demand curve for portable power banks will shift from D1 to D2. The opposite would occur if a decrease in the price of portable power banks was scheduled for next month (from D1 to D3).

Expectations

Consumers' expectations regarding future prices and future incomes will prompt them to buy more or less of a particular good without a change in its current money price.

Ceteris paribus conditions

Determinants of the relationship between price and quantity that are unchanged along the curve. Changes in these factors cause the curve to shift (include consumers' income; tastes and preferences; the prices of related goods; expectations regarding future prices and future incomes; and market size (number of potential buyers))

Inferior goods

Goods for which demand falls as income rises

Normal goods

Goods for which demand rises as income rises. Most goods are normal goods

Rational behavior

If nothing else changes and the price of a good falls, the lower price induces us to buy more because we can enjoy additional net gains that were unavailable at the higher price.

Cost of Inputs Used to Produce the Product (supply)

If one or more input prices fall, production costs fall, and the supply curve will shift outward to the right. That is, more will be supplied at each and every price. The opposite will be true if one or more inputs become more expensive.

Number of Firms in the Industry (supply)

If the number of firms increases, supply will increase, and the supply curve will shift outward to the right. If the number of firms decreases, supply will decrease, and the supply curve will shift inward to the left.

Why are prices are always expressed in constant-quality units?

In order to avoid the problem of comparing commodities that are in fact not truly comparable.

Supply schedule (or is referred to supply)

It is a set of planned production rates that depends on the price of the product.

What does the demand curve represent?

Law of demand (think about the inverse relationship between the price of portable power banks and the quantity demanded per year.)

Explain the law of demand

Other things being equal, individuals will purchase fewer units of a good at a higher price and will purchase more units at a lower price.

Is a shortage and scarcity the same thing?

Shortages and scarcity are not the same thing. A shortage is a situation in which the quantity demanded exceeds the quantity supplied at a price that is somehow kept below the market clearing price. Our definition of scarcity was much more general and all-encompassing: a situation in which the resources available for producing output are insufficient to satisfy all wants.

Price Expectations (supply)

Suppliers of portable power banks may withhold from the market part of their current supply if they anticipate higher prices in the future. The current amount supplied at each and every price will decrease.

Market demand

The demand of all consumers in the marketplace for a particular good or service. The summation (all buyers) at each price of the quantity demanded by each individual

Distinguish between changes in demand and changes in quantity demanded

The demand schedule shows quantities purchased at various possible prices. Graphically, the demand schedule is a downward-sloping demand curve. A change in the price generates a change in the quantity demanded, which is a movement along the demand curve. If any of the following ceteris paribus conditions of demand change, there is a change in demand, and the demand curve shifts to a new position: (1) income, (2) tastes and preferences, (3) the prices of related goods, (4) expectations, and (5) market size (the number of potential buyers).

Understand how the interaction of demand and supply determines the equilibrium price and quantity

The equilibrium price of a good and the equilibrium quantity of the good that is produced and sold are determined by the intersection of the demand and supply curves. At this intersection point, the quantity demanded by buyers of the good just equals the quantity supplied by sellers, so there is neither an excess quantity of the good supplied (surplus) nor an excess quantity of the good demanded (shortage).

Supply curve

The graphical representation of the supply schedule; a line (curve) showing the supply schedule which generally slopes upward (has a positive slope), other things being equal

Theory of law of supply

The law of supply is based on a model in which producers and sellers seek to make the most gain possible from their activities

Money price

The price expressed in today's dollars for any good or service; also called the absolute or nominal price

Market clearing, or equilibrium, price

The price that clears the market, at which quantity demanded equals quantity supplied; the price where the demand curve intersects the supply curve

What does a downward slope indicate?

The quantity demanded will rice as the price declines

What if colleges uniformly prohibited any of their students from using digital devices that utilize portable power banks?

The regulation would shift inward to the left. The quantity demanded would now be less at each and every possible price.

Distinguish between changes in supply and changes in quantity supplied

The supply schedule shows quantities produced and sold at various possible prices. On a graph, the supply schedule is a supply curve that slopes upward. A change in the price generates a change in the quantity supplied, which is a movement along the supply curve. If any of the following ceteris paribus conditions change, there is a change in supply, and the supply curve shifts to a new position: (1) input prices, (2) technology and productivity, (3) taxes and subsidies, (4) price expectations, and (5) the number of sellers.

What if the federal government gives every student registered in a college, university, or technical school in the United States a digital device that utilizes portable power banks?

Then the curve will be outward and the re will be an increase in the number of portable power banks demanded at each and every possible price (increase in demand)

Law of supply

There is usually a direct relationship between price and quantity supplied. As the price rises, the quantity supplied rises. As the price falls, the quantity supplied also falls.

What is quality-adjusted price? (EX)

Tipping behavior ensures a quality-adjusted price that consumers are willing to pay for a delivered service.

Complements

Two goods are complements when a change in the price of one causes an opposite shift in the demand for the other

Substitutes

Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price changes

Law of Demand

When the price of a good goes up, people buy less of it, other things being equal. When the price of a good goes down, people buy more of it, other things being equal.

What does "other things being equal mean"?

We referred to this in Chapter 1 as the ceteris paribus assumption. It means, for example, that when we predict that people will buy fewer digital devices if their price goes up, we are holding constant the price of all other goods in the economy as well as people's incomes. Implicitly, therefore, if we are assuming that no other prices change when we examine the price behavior of digital devices, we are looking at the relative price of digital devices.

Example of tastes and preferences

When Beanie Baby stuffed animals became the rage, the demand curve for them shifted outward to the right. When the rage died out, the demand curve shifted inward to the left.

Change in quantity supplied.

When price changes, quantity supplied changes—there is a movement from one point to another along the same supply curve.

When does a relative price change?

When the quality of a product improves thereby bringing about a decrease in the item's effective price per constant-quality unit. The price of an item may also decrease simply because producers have reduced the item's quality. Thus, when evaluating the effects of price changes, we must always compare price per constant-quality unit. (EX: i phone 6 and 7)

Example of related goods

When we draw the demand curve for home cinema speakers, we assume that the price of surround-sound amplifiers is held constant

Determinants

a factor that decisively affects the nature or outcome of something.

Example of substitutes

an increase in the price of margarine will lead to an increase in the demand for butter, and an increase in the price of butter will lead to an increase in the demand for margarine. For substitutes, a change in the price of a substitute will cause a change in demand in the same direction.

Why is that the law of supply implies a direct relationship between price and quantity supplied? (Example)

as a manufacturer attempts to produce more and more portable power banks over the same time period, it will eventually have to hire more workers, pay overtime wages (which are higher), and more heavily utilize its machines. Only if offered a higher price per portable power bank will the manufacturer be willing to incur these higher costs.

Example of Demand and Supply Schedules Combined

at a price of $1, only 2 million portable power banks would be supplied, but the quantity demanded would be 10 million. The difference would be 8 million, which we label excess quantity demanded (a shortage). At the other end, a price of $5 would elicit 10 million in quantity supplied. Quantity demanded would drop to 2 million, leaving a difference of +8 million units, which we call excess quantity supplied (a surplus).

Technology and production (supply)

when a better production technique for portable power banks becomes available, production costs will decrease, and the supply curve will shift to the right.

Shortage

excess quantity demanded

Suplus

excess quantity supplied

Related goods =

goods for which demand is interdependent

Fall in demand =

leftward shift in the demand curve

Equilibrium

point at which quantity demanded equals quantity supplied at a particular price. there tends to be no movement of the price or the quantity away from this point unless demand or supply changes.

Demand

refers to a schedule of planned rates of purchase and depends on a great many ceteris paribus conditions, such as incomes, expectations, and the prices of substitutes or complements. Whenever there is a change in a ceteris paribus condition, there will be a change in demand—a shift in the entire demand curve to the right or to the left.

Rise in demand =

rightward shift in the demand curve

What is the key economic explanation for tipping?

starts with the fact that consumers who purchase products such as food at restaurants, mixed drinks, or taxi services know how much they are willing to pay for services provided in a satisfactory way.

Relative price

the price of a commodity such as a good or service in terms of another; i.e., the ratio of two prices. A relative price may be expressed in terms of a ratio between any two prices or the ratio between the price of one particular good and a weighted average of all other goods available in the market. A relative price is an opportunity cost.