Macroeconomics Chapter 4

Define Substitute Goods. Give examples

-When a fall in the price of one good leads to a left shift in another good (or vise-versa). Ex: Public Transportation and Gas - If public transportation prices go up, then gas/driving is cheaper so people will demand more gas Ex: Pepsi and Coke - If the price of Coke goes up, people will demand more of Pepsi since it is cheaper

What will happen to the market for bike helmets if the price of bicycles goes down? What will shift? How are price and quantity affected?

-Demand will increase -Price will increase -Quantity will increase

What will happen to the market for cement if a 7.9 earthquake hits San Francisco? What will shift? How are price and quantity affected?

-Demand will increase -Price will increase -Quantity will increase

What will happen to the market for taxi service if the local subway workers go on strike? What will shift? How are price and quantity affected?

-Demand will increase -Price will increase -Quantity will increase

How do you find the aggregate demand curve of a market/economy? (Define the market demand curve)

-Fix the prices, and add up the quantity demanded of each buyer at each price. Plot those quantities at the corresponding prices -Sum of the individual demand curves of all the potential buyers, then plotting the relationship between total quantity demanded and the market price

Define Holding All Else Equal. What is the Latin term/definition for this concept?

-Implies that everything else in the economy is held constant -"Ceterius Paribus" = With other things the same

Define/Describe the Supply Curve

-Plots the quantity supplied at different prices -Upward sloping since price (y-axis) and quantity supplied (x-axis) are positively related

Define/Describe the Demand Curve

-Plots the relationship between prices and quantity demanded -Downward sloping since price (y-axis) and quantity demanded (x-axis) are negatively related

Define Competitive Equilibrium

-Point at which the market comes to an agreement about what the price will be and how much will be exchanged -Crossing point of supply and demand curves

What will happen to the market for apples if a new pesticide is developed which controls tent caterpillars? What will shift? How are price and quantity affected?

-Supply will increase -Price will decrease -Quantity will increase

Explain Marginal Cost of Production/Willingness to Accept (how are they related)

-They are the same -As long as a producer is paid at least the marginal cost of their good or service (cost of producing it), they will be willing to supply another unit of that good

Supply Shifter: Changes in number and scale of sellers

More sellers of a good means more supply (rightward shift)

Define Willingness to Accept

The lowest price a seller is willing to get paid to sell an extra quantity of their good or service

Define Market Supply Curve

Sum of all the individual supply curves of all potential sellers. It plots the relationship between the total quantity supplied and the market price, holding all else equal

Demand Schedule

Table that reports the quantity demanded at different prices, holding all else equal

Define Supply Schedule

Table that reports the quantity supplied at different prices, holding all else equal

Define Complementary Goods. Give an example

-When a fall in the price of one good leads to a rightward shift in another good's demand (or vise-versa) Ex: Peanut Butter and Jelly - If the price of jelly rises, then the demand for peanut butter will go down along with jelly since they are goods that work together

Which of the following is not one of the five major factors that shift the demand curve? A. Prices of inputs used to produce the good B. Expectations about the future C. Tastes and preferences D. Price of substitute goods

A

A group of economic agents who are trading a good or service would define a __________. Price takers exist throughout _______________ markets.

A group of economic agents who are trading a good or service would define a MARKET. Price takers exist throughout COMPETITIVE markets.

Explain the Apple laptop sale situation that happened in Henrico County, VA.

A store conducted a sale in which 1000 Apple Laptops were being sold at $50 each. 5000 people lined up between 1:30am and 7am when it opened. There was then excess demand of 5000 laptops compared to the supply shortage of 1000 laptops.

Define Quantity Demanded

Amount of a good or service that buyers are willing to purchase at a given price

Define Market

Group of economic agents who are trading a good or service plus the rules and arrangements for trading

Define Willingness to Pay

Highest price that a buyer is willing to pay for an extra unit of a good or service

Demand Shifter: Changes in buyer's beliefs about the future

If people become pessimistic about economy, or notice that prices may rise in the future, they'll demand more today so its a rightward shift. Their demand in the future will go down, shifting it left

What will happen to the market for hamburger if the price of hamburger rises? What will shift? How are price and quantity affected?

It is a movement along the curve so there is no shift.

What will happen to the market for jelly beans if the price of jellybeans goes up? What will shift? How are price and quantity affected?

It is a movement along the curve so there is no shift.

What happens to price and quantity if demand shifts right and supply shifts right?

P ?, Q up

What happens to price and quantity if demand shifts left and supply shifts right?

P down, Q ?

What happens to price and quantity if demand shifts left?

P down, Q down

What happens to price and quantity if supply shifts right?

P down, Q up

What happens to price and quantity if demand shifts right and supply shift left?

P up, Q ?

What happens to price and quantity if supply shifts left?

P up, Q down

Define Negatively Related

Two variables move in opposite directions

Define Positively Related

Two variables move in the same direction

Supply Shifter: Changes in seller's beliefs about the future

What impact from our future expectations will have on a firm's decision to sell today (or not to sell today)

Law of Demand

When price rises, quantity demanded falls/When price falls, quantity demanded rises

Demand Shifter: Changes in number and scale of buyers

When the number of buyers increase, the demand curve will shift right because there's more people demanding a good (or vise-versa)

Demand Shifter: Changes in income 1. Explain 2. Terms under this concept

1. Change in income affects your ability to pay for goods and services. So if you earn more money, you'll demand more (shift right). Vise-versa 2. Normal Goods and Inferior Goods

List the shifters of the demand curve

1. Changes in taste and preferences 2. Changes in income 3. Changes in the availability and prices of related goods 4. Changes in the number and scale of buyers 5. Changes in buyer's beliefs about the future

Define Quantity Supplied

Amount of a good or service that sellers are willing to sell at a given price

If Jay's Fruit Stand is able to charge considerably higher prices than other fruit stands, it is likely that... A. Jay's accepts the market prices B. There are no fruit stands in close proximity to Jay's C. There are a lot of fruit stands in close proximity to Jay's D. Jay's is a price taker

B

Supply Shifter: Changes in technology used to produce a good

Better technology helps to produce goods and services more efficiently and possibly cheaper, so firms are able to supply more. However, a technological shock (ex: an earthquake that destroys oil fracking areas) that make it harder to produce goods can shift the curve left (supplying less).

Holding all else equal, if the price of a digital camera rises, then we can expect... A. An increase in the quantity demanded B. An increase in demand C. A decrease in quantity demanded D. A decrease in demand

C

How did the oil fracking technology developed in the US between 2011-16 impact oil prices throughout the world?

The new technology increased oil supply, shifting the supply curve right. This rightward shift then reduced prices throughout the world.

Coffee and tea are likely ___________ because an increase in the price of coffee ____________ the demand for tea

Coffee and tea are likely SUBSTITUTES because an increase in the price of coffee INCREASE the demand for tea

Which of the following is not one of the four major factors that shift the supply curve? A. Number of sellers B. Technology used in production C. Sellers' beliefs about the future D. The income of consumers

D

Law of Supply

When prices rise, quantity supplied rises too. If prices fall, quantity supplied falls.

Demand Shifter: Changes in tastes and preferences

-A change in what we personally like, enjoy, or value -Change in styles, popularity, news -If a buyer prefers less of a good, the demand curve will shift left/If a buyers prefers more of a good, the demand curve will shift right

Define Inferior Good. Give examples

-An increase in income shifts the demand curve left for this kind of good which causes buyers to purchase less of it (and vise-versa) Examples: Spam, Ramen

Define Normal Good. Give examples

-An increase in income shifts the demand curve right for this kind of good which causes buyers to purchase more of it (and vise-versa) -Could buy more expensive products, name brand, etc. Examples: Fuel, steak

Discuss/Compare the oil policies between Brazil and Venezuela

-Both countries share a boarder, have similar income per person, and are large oil producers -Brazil heavily taxes the sale of gas, $5.58 per gal. -Venezuela aggressively subsidized the sale of gas, putting it around $0.04 per gal. -The law of demand states that when prices go down, quantity demanded will rise. Since prices are so low in Venezuela, consumption of oil is 5x higher than in Brazil. This creates a shortage of oil -In response to the huge shortage, Venezuela needed to reduce subsidies or rid of them completely.

Define Price Taker

-Buyer or seller who accepts the market price -Buyers can't bargain for a lower price, nor can sellers bargain for a higher price

What causes movement along the supply or demand curve? Is this the same as shifting the supply or demand curve?

-Change in price of a good -Not the same as a shifter

What will happen to the market for butter if the price of margarine goes up? What will shift? How are price and quantity affected?

-Demand will decrease -Price will decrease -Quantity will decrease

What will happen to the market for oreo cookies if the price of milk increases? What will shift? How are price and quantity affected?

-Demand will decrease -Price will decrease -Quantity will decrease

What will happen to the market for Redwood Lumber if environmentalists urge consumers to boycott redwood products? What will shift? How are price and quantity affected?

-Demand will increase -Price will increase -Quantity will increase

Define Competitive Equilibrium Price. What is another term for this?

-Price that equates quantity supplied and quantity demanded -Market clearing price -At this price, there is a buyer for every unit supplied in the market

What will happen to the market for corn if a drought destroys much of the crop? What will shift? How are price and quantity affected?

-Supply Decrease -Increase in price -Decrease in quantity

What will happen to the market for grapes if the National Marines Fisheries Service bans pesticides spraying within 100 feet of waterways? What will shift? How are price and quantity affected?

-Supply will decrease -Price will increase -Quantity will decrease

What will happen to the market for hot dog buns if the price of flour rises? What will shift? How are price and quantity affected?

-Supply will decrease -Price will increase -Quantity will decrease

What will happen to the market for wine if the average wage of grape harvesters rises by 10%? What will shift? How are price and quantity affected?

-Supply will decrease -Price will increase -Quantity will decrease

List the shifters of the supply curve

1. Changes in the prices of inputs used to produce a good 2. Changes in technology used to produce the good 3. Changes in the number and scale of sellers 4. Changes in seller's beliefs about the future

Supply Shifter: Changes in the prices of inputs used to produce the good 1. Define Inputs 2. Explain the shifter 3. Give example

1. Inputs: Goods and services used to produce another good 2. If it costs more to produce a good due to inputs costing more, optimizing firms will supply less of their good, shifting the supply curve left (or vise-versa) 3. Workers/labor, ingredients, equipment

What are the 3 assumptions that underlying the Perfectly Competitive Market model?

1. Large number of buyers and sellers 2. Firms sell identical goods 3. No barriers to entry or exist for firms

Excess Supply 1. Define 2. Other names 3. Why does it happen 4. Solution

1. When the market price is above the equilibrium price; where quantity supplied exceeds quantity demanded 2. Price Floor, Surplus 3. Higher prices make selling more desirable and buying less desirable, raising QS above QD 4. Competing firms would cut prices to attract more buyers, driving prices back down to equilibrium

Excess Demand 1. Define 2. Other names 3. Solution

1. When the market price is below competitive equilibrium price; where quantity demanded exceeds quantity supplied 2. Price Ceiling/Shortage 3. Buyers who aren't getting the goods will compete by offering higher prices which will drive up prices

Land in Sonoma, California, can be used to either grow grapes for pinot noir wine or to grow Gravestein apples? Given this information, what is the relationship between the wine and Gravestein apples? A. They're substitutes B. They share a common input C. They're complements D. They are completely unrelated

B

Define Diminishing Marginal Benefit

As you consume more of a good, your willingness to pay for an additional unit declines

Suppose a new off-campus university apartment complex could rent its rooms on the open market for $900 a month. If, instead, the university chooses to cap the price of rooms to $500 a month for students, the result would be that..... A. Quantity supplied would exceed quantity demanded = surplus B. Quantity demanded would exceed the quantity supplied = shortage C. Quantity demanded would exceed the quantity supplied = surplus D. Quantity supplied would exceed the quantity demanded = shortage

B

What happens to price and quantity if demand shifts right?

P up, Q up

What happens to price and quantity if demand shifts left and supply shifts left?

P?, Q down

Define Market Price

Price at which buyers and sellers conduct transactions

Define Aggregation

Process of adding up individual behaviors

Define Competitive Equilibrium Quantity

Quantity corresponding to the competitive equilibrium price

Define Perfectly Competitive Market

Sellers all sell an identical good or service, and any individual buyer or seller isn't powerful enough on their own to affect the market price

Suppose the price of pears increases and the demand for oranges increase. You determine that these goods must be....

Substitute Goods

Demand Shifter: Changes in Availability and Prices of Related Goods 1. What are the 2 terms under this concept

Substitute Goods and Complementary Goods

What happened with the US oil crisis of 1973-74?

The government capped the price of gas where demand was greater than supply. This caused a shortage in oil, and people would compete/fight for the oil. Many gas stations would run out from the high demand and limited supply.

The supply curve represents

The minimum price sellers are willing to accept to sell an extra unit of a good