Ch. 03: Demand and Supply

decrease in demand

means that quantity demanded decreases at each price. As a result, the demand curve shifts inward to the left

increase in demand

means that quantity demanded increases at each price. As a result, the demand curve shifts outward to the right

decrease in supply

means that quantity supplied decreases at each price. As a result, the supply curve shifts inward

increase in supply

means that quantity supplied increases at each price. As a result, the supply curve shifts outward

what does lower price induce some consumers to do?

move along the demand curve to increase their quantity demanded

an increase in the supply of a good or service generates what?

new equilibrium price that is lower and a new equilibrium quantity that is higher than the original equilibrium values

market surplus

occurs when the price of a good is above its equilibrium price - in a market surplus, Q^S is greater the Q^D at a given price

market shortage

occurs when the price of a good is below its equilibrium price -in a market shortage, Q^D is greater than Q^S at a given price -send a signal to suppliers to increase prices

substitutes

goods that tend to be used in place of one another

complements

goods that tend to be used together

producer substitution effect

(of a price increase) occurs when changes in the relative price of a good cause producers to move their production into the now relatively higher priced goods -causes increases in the quantity supplied of a good when the good's price rises

what are the expenses involved in production

-cost of inputs -cost to get goods or services to market -the technology used to produce the good sand services

what causes an increase in supply?

-cost of production could have fallen -there could be new technology to speed up production -there could be a drop in the price of substitute production good -producers' expectations may have changed -more producers could have entered this market

markets

-pervasive institutions of trade -can be a physical location or in cyberspace

demand (vs quantity demanded)

-shows us all the prices and all the quantities demanded in entire table or graph

what causes an increase in demand?

-the incomes of consumers could have risen -the price of a substitute good could have risen -the price of a complement good could have fallen -tastes and preferences could have shifted -consumers' expectations may have changed -more consumers could have entered the market

what are factors that contribute to the positive relationship between price and quantity supplied?

-the scale effect, the substitution effect and the law of increasing marginal costs

what is the relationship between the price and quantity supplied?

a direct or positive relationship

relative price

a good's price in comparison to the prices of other goods you could buy

an increase in demand for a good or service can generate what?

a new equilibrium price and quantity values that are higher than the original value

a decrease in the supply of a good or service generates what?

a new equilibrium price that is higher and a new equilibrium quantity that is lower than the original equilibrium values

inferior goods

an increase in income generates a decrease in demand

normal goods

an increase in income generates an increase in demand

what is the relationship between the price and quantity demanded?

an inverse or negative relationship (in a demand curve, the inverse relationship means that as the price of bread rises, ceteris paribus, the quantity of bread demanded falls. Similarly, as the price of break falls, the quantity of the dead demanded rises)

where does a market exist?

anywhere there are buyers willing to buy a good and sellers willing to sell it.

what happens when the market adjusts their surplus?

as the price of bread falls, the quantity of bread supplied per day will fall

law of increasing marginal costs

asserts that, ceteris paribus, the cost of production tend to rise as successive units of a good are produced -these increasing costs are then reflected in increases in the minimum prices that producers are willing to accept for the good as quantities of the good increase -it arises because resources are specialized--they are not equally productive at producing all goods and services

examples of substitutes?

bagels and bread, butter and margarine, DVD purchases and DVD rentals, Wii gaming systems and X-box gmaing systems, Coke and Pepsi

examples of complements?

iPods and iTunes downloads, ski equipment and ski passes, bread and peanut butter

how do you observe the demand for a good?

by tracking changes in the price of a good and the resulting changes in quantity demanded

changes in the price of peanut butter or bagels generate what changes

changes in the demand for bread

when the cost of production of a good or service increase, ceteris paribus the supply of the good or service will do what?

decrease

expectations

describe our notions about what we think will happen in the future -expectations for the future affect our choices today -are an important factor in shifting demand because they are often self-fulfilling

change in supply

implies a fundamental change in the overall supply relationship-- a new column of the supply table is needed and the supply curve shifts

income effect

implies that changes in the price of a good affect the amount of it that you can afford, which results in a change in quantity demanded, ceteris paribus -when the price of a good rises, ceteris paribus, a given level of income is no longer enough to purchase the same quantity of the good as before (aka the purchasing power of your income declines when the price of a good rises.) and vise versa.

consumer substitution effect

implies that consumers will respond to a higher price of a good, ceteris paribus, by decreasing their quantity demanded of that good and substituting instead into goods whose prices have not changed -how you respond to changes in relative prices

law of diminishing marginal utility

implies that the extra utility you get from consuming a good gets smaller as more of the good is consumed. As a result, your willingness to pay for another unit of a good decreases as more of the good is consumed. -people obtain less satisfaction from each successive unit of a good consumed; consequently there is a decrease in their willingness to pay for additional units of the good -an alternative way to explain the demand for goods and services, as represented by the demand curve. we can view demand as describing how much of a good consumers are willing and able to buy at a given price

what determines whether goods are normal or inferior?

individual preferences for a particular person

what is the fundamental relationship on the supply side?

it is between the price of the good and the quantity that sellers are willing and able to sell at that price (aka quantity supplied)

changes in the price of bread generate what changes?

its quantity demanded, not changes in its demand

as with the demand case, supply relationships can be....

linear

what axis is quantity measured on and which axis is price measured on?

quantity: x-axis price: y-axis

supply

represents the seller's side of the market -the relationship between the price of a good and its quantity supplied, ceteris paribus -shows the price and all the quantities supplied in the entire table or graph -describing how much of a good producers are willing and able to sell at a given price. This is a "horizontal" reflection in the sense that supply shows the quantity supplied, measured on the horizontal axis, for a given price. -that it reflects the minimum amount that producers are willing and able to accept in order to sell a given about of a good. This is a "vertical"interpretation of supply in the sense that it shows the minimum dollar amount, measured on the vertical axis, that producers will accept in payment for a given quantity of the good

change in quantity demanded

results from a change in the price of the good, ceteris paribus but not a change in demand, for the good. -it is represented by a movement along the demand curve

change in quantity supplied

results from a change in the price of the good, ceteris paribus. It is represented by a movement along the supply curve -comes only from a change in the price of the good, ceteris paribus, does not imply the a change in the overall relationship but rather a movement within the relationship

why would you increase prices during a market shortage?

some customers will decide to buy less, so quantity demanded will decrease -at the same time, higher prices make it easier for sellers to cover the cost of producing more, so that the quantity supplied rises

what happens when you build a demand curve?

you can describe the behavior/demand of an individual or the behavior of all the consumers in a market

market forces

take the form of market shortages and surpluses

quantity demanded (vs. demand)

the amount of a good or service that consumers are willing and able to buy at a given price and holding all other things equal. -each quantity demanded is one point in the demand table or one point on the demand curve

quantity demanded

the amount of a good that buyers are willing and able to buy at a given price of the good, ceteris paribus -the quantity demanded of a good changes aaas the price of the good changes, ceteris paribus.

quantity supplied

the amount of a good that sellers are willing and able to sell at a given price and time, ceteris paribus -changes as the price of the good changes -each quantity supplied is one point in the supply table or one point on the supply curve

demand curve

the demand relationship on a graph -can be linear or curved

supply curve

the line connecting each of the price and quantity supplied combinations -labeled S

what happens when buyers can obtain all the good that they are willing and able to buy at a given price and sellers can sell all of the good that they are willing and able to sell at a given price?

the market is in equilibrium

how does the market adjust when there is a surplus?

the market surplus is a signal to sellers to lower their price. If they dont, they will be stuck with excess bread day after day

what factors can generate shifts in supply?

the primary factors are the costs of production, the prices of alternative goods that could be produced, seller expectations, and the number of suppliers in the market

demand

the relationship between the price of a good and the quantity of the good that buyers are willing and able to buy at that price, ceteris paribus -the buyers' side of the market

Scale effect

the scale effect of a price increase generates increased incentives for producers to expand their scale of production, thus increasing the quantity supplied -aka implies that when the price of a good rises, producers increase their quantity supplied because they can afford to increase their scale of production -when the price of a good falls, producers decrease their quantity supplied because they cannot afford to keep up their current scale of production

law of supply

there is a positive relationship between price and quantity supplied

law of demand

there is an inverse relationship between the price and quantity demanded -income effect, the substitution effect and the law of diminishing marginal utility all contribute to law of demand