Chapter 3: Demand, Supply, and Market Equilibrium

(Supply) Number of Sellers

An increase in the number of tattoo parlors increases the supply of tattoos; the formation of women's professional basketball leagues increases the supply of women's professional basketball games

(Supply) Prices of Other Goods

An increase in the price of cucumbers decreases the supply of watermelons

Changes in Demand

An increase in demand raises both equilibrium price and equilibrium quantity. A decrease in demand reduces both equilibrium price and equilibrium quantity

(Supply) Taxes and Subsidies

An increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduces the supply of higher education

(Demand) Number of Buyers

An increase in the number of buyer in a market is likely to increase demand A decrease in the number of buyer will decrease demand

Change in number of buyers

EX: A decline in the birthrate reduces the demand for children's toys

Demand Schedule

A table of numbers showing the amounts of a good or service buyers are willing and able to purchase at various prices over a specified period of time.

Supply Schedule

A table of numbers showing the amounts of a good or service producers are willing and able to make available for sale at each of a series of possible prices during a specified period of time.

Individual demand to Market demand

Adding the quantities demanded by all consumers at each of the various possible prices Figure 3.2

(Supply) Producer Expectations

An expectation of a substantial rise in future log prices decreases the supply of logs today

Demand

**A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time. **Shows the quantities of a product that will be purchased at various possible prices, other things equal.

Diminishing Marginal Utility

**In any specific time period, each buyer of a product will derive less satisfaction (utility) from each successive unit of the product consumed. **Because of this consumers will buy additional units only if the price of those units is progressively reduced

Income Effect

**Indicates that a lower price increases the purchasing power of a buyers money income, enabling the buyer to purchase more of the product than before. **A higher price will decrease the purchasing power of a buyers money income.

(Demand) Tastes

A change in consumer tastes that makes a product more desirable-means that more of it will be demanded at each price. Demand will increase: the demand curve will shift rightward. An unfavorable change in consumer tastes will decrease demand, shifting the curve to the left

Change in Supply

A change in the schedule and a shift of the curve. An increase in supply shifts the curve to the right; a decrease in supply shifts it to the left. The cause of a change in supply is a change in one or more of the determinants of supply

Demand Curve

A curve that illustrates the demand for a product by showing how each possible price (on the vertical axis) is associated with a specific quantity demanded (on the horizontal axis)

Supply Curve

A curve that illustrates the supply for a product by showing how each possible price (on the vertical axis) is associated with a specific quantity supplied (on the horizontal axis)

(Supply) Resource Prices

A decrease in the price of microchips increases the supply of computers; an increase in the price of crude oil reduces the supply of gasoline

Increase in demand may be caused by:

A favorable change in consumer tastes an increase in the number of buyers Rising incomes if the product is a normal good Falling incomes if the product is an inferior good An increase in the price of a substitute good A decrease in the price of a complementary good A new consumer expectation that either prices or income will be higher in the future

Substitute good

A good that can be used in place of another good.

Change in quantity supplied

A movement from one point to another on a fixed supply curve. Caused by a change in price of the specific product being considered

Change In Quantity Demanded

A movement from one point to another point-from one price-quantity combination to another-one a fixed demand curve. Caused by an increase or decrease in the price of the product under consideration. EX: A decline in the price of corn from $5 to $4 will increase the quantity demanded of corn from 2,000 to 4,000. A movement from point a to pint b on a curve.

Change in income

A rise in incomes increases the demand for normal goods such as restaurant meals, sports tickets, and necklaces while reducing the demand for inferior goods such as cabbage, turnips, and inexpensive wine.

Supply

A schedule or curve showing the various amount of a product that producers are willling and able to make available for sale at each of a series of possible prices during a specific period.

Change in Demand

A shift in the demand curve

Change in demand

A shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand) Occurs because the consumer's state of mind about purchasing the product has been altered in response to a change in one or more of the determinanats of demand. A change in the schedule and a shift of the curve. A shift from D1 to D2 or D3

Decrease in demand may be caused by:

An unfavorable change in consumer taste A decrease in the number of buyers Falling incomes if the product is a noral good Rising incomes if the product is an inferior good A decrease in the price of a substitute good An increase in the price of a complementary good A new consumer expectation that either prices or income will be lower in the future

Law of Supply

As price rises, the quantity supplied rises; as price falls, the quantity supplied falls.

Price

Consumer: An obstacle, higher the price, the less the consumer will buy Supplier: Price is revenue, an incentive to produce and sell a product. Higher price means higher incentive to supply means higher quantity supplied

Supply Decrease; Demand Increase

EP: Increase EQ: Indeterminate A decrease in supply and an Increase in demand both increase price. The combined effect is an increase in equilibrium price greater than that cause by either alone. Effect on equilibrium quantity is indeterminate. If decrease in supply is larger than the increase in demand the equilibrium quantity will decrease

Supply Decrease; Demand Decrease

EP: Indeterminate EQ: Decrease If the decrease in supply is greater than the decrease in demand EP will rise If the decrease in supply is less than the decrease in demand the EP will fall EQ will fall

Supply Increase; Demand Increase

EP: Indeterminate EQ: Increase If the increase in supply is greater than the increase in demand the EP will fall. If the Increase in supply is less than the increase in demand the EP will rise The EQ will increase by an amount greater than that caused by either change alone

(Demand) Income

Demand for normal goods goes up, Demand for inferior goods goes up as income increases Demand for normal goods goes down, demand for inferior goods goes up as income decreases

Changes in Supply

Demand is Constant but Supply Increases: Intersection of supply and demand is located at a lower equilibrium price but increases equilibrium quantity If supply decreases but demand is constant: equilibrium price rises while equilibrium quantity declines.

Supply Increase; Demand Decrease

EP: Decrease EQ: Indeterminate Both changes decrease price; the net result is a price drop greater than that resulting from either change alone. Equilibrium quantity: If the increase in supply is larger than the decrease in demand EQ will increase. If the decrease in demand is greater than the increase in supply the EQ in decrease.

Change in buyer tastes

EX: Physical fitness rises in popularity, increasing the demand for jogging shoes and bicycles; cell phone popularity rises, reducing the demand for landline phones

Shortage

Excess demand. Lower price discourages sellers from sellers but encourages buyers to buy.

Surplus

Excess supply. Drive prices down. Prompt competing sellers to lower the price to encourage buyers to take the surplus off their hands.

Determinants of Demand

Factors other than price that determine the quantities demanded of a good or service. Also referred to as "demand shifters" because changes in the determinants of demand will cause the demand curve to shift either right or left. (1) Consumers' tastes/preferences (2) the number of buyers in the market (3) consumers' incomes (4) the prices of related goods (5) consumer expecations

Inferior Goods

Goods whose demand varies inversely with money income

Change in consumer expectations

Inclement weather in South America creates an expectation of higher futrue coffee bean prices, thereby increasing today's demand for coffee beans.

Substitution Effect

Need to find video explaining this concept. Book definition is hard to understand

Market Supply Curve

Obtained by "horizontally adding" the supply curves of the individual producers

Complementary good

One that is used together with another good.

Normal Goods

Products whose demand varies directly with money income are called superior goods, or normal goods.

Price Ceiling

Sets the maximum legal price a seller may charge for a product or service Enable consumer to obtain some "essential" good or service that they could not afford at the equilibrium price EX: rent controls

Determinants of Supply

The "other things equal" that shift the supply curve if changed. (1) resource prices (2) technology (3) taxes and subsidies (4) prices of other goods (5) producer expectations (6) the number of sellers in the market A shift to the right signifies an increase in supply A shift to the left indicates a decrease in supply

(Supply) Technology

The development of more effective wireless technology increases the supply of cell phones

Allocative Efficiency

The particular mix of goods and services most highly valued by society

Equilibrium Price (Market-clearing Price)

The price where the intentions of buyers and sellers match. The price where quantity demanded equals quantity supplied

Law of Demand

The principle that, other things equal, an increase in a products price will reduce the quantity of it demanded, and a decrease in price will increase the quantity of it demanded.

Productive Efficiency

The production of any particular good in the least costly way

Equilibrium Quantity

The quantity at which the intentions of buyers and seller match, so the quantity demanded and quantity supplied are equal

Change in the prices of related goods

a reduction in airfares reduces the demand for bus transportation (substitute goods); a decline in the price of DVD players increases the demand for DVD movies (complementary goods)

Expectation of higher prices later...

may cause consumers to buy now