Chapter 4: Market forces of Supply and Demand

Shortage

a situation in which quantity demanded is greater than quantity supplied

Surplus

a situation in which quantity supplied is greater than quantity demanded

What factor when it comes to price would we expect a shift in the supply curve for a product to the left?

An expectation that the price of the good will be higher in the future than it is today. If the suppliers believe prices will be higher in the future, they will store some of their current production for sale in the future and reduce the current supply, shifting the supply curve to the left

Suppose the market for good X starts out in equilibrium. If the supply of good X increases, all else the same, we would expect:

An increase in supply shifts the supply curve to the right, resulting in a lower equilibrium price and a higher equilibrium quantity

Competitive market

Consists of many buyers and sellers, each has a negligible effect on price.

Market supply

The market supply is the sum of the two individual supplies.

In a perfectly competitive market:

- All goods are exactly the same - Buyers and sellers so numerous that no one can affect market price - each is a "price taker"

Determinants of how much consumers want to buy (Cause a shift in the demand curve):

- Income - The price of substitutes - Complements - Tastes - Expectations - Number of buyers

Determinants of how much producers want to sell (Cause a shift in the supply curve):

- Input price - Technology - Expectations - Number of sellers

Which of the following would we not expect to shift the demand curve for a good to the right?

Changes in the price of a good moves us along the given demand curve, changing the quantity demanded. Changes to other factors other than price will shift the demand curve. In this case, all of the changes shift the demand to the right except for the change in the price of the good

Suppose the price of good A increases and as a result the quantity demanded for good B decreases. We can conclude that goods A and B are:

Complements

An increase in price will shift the supply curve to the right. (T/F)

False. Changes in price do not shift the supply curve but instead move us along the given supply curve. Changes in factors other than price that effect supply will shift the supply curve

When consumer income increases we would expect the demand curve:

For normal goods, an increase in income will shift the demand curve to the right. For inferior goods, an increase in income will shift the demand curve to the left

Suppose the market for lawn mowers starts out in equilibrium. If the price of steel, an input used in the production of lawn mowers, rises, and if at the same time homeownership increases, increasing the number of buyers of lawn mowers, which of the following would we expect to occur?

The equilibrium price will rise, and the effect on the equilibrium quantity would be ambiguous. An increase in the price of an input will decrease supply, increasing price and decreasing quantity. An increase in the number of buyers will increase demand, increasing price and increasing quantity. Since both changes are pushing the price higher, we would expect the price to rise. However, since the two changes are pushing the quantity in opposite directions we cannot determine whether quantity will be higher, lower, or the dame without further information

In a perfect competitive market

The number of buyers and sellers is so large that no individual buyer or seller has any influence over the price

When input prices increase we would expect:

The supply curve to shift to the left

If goods A and B are complements, then we would expect the demand for good A to increase when the price of good B rises. (T/F)

True

In a market that starts out in equilibrium, if supply were to increase at the same time the demand was to decrease, we would expect the equilibrium price to fall. (T/F)

True. If supple increases, the supply curve shifts to the right, pushing price down and quantity up. A decrease in demand will shift the demand curve left and will push price down and quantity down. Since both changes are pushing the price down we would expect the market price to fall

Inferior good

a good for which, other things being equal, an increase in income leads to a decrease in demand

Normal good

a good for which, other things being equal, an increase in income leads to an increase in demand

Demand Curve

a graph of the relationship between the price of a good and the quantity demanded. As the price of a good falls, the quantity demanded rises; therefore, the demand curve slopes downward.

Supply curve

a graph of the relationship between the price of a good and the quantity supplied. A higher price increases the quantity supplied; therefore, the supply curve slopes upward.

market

a group of buyers and sellers of a particular product

Equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

Demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

Supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

Quantity supplied

the amount of a good that sellers are willing and able to sell

Quantity demanded

the amount of the good that buyers are willing and able to purchase.

Law of supply and demand

the claim that the price of any good adjusts to bring the quantity demanded for that good into balance

Law of demand

the claim that the quantity demanded of a good falls when the price of the good rises, other things equal. (Other things=income, taxes, # of buyers, related goods). (Price and qty demanded are negatively related, meaning they move in opposite directions...price goes up, demand goes down).

Law of supply

the claim that, other things being equal, the quantity supplied of a good rises when the price of the goo rises

Equilibrium price (clearing price)

the price that balanced quantity supplied and quantity demanded.

Equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price.

Complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

Substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other