Economics Chapter 4 Equilibrium

disequilibrium symptom #3

secondary market places ex: When you parked in someone else's driveway, you've found a way around the "official" market for parking spots

Whenever the price is rising, that's a sign that at the current price

the quantity demanded exceeds the quantity supplied

planned economies

an economic system directed by government agencies

if the price is falling, it's likely that the quantity supplied

exceeds the quantity demanded.

equilibrium price

the price at equilibrium

equilibrium quantity

the quantity demanded and supplied at the equilibrium price

what do markets do?

-determines what and how much gets produced -who produces and receives it - at what price

step 2: Is that shift an increase, shifting the curve to the right? Or is it a decrease, shifting the curve to the left?

An increase in marginal benefit is an increase in demand, while an increase in marginal cost creates a decrease in supply.

step 3: How will prices and quantities change in the new equilibrium?

Compare the old equilibrium with the new equilibrium.

disequilibrium

Occurs when quantity demanded and quantity supplied are not in balance

step 1: is the supply or demand curve shifting (or both)?

Remember that any change affecting buyers or their marginal benefits will shift the demand curve, while any change affecting sellers or their marginal costs will shift the supply curve

example: A major retailer announces plans to install charging stations for electric cars in 400 parking spaces in 120 cities. How will this affect the demand for electric cars?

Step one: Because buyers of electric cars will have greater access to charging stations while running errands, the convenience—and therefore marginal benefit—of owning an electric car will be higher so this will shift the demand curve. Step two: The increased convenience will increase demand for electric cars, shifting the demand curve to the right. Step three: At the new equilibrium, this increased demand will raise both the price and quantity of electric vehicles. This is good news for electric car manufacturers.

Example three: The federal government announces a plan to fund research that will eventually lower the cost of the batteries used in hybrid cars. The head of General Motors' hybrid vehicle division wants to know how these innovations will affect the hybrid car market.

Step one: Since the new manufacturing technologies will affect the seller's marginal cost of producing each hybrid car, this will shift the supply curve. Step two: Because these cheaper batteries will reduce the cost of an important input into making hybrid cars, it will lower their marginal costs. Lower marginal costs lead to an increase in supply, shifting the supply curve to the right. Step three: This increased supply will mean a lower price and higher quantity of hybrid cars sold—a welcome development for those who would like to see more "green" vehicles on the roads.

Example two: Amazon announces that it is developing technology to deliver orders to customers within 30 minutes. Owners of local brick-and-mortar stores want to know how this will affect their company's sales.

Step one: Since the people who normally buy from their local stores will have a closer substitute for buying goods that they want quickly, this will shift the demand curve. Step two: These buyers will find buying from Amazon to be more attractive, making them less likely to buy from local brick-and-mortar stores. This is a decrease in demand for goods from local stores, shifting the demand curve to the left. Step three: Reduced demand will lead to a new equilibrium with both a lower price and a lower quantity. This is bad news for local stores.

Example four: Due to a drought in California, farmers face rising costs for water. Almond farming is a water-intensive process. How will the drought affect the market for almonds?

Step one: Since water is an input into almond farming, the scarcity of the input will increase the seller's marginal cost of producing almonds, which will shift the supply curve. Step two: Because the marginal cost of producing almonds will rise, supply will decrease, shifting the supply curve to the left. Step three: This decrease in supply will lead to a new equilibrium involving a higher price and lower quantity of almonds.

market

a group of buyers and sellers of a particular good or service

decrease in demand

a leftward shift of the demand curve, leads people to buy a smaller quantity at each price

decrease in supply

a leftward shift of the supply curve; indicating a decrease in the quantity suppliers are willing to produce at any price; causes an increase in the price and a decrease in quantity

increase in demand

a rightward shift of the demand curve, leads you (or others) to buy a larger quantity at each price

increase in supply

a rightward shift of the supply curve; increases the quantity suppliers plan to sell at each price; causes a decrease in price and an increase in quantity.

disequilibrium symptom #2

bundling to raise the price ex: bought dinner just so you could get the valet to park your car, you were effectively buying extras (that dinner) so you could get the thing you wanted (the parking spot), and this effectively raises the price you're paying to park.

equilibrium point

can help you figure out whether prices are headed up or down

an increase in supply

causes a decrease in price and an increase in quantity.

decrease in supply

causes an increase in the price and a decrease in quantity

market economies

economic systems in which individuals own and operate businesses

there will be no tendency for the price to change when at

equilibrium

a shift in demand causes price and quantity to move

in the same direction

disequilibrium symptom #1

long lines ex: When you're driving around looking for a spot, you're effectively queuing—waiting in line—for the next available spot. The extra time you spend in the queue raises the effective price you're paying because it'll cost you both time and money to get a spot.

demand

marginal benefit

supply

marginal cost

a shift in supply causes price and quantity to move in

opposite directions

shortages lead to...

price to rise -when gas is only $2 per gallon, a shortage will result: The quantity of gas demanded (2.4 billion gallons per week) far exceeds the quantity supplied (1.5 billion gallons). There are too many people chasing too little gas, leading to shortages. As a result, individual gas stations find themselves selling out of gas, or facing long queues of desperate customers.

surpluses lead to...

prices to fall -when gas is $4 per gallon, a surplus results as the quantity of gas supplied far exceeds the quantity demanded. Gas station owners, trying to sell off their unsold gas, will charge lower prices in the hopes of attracting more customers. With enough competition, repeated rounds of discounting will push the price down to $3 per gallon, eliminating this surplus

Equilibrium

quantity supplied = quantity demanded; The point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded

sellers are referred to as... and buyers are referred to as...

suppliers and demanders

market outcomes are determined by...

the forces of supply and demand