macro econ chapter 4

three steps to analyze changes in equilibrium

1. decide whether the event shifts the supply or demand curve (perhaps both) 2. decided in which direction the curve shifts 3. use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity

supply curve shifters

1. Input prices ex. sugar is an input into the production of ice cream. if the price of sugar falls, selling ice cream become more profitable. this will raise the supply of ice cream; at any given price, sellers are now willing to produce a larger quantity. the supply curve for ice cream shifts to the right. 2. technology ex. invention of the mechanized ice cream machine will reduce the amount of labor to make ice cream. by reducing the firm's costs, the technology raises the supply of ice cream 3. expectations ex. the amount of ice cream the firm supplies today depends on its expectations for the future. if the firm expects the ice cream price to rise in the future, it will save it and supply less to the market today. [shifts to the left] 4. number of sellers ex. if Ben or Jerry would retire from the ice cream business, the supply in market would fall.

variables that shift demand

1. income 2. price of related goods 3. tastes ex. if you like it, you will buy more 4. expectations 5. number of buyers *** price of the good itself would not shift, but represents a movement along the demand curve***

market

a group of buyers and sellers of a particular good or service -buyers determine the demand -sellers determine the supply

competitive market

a market where there are many buyers and sellers that each has a negligible(almost no)impact on the market price ex. each seller of ice cream has limited control over the price because other sellers are offering similar products -good offered for sale are all exactly the same -the buyers and sellers are so numerous that no single buyer or seller has any influence over the market place

change in quantity demanded

a movement along a fixed demand curve

change in quantity supplied

a movement along a fixed supply curve

change in demand

a shift in demand curve

change in supply

a shift in supply curve

demand schedule

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

supply schedule

a table that shows the relationship between the price of good and the quantity supplied, holding everything else constant.

monopoly

not all g&s are sold in perfectly competitive markets. such a seller is called a monopoly. ex. local cable television company

law of supply

relationship between price and quantity supplied ex. when the price of ice cream is high, selling ice cream is profitable, the quantity supplied will be large; sellers of ice cream work long hours, buy many ice-cream machines, and would hire many workers. However, when the price of ice-cream is low, the business is less profitable, so sellers would produce less ice cream; at this low price, some sellers would choose to shut down their shops, and their quantity supplied falls to zero. * While other things are being equal, the relationship is positive.

supply curve

slope is upward because higher price means a greater quantity supplied

quantity demanded

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

quantity supplied

the amount that sellers are willing and able to sell

equilibrium

the point where supply and demand intersect

law of supply and demand

the price of any good adjusts to bring the quantity supplied and quantity demanded in a good balance.

equilibrium price(market clearing price)/quantity

the price/quantity at this intersection

market supply

the sum of supplies of all sellers

market demand

the sum of the quantities demanded by all buyers at each price

complements

when a fall in the price of one good raises the demand for another good, the two goods are called complements. ex. suppose that the price of hot fudge falls. according to the law of demand, you will buy more hot fudge. yet, in this case, you will likely buy more ice cream as well because ice cream and hot fudge are often used together. when price of hot fudge falls, yet people would buy hot fudge and ice cream as well, these two goods are called complements.

substitutes

when a fall in the price of one good reduces the demand for another good, the two goods are called substitutes ex. suppose that the price of frozen yogurt falls. the law of demand says that you will buy more frozen yogurt. since ice cream and frozen yogurt are both cold and sweet desserts, they satisfy similar desires. so since frozen yogurt price falls, and people are willing to buy more frozen yogurt instead of ice cream, frozen yogurt and ice cream are called substitutes. **more substitute examples: hot dogs and hamburgers, sweaters and sweatshirts, movie tickets and DVD rentals

normal good

when income falls and the demand for a good falls [positive, shift right] ex. if you lose your job, your demand for ice cream will fall.

inferior good

when income falls, but the demand for good rises [negative, shift left] ex. bus rides: as your income falls, you are less likely to buy a car and more likely to ride a bus

shortage(excess demand)

when quantity demanded is greater than quantity supplied ex.too many people wanting to buy ice cream, but there are few goods. sellers can respond to shortage by raising up the prices without losing sales. then, price increase could cause the quantity demand to fall and the quantity supplied to rise, which will go to the equilibrium.

surplus(excess supply)

when quantity supplied is greater than quantity demanded ex. sellers of ice cream would find their freezers increasingly full and they want to sell them but cannot. they respond to surplus by cutting prices. then people would buy more ice cream and their quantity supplied will decrease. this will eventually go to equilibrium.

when does demand curve shift?

when something happens to alter the quantity demanded at any given price ex. if there is a discovery that people who regularly eat ice cream live longer, healthier lives, the discovery would raise the demand for ice cream. now at given any price, buyers would want to purchase larger quantity of ice cream, and the demand curve would shift *positive - shifts right negative-shifts left

law of demand

while other things are being equal, when the price of the good rises, the quantity demand of the good falls. [downward slope]