Microeconomics Chapter 4

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Demand Curve

is a set of various quantities demanded at corresponding prices. It is the curve itself.

The supply curve

is a set of various quantities supplied (QS) at corresponding prices.

Shortage (aka excess demand)

when quantity demanded is greater than quantity supplied

Surplus (aka excess supply)

when quantity supplied is greater than quantity demanded

Equilibrium quantity:

The quantity supplied and quantity demanded at the equilibrium price

Change in quantity demanded

a movement along a fixed D curve occurs when P changes

Change in quantity supplied

a movement along a fixed S curve occurs when P changes

Change in demand

a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers)

Change in Supply

a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs)

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. eg: Starbucks supply of lattes (pg 71)

Equilibrium Price:

The price that equates quantity supplied with quantity demanded

Market Demand vs. Individual Demand

The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price. (see page 59)

SC Shifters: Input prices

-Examples of input prices: wages, prices of raw materials -A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right.

Demand Curve Shifters: Expectations

-Expectations affect consumers' buying decisions -Eg. If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now. -If the economy sours and people worry about their future job security, demand for new autos may fall now.

SC Shifters: Technology

-Technology determines how much inputs are required to produce a unit of output -A cost-saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right.

Demand Curve Shifters: Prices of Related Goods

-Two goods are substitutes if an increase in the price of one causes an increase in demand for the other

SC Shifters: # of sellers

An increase in the number of sellers increases the quantity supplied at each price, shifts S curve to the right.

Demand Curve Shifters: Tastes

Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right. Eg: The Atkins diet became popular in the 90s, caused an increase in demand for eggs, shifted the egg demand curve to the right. Also, tablet computers, such as the iPad, are currently very popular so the demand curve for these computers has shifted to the right as well.

Price shift

Causes a movement along the D curve

Demand Curve Shifters: Prices of Related Goods Examples

Crest and Colgate. An increase in the price of Crest toothpaste increases demand for Colgate toothpaste, shifting the Colgate demand curve to the right. Other ex: Coke and Pepsi, laptops and desktop computers, butter and margerine, CDs and music downloads

Demand Curve Shifters: Income

Demand for a normal good is positively related to income. Increase in income causes increases in quantity demanded at each price, shifts D curve to the right.

SC Shifters: Expectations

Eg: -Events in the Middle East lead to expectations of higher oil prices -In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price -S Curve shifts left. In general, sellers may adjust supply when their expectations of future prices change.

A Shift in Demand

Event to be Analyzed: Increase in price of gas (91) Step 1: D Curve shifts Step 2: D shifts right Step 3: this shift causes an increase in price and quantity of hybrid cars.

A Shift in Supply

Event: New technology reduces cost of producing hybrid cars Step 1: S curve shifts Step 2: S shifts right Step 3: The shift causes prices to fall and quantity to rise

A Shift in Both Supply and Demand

Events: price of gas rises and new technology reduces producton costs Step 1: Both curves shift Step 2: Both shift to the right Step 3: Q rises, but effect on P is ambiguous or uncertain. (94)

Shortage

Facing a shortage, sellers raise the price, causing Q^D to fall and Q^s to rise. Prices continue to rise until market reaches equilibrium.

Surplus

Facing a surplus, sellers try to increase sales by cutting price. This causes Q^D to rise and Q^S to fall... which reduces the surplus. Markets continue to fall until market reaches equilibrium.

Demand Curve Shifters: # of Buyers

Increase in # of buyers: Increases quantity demanded at each price, shifts D curve to the right.

Inferior Good

Negatively related to income (increase in income shifts D curve for inferior goods to the left)

Equilibrium:

P has reached the level where quantity supplied equals quantity demanded.

Normal Good

Positively related to income

Law of Supply

The claim that the quantity supplied of a good rises when the price of the good rises, other things equal.

Demand Curve Shifters

The demand curve shows how price affects quantity demanded, other things being equal. A change in the price of the good changes QD and results in a movement along the D curve. These "other things" are non-price determinants of demand (i.e. things that determine buyers demand for a good, other than that goods price) Changes in them shift the D curve

Quantity Demanded (QD)

The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase at a specific price. QD is a point on the demand curve.

Supply Curve Shifters

The supply curve shows how price affects quantity supplied, other things being equal. A change in the price of the good changes QS and results in a movement along the S curve. -These "other things" are non-price determinants of supply. -Changes in them shift the S curve.

Three steps to Analyzing changes in Equilibrium

To determine the effects of any event, 1. Decide whether event shifts S curve, D curve, or both. 2. Decide in which direction curve shifts. 3. Use the supply-demand diagram to see how the shift changes eq'm P and Q.

Demand Curve Shifters: Prices of Related Goods Complements

Two good are Complements if an increase in the price of one causes a fall in demand for the other.

Complements

Two good are Complements if an increase in the price of one causes a fall in demand for the other. Ex: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left. Other examples: college tuition and textbooks, bagels and cream cheese, PB and J, hot dogs and hot dog buns

# of sellers:Shifts the S curve