Microeconomics Ch 3

-Demand: a schedule or curve that shows the various amounts of a product that consumers will buy at each of a series of possible prices during a specific period

-Demand is simply a statement of a buyer's plans, or intentions, w/ respect to the purchase of a product

-Quantities demanded @ each price MUST relate to a specific period--day, week, month

-Law of Demand: the principle that, other things equal, as price ↓ quantity demand ↑; as price ↑, the quantity demanded ↓

-There is an INVERSE relationship b/t price & quantity demanded

-Many factors other than the price of the product being considered affect amount purchased

-The law of demand is consistent w/ both common sense & observation

-Inverse relationship b/t price & quantity demand represented on a graph

-Quantity Demanded on HORIZONTAL axis

-Price on VERTICAL axis

-Demand Curve: downward slope means as price ↓, people buy more

-Competition requires more than one buyer be present in each market

-By adding quantities demanded by all consumers @ each of the various possible prices, we can get from INDIVIDUAL demand to MARKET demand

-Determinants of Demand: factors other than price that locate position of demand curve; sometimes referred to as demand shifters

-Basic determinants of demand are:
1. consumers' tastes/preferences
2. the # of consumers in the market
3. consumers' incomes
4. prices of related goods
5. expected prices

-A change in the demand schedule or, graphically, a shift in the demand curve is called a Change in Demand

[TASTES]
-Favorable change in consumer tastes for a product means more of it will be demanded @ each price; demand ↑; demand curve will shift rightward /
/ unfavorable change in consumer preferences => demand ↓, shifting demand curve to the left


[NUMBER OF BUYERS]
-The # of buyers in a market ↑ => product demand ↑


[INCOME]
-Income ↑ => demand for products ↑; income ↑ beyond a point, demand ↓

*Normal Good: good/service ↑ = income ↑
& good/service ↓ = income ↓

*Inferior Good: good/service ↓ = income ↑
& good/service ↑ when income ↓


[Prices of Related Goods]
-Changes may depend on whether related good is a substitute or complement

*Substitute Good: good/service used in place of another good/service; ex: beef & chicken

-If price of one good ↑, the other good's price will too

*Complementary Good: good/service that is used with another good/service; ex: computers & software

-If price of a complement ↑, demand for related good ↓

-Unrelated goods are called independent goods


[Expected Prices]
-A newly formed expectation of a price ↑ in future = consumers buy now (current demand ↑) to "beat" anticipated price rise/
/newly formed expectation of prices ↓ = current demand ↓

-Change in Quantity Demanded: movement from one point to another on a fixed demand curve

-Supply: a schedule or curve showing amounts of a product that producers will make available for sale @ each of a series of possible prices during specific period

-Law of Supply:
Price ↑ = Quantity supplied ↑; Price ↓ = Quantity supplied ↓

-A supply schedule or curve reveals that firms will offer for sale more of their product at a high price than at a low price

-Consumer Standpoint: Higher the price, less they buy

-Supplier Standpoint: Higher the price, greater this incentive & greater the quantity supplied

-We sum the quantities supplied by each producer @ each price => to obtain the market supply curve

-Supply Curve: curve illustrating direct relationship b/t price of a product & quantity of it supplied

Determinants of Supply:
1. Resource prices
2. Technology
3. Taxes & Subsidies
4. Prices of Other Goods
5. Expected Price
6. Number of Sellers in the Market

-A change in any of these (supply shifters) will move the supply curve right or left

-a shift to RIGHT means supply ↑
-a shift to LEFT means supply ↓

[Resource Prices]
-Prices of resources used in production process help determine costs of production incurred by firms

-Resource prices ↑ = production costs ↑ and squeeze profits (assuming a particular product price)

-Reduction in profits = reduction in incentives for firms to supply output @ each product price

-Example: prices of coffee beans & milk ↑ = cost of making lattes ↑ = reduce supply

-In contrast, lower resources prices = lower production costs & profits ↑

-Resource prices ↓ = firm supply ↑

-Example: Prices of sand, gravel, & limestone ↓ = supply of concrete ↑


[Technology]
-Improvements in tech. enables firms to produce units of output w/ fewer resources

-Using fewer resources, production costs ↓ = supply ↑


[Taxes & Subsidies]
-Businesses treat sales & property taxes as costs

-Taxes ↑= production costs ↑ = supply ↓

-If gov. subsidizes production of a good, producers' costs ↓ = supply ↑


[Prices of Other Goods]
-Firms that produce a particular product may produce alternative goods

-The higher the prices of the "other goods," more likely producers may switch production to other goods to increase profits ((substitution in production))


[Expected Prices]
-Changes in expectations about the future price of a product => affect producer's current willingness to supply that product

-Difficult to generalize about how new expectation of higher prices affects present supply of product

-Example: Farmers anticipating wheat price ↑ in future => withhold some of the current wheat harvest from market = ↓ current supply of wheat

-In contrast, newly formed expectations of price ↑ = more shifts or expand production facilities = current supply ↑


[Number of Sellers]
-Larger the number of sellers, the greater the market supply

-As more firms enter an industry, supply curve shifts to RIGHT; as a firm leaves, the supply curve shifts to LEFT

-Change in Supply: change in the quantity supplied of a product @ every price; supply ↑ = shifts curve to RIGHT; supply ↓ = shifts curve to LEFT

-Change in Quantity Supplied: movement from one point to another on a fixed supply curve; cause of movement => change in price of specific product being considered

-Equilibrium Price (market-clearing price): price in a competitive market at which the quantity demanded & quantity supplied of a product are equal

-Equilibrium Quantity: quantity demanded & quantity supplied that occur @ equilibrium price in a competitive market

-Graphically, equilibrium price is indicated by the intersection of the supply curve & the demand curve (the horizontal axis measures both quantity demanded & quantity supplied)

-With neither shortage or surplus, the market is in equilibrium "in balance" or "at rest"

-Example: at $4 price, sellers will offer 10,000 lattes, but buyers will purchase only 4,000. The $4 price encourages sellers to offer lots of lattes but discourages many consumers from buying them. Result: Surplus. If latte sellers made them all, they would find themselves w/ 6,000 unsold lattes

-Surplus: excess supply

-Surpluses drive prices down

-Large surplus => competing sellers lower price => buyers stop in to buy surplus off their hands

-Price ↓ = incentive to produce lattes ↓ = incentive for consumers to buy lattes ↑

-Any price below equilibrium price => shortage

-Shortage: excess demand

-The ability of the competitive forces of supply & demand to establish a price @ which selling & buying decisions are consistent is called the RATIONING FUNCTION OF PRICES

-How will such changes in demand & supply affect equilibrium price & quantity?

[Changes in Demand]
-Supply of a good is constant & demand for good ↑.
Result: new intersection of the supply & demand curve is at HIGHER values on BOTH the price & the quantity axes

-Demand ↑ = equilibrium price ↓ = equilibrium quantity ↑

-Demand ↓ = equilibrium price ↓ = equilibrium quantity ↓


[Changes in Supply]
-Demand for a good is constant & supply ↑
Result: new intersection of supply & demand is located at a LOWER equilibrium price but a HIGHER equilibrium quantity

-Supply ↑ = equilibrium price ↓ = equilibrium quantity ↑

-Supply ↓ = equilibrium price ↑ = equilibrium quantity ↓


[Supply Increase; Demand Decrease]
-What effect will a supply increase for some good & a demand decrease have on equilibrium price?

-Both changes decrease price = net result is a price drop greater than resulting from either change alone

-What effect will a supply increase for some good & a demand decrease have on equilibrium quantity?

-Supply ↑ = equilibrium quantity ↑

-Demand ↓ = equilibrium quantity ↓

-Direction of the change in equilibrium quantity depends on the relative sizes of the changes in supply & demand

-If supply ↑ is larger than demand ↓ = equilibrium quantity ↑

-If demand ↓ is larger than supply ↑ = equilibrium quantity ↓


[Supply Decrease; Demand Increase]
-Supply ↓ & Demand ↑ = Equilibrium Price ↑

-If supply ↓ is larger than demand ↑ = equilibrium quantity ↓

-If demand ↑ is larger than supply ↓ = equilibrium quantity ↑


[Supply Increase; Demand Increase]
-Supply increase drops equilibrium price while a demand increase boosts it

-If supply ↑ is larger than demand ↑ = equilibrium price ↓

-If demand ↑ is larger than supply ↑ = equilibrium price ↑

-If demand & supply ↑ are the same = equilibrium price will not change


[Supply Decrease; Demand Decrease]
-If supply ↓ is larger than demand ↓ = equilibrium price ↑

-If demand ↓ is larger than supply ↓ = equilibrium price ↓

-If demand & supply ↑ are the same = equilibrium price will not change

-Government occasionally concludes that changes in supply & demand have created prices that are unfairly high to buyers or unfairly low to sellers

-Government may place legal limits on how high or low a price or prices may go

-Government-controlled prices lead to shortages or surpluses, distort resource allocations, & cause negative side effects