MICROECONOMICS CHAPTER 4: How Supply and Demand Determine Prices

when the quality supplied is greater than the QTY demanded
*-competition pushes prices down when there is a surplus

-when quantity demanded exceeds quantity supplied
*-competition will push prices up when there is a shortage
-as prices are pushed up the QTY supplied will increases, QTYD decreases

when there is a surplus, sellers an incentive to decrease their price while buyers have the incentive to offer lower prices
-prices are driven down, QTYD Increases while QTYS decreases

when there is a shortage, seller have an incentive to drive prices up, while buyers have the incentive to pay more for the good
-Prices is driven up, QTYD is decreases, QTYS increases

-buyers compete with other buyers; while sellers compete with other sellers !

the quantity demanded is equal to the quality supplied

-At the equilibrium QTY there are NO unexploited gains from trade or wasteful trades
-unexploited gains from trade exist when QTY is below the equilibrium QTY
-only at the equilibrium QTY, there are no wasted resources

-economic system in which individuals decide for themselves what to produce and sell
-free market maximizes gains from trade AS WELL AS maximizing producer and consumer surplus
-this teaches us the pursuit of self interests is beneficial not chaotic

1) buyers are willing to pay more for a good than non buyers
2) sellers are willing to sell a good for less than non sellers
3) there are NO mutually profitable deals between non buyers and non sellers

-the supply of a good is bought by buyers with the highest willingness to pay
-the supply is sold at the lowest price by the sellers
-there are no unexploited gains from trade and no waste between sellers and buyers

-An increases in SUPPLY, will reduce price and increase QTY. When costs fall, supply will increase shifting right, decreasing equilibrium price and increasing QTY (technology advances)
-A decrease in SUPPLY will increase the market price and reduce the QTY.

-an increase in DEMAND, increases price and QTY
-a decrease in DEMAND, decreases price and QTY

-an increase in the QTY demanded is a MOVEMENT along the demand curve
-a increase in the Demand is a SHIFT of the ENTIRE demand curve

1) Market competition leads to an equilibrium, where QTYS AND QTYD are equal
2) Only price/QTY combination is a market equilibrium
3) Incentives that enforce market equilibrium.
4) When price is above equilibrium price quantity supplied is greater than quantity demanded, creating a surplus. Market price will fall.
When price is BELOW equilibrium price, QTY supplied is less than the QTY demanded creating a shortage. market price will rise.
5) Gains from trade are maximized at the equilibrium
6) Factors that shift DEMAND are price of sub., price of comp., income, population, expectations, taste and prefrences. Factors that change SUPPLY are technology, taxes, opportunity cost, expectations, entry or exit of producer.
7) A change in demand is a SHIFT of the entire curve while QTY demanded is a movement along the curve.