Chapter3: Demand, Supply, and Market Equilibrium

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14 Terms

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Demand

The Various amounts of a product that consumers are willing and able to purchase at possible prices during a specific time period.

2
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Law of Demand

Diminishing marginal utility ( consumers will only buy additional units if price reduces, income effect ( lowering prices increases the purchasing power of buyers), and substitution effect ( buyers will want to substitute a high price product with a similar lower price product)

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Determinents/ factors that impact demand

TRIBE:

1) Taste/consumer preference

2)Price of related goods ( substitution/complementary goods)

3) Consumer Income

4) Number of buyers ( increase number of buyers causes a shift right)

5) Consumer expectations

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Complementary vs subsition goods

  • Substitution goods: as price of one good declines there is a decrease in demand for the other good

  • Complementary good: as the price of one good declines, there is an increase in demand for the other good

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Changes in quantity demanded vs change in demand

  • Quantity demanded means consumers choosing to move from one point to another on the fixed demand curve ( price went up or down)

  • Change in demand means the consumers have changed their minds based on the factors of demand.

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Supply

  • The Various amounts of product that producers are willing and able to make available for sale at each possible price during a specific period

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Law of supply

  • As prices rise the quantity supplied rises as prices fall the quantity supplied falls

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Determinants of supply:

  • Factors that cause a change in supply

  • ROTTEN

1) Resource Price ( labor, capital, land, and enterpenural ability)

2) Other goods price ( For substitution a higher price of one product may cause suppliers to shift towards that product compared to the other product. For complementary goods an increase in price may cause a shift in supply to increase since they are made for together)

3) Technology ( Improvements cause supply to be increased)

4) Taxes and subsidies ( taxes cause the supply curve to shift left while subsidies cause it to shift right)

5) Producer expectations

6) Number of sellers

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Productive efficiency

  • The production of any particular good in the least costly way

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Allocative efficiency

  • The particular mix of goods and services most highly valued by society. ( it needs certain goods in order to produce other goods)

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What happens to equilibrium if both supply and demand increase/decrease

  • If both supply and demand increase or decrease the equilibrium quantity either rises or falls depending if it’s decrease or increase however EQUILIBRIUM PRICE is intermediate/ unknow

*IF THE SHIFTS ARE BOTH EQUAL THEN THEY WILL CANCEL EACH OTHER OUT ON THE ONE THEY DON’T AGREE ON.

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What happens to equilibrium if supply or demand increase/decrease while the other increases or decreases  

If both supply or demand either increase or decrease while the other is the opposite means that there will be a rise in equilibrium price or a decrease in equilibrium price and the equilibrium quantity is interdimate 

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Price Ceiling

  • The maximum legal price a seller may place on their product/service

  • Creates a product shortage

  • Creates Misallocation

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Price floor

  • The minimum price placed by the government when producers or resource suppliers aren’t getting enough from the market system

  • There will be a surplus of product

  • This forces the government to either increase demand or buy the surplus