topic 4

demand

the amount of some good or service consumers are willing and able to purchase at each price.

quantity demanded

total number of units that consumers would purchase at that price

law of demand

inverse relationship between price and quantity demanded

demand curve

relationship between price and quantity demanded with quantity on the horizontal axis and the price on the vertical axis.

demand is not the same as quantity demanded. When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule. When economists talk about quantity demanded, they mean only a certain point on the demand curve, or one quantity on the demand schedule. In short, demand refers to the curve and quantity demanded refers to the (specific) point on the curve.

Is demand the same as quantity demanded?

supply

the amount of some good or service a producer is willing to supply at each price.

quantity supplied

affected by the rise or fall in price

law of supply.

assumes that all other variables that affect supply (to be explained in the next module) are held constant.

supply is not the same as quantity supplied. When economists refer to supply, they mean the relationship between a range of prices and the quantities supplied at those prices, a relationship that we can illustrate with a supply curve or a supply schedule. When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve and quantity supplied refers to the (specific) point on the curve.

Is supply the same as quantity supplied?

supply curve

graphic illustration of the relationship between price, shown on the vertical axis, and quantity, shown on the horizontal axis.

Equilibrium
-Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply determine the price and the quantity that will be bought and sold in a market.

Where Demand and Supply Intersect and what does that mean

equilibrium price

the only price where the plans of consumers and the plans of producers agree—that is, where the amount of the product consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied).

excess supply or a surplus.

the quantity supplied exceeds the quantity demanded.

excess demand, or a shortage

When the price is below equilibrium, at the given price the quantity demanded, which has been stimulated by the lower price, now exceeds the quantity supplied, which had been depressed by the lower price.

Shift in Demand

at any price (and at every price), the quantity demanded will be different than it was before. Following is an example of a shift in demand due to an income increase.

Demand Curve
- We can use the demand curve to identify how much consumers would buy at any given price
-

what does this show you?
describe the possible change?

Demand curve
- income increases
- consumers buy more
- caused an upward right shift in the demand curve, so that at any price the quantities demanded will be higher
- With an increase in income, consumers will purchase larger quantities, pushing demand to the right and demand curve to the right.

what does this show you?
describe the possible change?

factors that increase demand and therefore shift the demand curve upward/ rightward

- population likely to buy rises
- income rises (for a normal good)
- price of substitutes rises
- price of complement falls
- future expectations encourage buying

factors that decrease demand and shift the demand curve downward / leftward

- population likely to buy drops
- income drops
price of substitutes falls
price of complements rises
future expectations discourage buying

shift in supply

change in the quantity supplied at every price.

inputs or factors of production

A firm produces goods and services using combinations of labor, materials, and machinery

supply curve
- shift in supply due to a production cost increase
- minimum price a firm will accept to produce a given quantity of output

what does this show you?
describe the possible change?

supply curve
- when the cost of production and the desired profit equal the price a firm will set for a product
- when the cost of production increases, the price for the product will also need to increase
- the supply curve will shift that was caused by the increase in cost that caused an upward (leftward) shift in supply curve, so that at any price, the quantities supplied will be smaller

what does this show you?
describe the possible change?

factors that increase supply or shift the supply curve rightward

- favorable natural conditions for production
- fall in input prices
- improved technology
- lower product taxes / less costly regulations

factors that decrease supply or shift the supply curve leftward

- poor natural conditions for production
- rise in input prices
- a decline in technology (not common)
- higher product taxes
- more costly regulations

deadweight

The loss in social surplus that occurs when the economy produces at an inefficient quantity

producer surplus

The extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept

consumer surplus

The amount that individuals would have been willing to pay, minus the amount that they actually paid

F because the equilibrium price in the market was way less than that many of the consumers were willing to pay

where is consumer surplus on a graph and what does it mean

G because the equilibrium price received in the market was more than what many of the producers were willing to accept for their products

where is producer surplus on a graph and what does it mean

S= ssupply curve
D= demand curve
E= equillibrum
F= consumer surplus
G= producer surplus
J= a point on the demand curve that shows

name each part of this graph

mutually beneficial trade

trade benefitting both sides because gains from trade come from specializing in one's comparative advantage

shocks

what can shift the aggregate supply curve that is affected by its effects to input good or labor

price ceiling

keeps a price from rising above a certain level
- a legal maximum price that one pays for some good or service.

price floor

keeps a price from falling below a given level
- lowest price that one can legally pay for some good or service.

example of price ceiling
- price ceiling is set but there is excess demand or shortage from the price not being permitted to rise, the quantity supplied remains at 15,000

what is happening here

price floor example where the a price floor set at PF holds the price above the equillibrium and prevents it from falling. the quanitity supplied Qs exceeds the quanitity demanded Qd, there is excess supply

what is happening here

elasticity

an economics concept that measures responsiveness of one variable to changes in another variable

elastic demand

when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
- smaller decrease in price

elastic supply

when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

inelastic demand

when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes
- bigger decrease in price

inelastic supply

when the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)

price elasticity of supply

percentage change in the quantity supplied divided by the percentage change in price

price elasticity of demand

percentage change in the quantity demanded of a good or service divided the percentage change in price

Quantity demanded (QD)=Quantity Supplied (QS)

what is the formula for equilibrium price

deadweight loss would occur if there were units that could have been traded for mutual benefit of buyer and seller (surpluses)

what must happen for there to be deadweight loss?

area of triangle: 1/2 b*h

how do you calculate consumer surplus/ producers surplus using a graph