U3: Market Forces

what is the “quantity demanded”?

the amount buyers are willing and able to purchase at a specific point

what does willing mean? what does ability mean?

• willing means the price is agreeable

  • ability means having the financial means to buy something

what does PIRTEB stand for?

• Price

• Income

• price of Related goods

• Expectations of the future

• Buyers

What does the demand determinant #1: price state?

as the price of a good/services rises, the quantity of that good/service typically decreases (inverse relationship)

what is the law of demand?

if all other variables are held equal/constant, higher prices = lower quantity demanded (and vice versa)

what acronym can you use to list the determinants of demand?

PIRTEN

price, income, price of related goods, tastes and preferences, expectations of the future, number of buyers

What does the demand determinant #1: income state?

more income = more money to spend (and vice versa)

What does a normal good/service mean?

if income increases, quantity demanded increases at any price

what does a inferior good/service mean?

if income increases, quantity demanded decreases at any price

What does the demand determinant #3: prices of related goods state?

the prices of other things or other sellers can influence purchase

what are substitute goods?

an increase in the price of one good leads to an increase in the quantity demanded of the other (tea and coffee, burger king and mcdonalds

what are complementary goods?

an increase in the price of one good lead to a decrease in the quantity demanded of the other (bread and butter, tennis rackets and tennis balls)

What does the demand determinant #4: consumer tastes and preferences state?

if you like something, you generally buy more of it at any price that is offered

What does the demand determinant #5: expectations of the future state?

events that happen in the future or will be expected to happen in the future affect our prices or spending habits

What does the demand determinant #6: buyers state?

More buyers = more quantities demanded at any price, and vice versa

practice the graphing lesson for price v quantity demanded

What is the quantity supplied?

the amount of goods that businesses are willing and able to sell

what’s the difference between supply and demand?

positive relationship between P/Q instead of inverse

what’s the Law of Supply?

higher price = higher quantity supplied

what acronym can you use to list the determinants of supply?

P(IP)TEN

price, input price, technology, expectations, number of sellers

What does the supply determinant #1: price state?

• high sales price = incentive for business to produce/sell more

• low sales price = businesses will typically cut back on production and supply less (less profit for each unit sold, why supply a large quantity if nobody is buying

  • fewer products available = greater competition among customers for limited amount (and some customers will be willing to pay more)

What does the supply determinant #2: input price (cost of production) state?

• increase in input prices = higher cost of doing business

• low input prices = more profitable to produce goods

  • quantity supplied = inversely related to input prices

What does the supply determinant #3: technology state?

mechanization and technological advancement reduces amount of labor required, more efficient, and reduces costs of firms

What does the supply determinant #4: expectations state?

• future expectations may affect current supply

• seasonal items businesses’ plans (new products, improved versions, out-of-date items, etc.)

  • recessions/economic slowdowns

What does the supply determinant #5: number of sellers state?

more sellers = more supplied at any price

What is market equilibrium? what is the equilibrium price?

• where buyers and sellers are happy with the price and quantity offered

• equilibrium price (market clearing price): quantity supplied = quantity demanded

why do markets naturally move towards equilibrium?

they just do

surplus

price set higher than equilibrium = excess quantity supplied

what do sellers do during a surplus

sellers lower prices and supply less until equilibrium is reached

shortage

price lower than equilibrium = excess quantity demandedse

what do sellers do during a shortage?

increase prices and supply more until equilibrium is reachedwha

what is the law of supply and demand?

prices of goods adjust to bring supply and demand into balance

what are the steps to graph?

• start at market equilibrium

• does an event cause supply or demand?

• what direction does the curve shift?

  • draw the new curve and new temporary point of equilibrium

In demand, a shift left means what? a shift right means what?

Shifts right = higher price, larger quantity

Shifts left = lower price, smaller quantity

In supply, a shift left means what? a shift right means what?

Shifts right = lower price, larger quantity

Shifts left = higher price, lower quantity

what is stagflation?

less quantity supplied, higher price