microe ch 3

demand

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

• influenced by

  • changes in individual income

  • change in country economy (recession/inflation)

  • higher price for a substitute good has the reverse effect

supply

• refers to the amount of some good or service a producer is willing and able to supply at each price. price is what the producer receives for selling 1 unit of a good or service

• influenced by

  • changes in country economy (recession or inflation in case of war or natural disaster)

  • changes in innovation that might speed up production and/or change the cost of production can also have an effect

demand

• also based on ability to pay

• if you cannot pay for it, you have no effective demand

price

• what a buyer pays for a unit of the specific good or service

qty demanded

• the total number of units that consumers would purchase at that price is called

• a rise in price of a good/service almost always decreases the ? of that good or service (inverse)

law of demand

• inverse relationship btw price and qty demanded

• assumes that all other variables that affect demand, are held constant

• the amt consumers buy falls for 2 reasons

  • higher price

  • lower income

demand vs qty demanded

• demand

  • relationship btw a range of prices and the quantities demanded at those prices

  • usually illustrate with a demand curve or a demand schedule

  • refers to the curve

• qty demanded

  • means only a certain point on the demand curve or 1 qty on the demand schedule

  • refers to a specific point on the curve

supply vs qty supplied

• supply

  • relationship btw a range of prices and the quantities supplied at those prices

  • illustrate with supply curve or a supply schedule

  • the curve

• qty supplied

  • only a certain point on the supply curve, or one qty on the supply schedule

  • specific point on curve

demand curve

• shows the relationship btw price and qty demanded on a graph

• x axis: qty

• y axis: price per gallon

demand curves

• fundamental similarities

  • slope down from L to R

  • embody the law of demand

    • as price increases, the qty demanded decreases

    • conversely, as the price decreases, the qty demanded increases

• remember demand refers to the relationship btw a range of prices and the quantities demanded at those prices

• demand refers to the curve but qty demanded refers to the specific point on the curve

law of supply

• positive relationship btw price and qty supplied

  • higher price leads to a higher qty supplied

  • lower price leads to a lower qty supplied

• price is what the producer receives for selling 1 unit of a good or service

• a rise in price almost always leads to an increase in the qty supplied of that good or service

• a fall in price will decrease the qty supplied

supply curve

• graphic illustration of relationship btw price (y) and quantity (x)

• supply schedule and the supply curve are 2 diff ways of showing the same info

• the horizontal and vertical axes on the graph for the ? are same as for demand curve

supply curves

• fundamental similarity

  • slope up from L to R and illustrate the law of supply

  • as the price increases, the qty supplied increases

  • as the price falls, qty supplied decreases

• remember

  • supply- relationship btw a range of prices and the qty supplied at those prices, a relationship illustrated by supply curve or supply schedule

  • supply refers to the curve and qty supplied refers to the specific point on the curve.

equilibrium

• interaction of demand and supply where qty demanded= qty supplied

• optimum level of production

shortage

• demand exceeds supply

surplus

supply exceeds demand

equilibrium price (balance)

• only price where the plans of consumers and plans of producers agree

• aka market clearing price

• if qty demanded doesn’t exactly equal the qty supplied, the market isn’t in equilibrium at that price. ten economic pressures arise to move the market toward the equilibrium price and equilibrium qty

equilibrium qty

• where the amount of the product consumers want to buy (qty demanded) = amt producers want to sell (qty supplied)

no, price + willingness to purchase (desire) or ability to purchase (income)

• is price the only factor influencing demand?

demand factors

• price

• pick another factor

  • willingness to purchase (desire)

  • ability to purchase (income)

ceteris paribus assumption

• latin “other things being equal”

  • any given demand or supply curve is based on assumption that all else is held equal

• a demand/supply curve is a relationship btw 2 and ONLY 2 variables when all other variables are kept constant

  • if other variables not held constant, then laws of supply and demand won’t necessarily hold, but we examine the changes one at a time, assuming other factors held constant

  • analyze each factor separately, then combine the results

ceteris paribus assumption

• analyze complex problems more easily

• allows you to look at the effect of 1 factor at a time on what it is you’re trying to analyze

• when you’ve analyzed all the factors individually, you add the results together to get the final answer

• ex., increase in interest rate causes demand for loans to fall (increase cost of borrowing, so less demand, but if confidence is high, ppl still want to borrow more. ceteris paribus assumes things like confidence remain the same).

market as a whole

• a shift in demand curve captures a pattern for the market as a whole

  • not everyone has a higher/lower income and not everyone would buy or not buy an additional car.

normal good

• a product whose demand rises when income rises and vice versa

• for some- luxury cars, vacations in Europe and fine jewelry

inferior good

• a product whose demand falls when income rises

• as incomes rise, many people will buy fewer generic brand groceries and more name brand groceries

• less likely to buy used cars and more likely to buy new cars

• less likely to rent apartment and more likely to own a home

changing tastes or preferences

• another factor that shifts demand curves

• changes like shift from beef to chicken

• change the qty of a good demanded at every price

• they shift the demand curve for that good rightward for chicken and leftward for beef.

changes in population composition

• another factor that shifts demand curves

• more elderly people

  • notice a higher demand for nursing homes and hearing aids

changes in expectations about future prices or other factors affecting demand

• although price of a good affects the qty demanded, also true that expectations about the future price can affect demand

• shift in demand happens when a change in some economic factor (other than price) causes a diff qty to be demanded at every price

substitute

• a good or service that we can use in place of another good or service

• ex., price of coffee increases, the demand for tea may also increase as consumers switch from coffee to tea to maintain their budgets

complements

• we often use the goods together bc consumption of one good tends to enhance consumption of the other

• ex., breakfast cereal and milk

• if the price of one good decreases, that will lead the demand of the other good to increase

a shift of the demand curve for beef to the left

After widespread press reports about the dangers of contracting "mad cow disease" by consuming beef from Canada, the likely economic effect on the U.S. demand curve for beef from Canada is:
A. no change; only the supply curve for beef is likely to be affected.
B. a shift of the demand curve for beef to the left.
C. a movement down along the demand curve for beef to the right.
D. a shift of the demand curve for beef to the right.

production costs and supply

• supply curve shows how qty supplied changes as price changes (assume ceteris paribus)

• when costs of production fall, firm will tend to supply a larger qty at any given price for its output

• other factors that affect supply, profits (firm or business motivation)

  • firm produces goods and services using combo of labor, materials, and machinery (inputs or factors of production)

weather/natural conditions effect on supply

• weather conditions affect cost of production for many agricultural products

• severe drought→ decrease supply→ at any given price, a lower qty will be supplied (vise versa)

new tech for production affecting supply

• a tech improvement that reduces costs of production will shift supply to the R, so that a greater qty will be produced at any given price

government policies affecting supply

• can affect the cost of production and the supply curve thru taxes, regulations, and subsidies

• businesses treat taxes as costs, so higher costs decrease supply of x

government subsidies affecting supply

• occurs when government pays a firm directly or reduces the firm’s taxes if the firm carries out certain actions. from firm’s perspective, taxes or regulations are an additional cost of production that shifts supply to the L, leading the firm to produce a lower qty at every given price

the supply curve

A severe freeze has once again damaged the Florida orange crop. The impact on the market for orange juice will be a leftward shift of:
A. the supply curve.
B. the demand curve, as consumers try to economize because of the shortage. C. both the supply and demand curves.
D. the supply curve and a rightward shift of the demand curve, resulting in a higher equilibrium price.

decrease in supply

• change from point A to point E

increase in supply

a change from point A to point D

increase in qty supplied

change from point A to point B

decrease in qty supplied

change from point a to point c

decrease in demand

• change from point A to point E

increase in demand

change from point a to point d

decrease in qty demanded

change from point a to point b represents

increase in qty demanded

change from point a to point c represents

evaluating how economic event affected equilibrium price and qty

1. develop a demand and supply model to think about what the market looked like before the event

   1. demand curve D0 and supply curve S0 show the og relationships

2. did the described change affect supply or demand

3. was the effect on demand positive or negative (r or l curve shift)

4. compare the new equilibrium price and qty to the original equilibrium price

types of changes

• shift in demand curve, positive or negative

• shift in supply curve, positive or negative

• shift in both curves (supply and demand at the same time)

free market

• operate with no government intervention

price controls

• laws that governments enact to regulate prices

price ceiling

keeps a price from rising above a certain level (the “ceiling”)

price floor

keeps a price from falling below a given level

price ceiling

• legal maximum price that one pays for some good or service

• a government imposes this to keep the price of some necessary good or service affordable

• pros

  • those who manage to purchase the product at the lower price given by the price ceiling will benefit

  • one of the ironies is that while it was intended to help renters rent control becomes a politically hot topic when rents begin to rise rapidly

• cons

  • when market price isn’t allowed to rise to equilibrium level, qty demanded exceeds qty supplied, and thus a shortage occurs

  • quality is also likely to deteriorate

price floors

• lowest price that one can legally pay for some good or service

• ex., minimum wage (working FT should be able to afford basic standard of living)

• pros:

  • when qty supplied exceeds the qty demanded, a surplus exists

• cons:

  • if the government is willing to purchase the excess supply (or to provide payments for others to purchase it), then farmers will benefit from the price floor, but taxpayers and consumers will pay the costs

    • agricultural economists and policy makers have offered numerous proposals for reducing farm subsidies

price floors

• aka price support

  • they support a price by preventing it from falling below a certain level

• the lowest price one can legally pay for some good or service

• ex., minimum wage

• ex., agriculture sector (++ gov enters the market sometimes and buys up the product)

economic efficiency

• the familiar demand and supply diagram holds within it the concept of ?

• 1 typical way economists define ? is when it’s impossible to improve the situation of one party wo imposing a cost on another. vise versa

• basically, the optimal amount of each good and service is produced and consumed

consumer surplus

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

producer surplus

• the amount that a seller is paid for a good minus the seller’s actual cost

social surplus (total)

• consumer surplus + producer surplus = ?

• aka economic surplus

• shown in area F+G

  • larger at equilibrium qty and price than it would be at any other qty

    • demonstrates economic efficiency of the market equilibrium

    • efficiency achieved when ? is maximized

inefficiency of price floors and ceilings

• imposition of price floor or a price ceiling will prevent a market from adjusting to its equilibrium price and qty, and thus will create an inefficient outcome

• there is a way to prevent crating inefficiency, price floors and ceilings will also transfer some consumer surplus to producers, or some producer surplus to consumers

• an inefficient outcome occurs and the total surplus of society is reduced. The loss in social surplus that occurs when the economy produces at an inefficient qty is deadweight loss

• price ceiling will transfer some producer surplus to consumers which is why consumers often favor them

• a price flow will transfer some consumer surplus to producers, which is why producers often favor them

deadweight loss

• the loss in social surplus that occurs when the economy produces at an inefficient qty

demand and supply as a social adjustment mechanism

• demand and supply model emphasizes that prices are not set only by demand or only by supply but by their interaction

excess demand

If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. This is known as ________________.

Option A

a price ceiling

Option B

ceteris paribus

Option C

excess demand

Option D

excess supply

law of demand

Economists refer to the relationship that a higher price leads to a lower quantity demanded as the

Option A

law of demand

Option B

income gap

Option C

market equilibrium

Option D

price model

supply curve to the right

A drought decreases the supply of agricultural products, which means that at any given price a lower quantity will be supplied; conversely, especially good weather would shift the _________________________.

Option A

demand curve to the left

Option B

supply curve to the right

Option C

demand curve to the right

Option D

supply curve to the left

The statement is correct.

Interpret the following statement: "An increase in the price of wheat will encourage farmers to increase the quantity of wheat supplied to the market."

Option A

The statement is incorrect because it confuses a change in quantity supplied with a change in supply.

Option B

The statement is correct.

Option C

The statement would be correct if "quantity of wheat demanded" were substituted for "quantity of wheat supplied."

Option D

The statement would be correct if it read that a "decrease in the price of wheat will encourage farmers to increase the quantity of wheat supplied to the market."

all else is held equal

Any given demand or supply curve is based on the ceteris paribus assumption that

Option A

everything is variable.

Option B

what is true for the individual is not necessarily true for the whole. 

Option C

all else is held equal

Option D

no one knows which variables will change and which will remain constant

increase in demand

Refer to the Figure blow, Using the graph above and beginning on D1, a shift to D2 would indicate a(n):

Option A

decrease in demand. 

Option B

decrease in quantity demanded.

Option C

increase in demand.

Option D

increase in quantity demanded.

costs of production fall

When __________________, a firm will supply a higher quantity at any given price for its output, and the supply curve will shift to the right.

Option A

equilibrium is achieved

Option B

costs of production fall

Option C

there is a population increase 

Option D

prices rise

qty supplied

When economists talk about supply, they are referring to a relationship between price received for each unit sold and the ________________.

Option A

quantity supplied

Option B

demand curve

Option C

demand schedule

Option D

market price

a rise in demand ig*

The computer market in recent years has seen many more computers sell at much lower prices. What shift in demand  is most likely to explain this outcome?

Option A

A rise in demand 

Option B

A rise in supply 

Option C

 A fall in demand 

Option D

A fall in supply

equilibrium qty

The _______________ is the quantity where quantity demanded and quantity supplied are equal at a certain price.

Option A

equilibrium quantity

Option B

quantity demanded

Option C

supply schedule

Option D

demand schedule

up from L to R

Nearly all supply curves share a basic similarity: they slope ________________.

Option A

up from left to right

Option B

up from right to left

Option C

down from left to right

Option D

down from right to left

buyers desire to purchase less of it.

The nature of demand indicates that as the price of a good increases:

Option A

suppliers wish to sell less of it.

Option B

buyers desire to purchase less of it.

Option C

more of it is produced.

Option D

more of it is desired.

a change along the supply curve

A change in price of a good or service typically causes ________________ for that specific good or service.

Option A

the supply curve to shift to the left

Option B

a decreased demand

Option C

a new equilibrium price

Option D

a change along the supply curve

qty demanded

refers to the total number of units that are purchased at that price.

Option A

market quantity

Option B

supply

Option C

quantity

Option D

quantity demanded

qty

A supply curve is a graphical illustration of the relationship between price, shown on the vertical axis, and _________________, shown on the horizontal axis.

Option A

price of quantity supplied

Option B

quantity

Option C

demand

Option D

quantity demanded

price, qty demanded

The downward slope of the demand curve again illustrates the pattern that as _____________ rises, ______________ decreases.

Option A

price, quantity demanded

Option B

price, quantity supplied 

Option C

quantity supplied, quantity demanded

Option D

quantity demanded, price

decrease in supply

Refer to Figure 3-3. A change from Point A to Point E (top to bottom) represents a(n):

Option A

increase in supply.

Option B

decrease in supply.

Option C

increase in quantity supplied.

Option D

decrease in quantity supplied.

decrease in qty demanded

a change from Point A to Point B represents an:

Option A

increase in quantity demanded.

Option B

decrease in demand.

Option C

increase in demand.

Option D

decrease in quantity demanded.

goods x and y are complement goods

• if an increase in price of good x causes a decrease in demand for good y…

  • goods x and y are normal goods

  • goods x and y are substitute goods

  • goods x and y are complement goods

  • the price of good y will increase

price, qty demanded

The downward slope of the demand curve again illustrates the pattern that as _____________ rises, ______________ decreases.

Option A

quantity supplied, quantity demanded

Option B

price, quantity demanded

Option C

quantity demanded, price

Option D

price, quantity supplied 

qty demanded

____________ refers to the total number of units that are purchased at that price.

Option A

quantity

Option B

quantity demanded

Option C

market quantity

Option D

supply

decrease in supply

A change from Point A to Point E (top to bottom) represents a(n):

Option A

increase in supply.

Option B

decrease in quantity supplied.

Option C

increase in quantity supplied.

Option D

decrease in supply.

decrease in quantity demanded.

Shift from Point A to Point B

decrease in demand.

Option B

increase in quantity demanded.

Option C

increase in demand.

Option D

decrease in quantity demanded.

excess demand

If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. This is known as ________________.

Option A

ceteris paribus

Option B

a price ceiling

Option C

excess demand

Option D

excess supply

increase in demand

• shift from d1 to d2

  • increase in quantity demanded.

    Option B

    decrease in demand. 

    Option C

    decrease in quantity demanded.

    Option D

    increase in demand.

a change along the supply curve

A change in price of a good or service typically causes ________________ for that specific good or service.

Option A

a decreased demand

Option B

a change along the supply curve

Option C

the supply curve to shift to the left

Option D

a new equilibrium price

buyers desire to purchase less of it

The nature of demand indicates that as the price of a good increases:

Option A

buyers desire to purchase less of it.

Option B

more of it is desired.

Option C

more of it is produced.

Option D

suppliers wish to sell less of it

costs of production fall

When __________________, a firm will supply a higher quantity at any given price for its output, and the supply curve will shift to the right.

Option A

costs of production fall

Option B

equilibrium is achieved

Option C

prices rise

Option D

there is a population increase 

qty

A supply curve is a graphical illustration of the relationship between price, shown on the vertical axis, and _________________, shown on the horizontal axis.

Option A

demand

Option B

price of quantity supplied

Option C

quantity

Option D

quantity demanded