Macroconomics3e-Ch03 (1)

Chapter 3: Demand and Supply

3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services

• Demand: The total amount of a good or service that consumers are willing and able to purchase at various prices.

• Price: The amount paid for a unit of a good or service.

• Quantity Demanded: Total number of units consumers are willing to buy at a specific price.

• Law of Demand:

  • If prices decrease, quantity demanded increases.

  • If prices increase, quantity demanded decreases.

3.2 Shifts in Demand and Supply for Goods and Services

• Demand vs. Supply: Understand the different influences on demand and supply curves.

• Ceteris Paribus: A Latin phrase meaning "other things being equal." Used in the context of analyzing demand and supply under the assumption nothing else changes.

3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process

• Four-Step Process for analyzing effects on equilibrium:

  1. Draw demand and supply model before change.

  2. Decide whether the change affects demand or supply.

  3. Determine the direction of the shift and sketch the new curve.

  4. Identify the new equilibrium and compare it to the original.

Supply of Goods and Services

• Supply: The total amount that producers are willing to sell at various prices.

• Quantity Supplied: Total number of units that producers are willing to sell at a specific price.

• Law of Supply:

  • If price increases, quantity supplied increases.

  • If price decreases, quantity supplied decreases.

3.4 Price Ceilings and Price Floors

• Price Controls: Government laws to regulate prices.

• Price Ceiling: Maximum legal price for a good or service, preventing prices from exceeding a certain level.

• Price Floor: Minimum legal price, preventing prices from falling below a certain level.

3.5 Demand, Supply, and Efficiency

• Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay. It is the area above market price and below the demand curve.

• Producer Surplus: Difference between what producers receive and the minimum price they would accept. It is the area between the market price and the supply curve below the equilibrium.

• Social Surplus: Total surplus (consumer surplus + producer surplus).

• Deadweight Loss: Loss of economic efficiency when equilibrium is not achieved or is not achievable.

Factors Affecting Demand and Supply

• Demand Factors: Can include changes in income, preferences, population composition, substitutes/complements.

• Supply Factors: Include input costs, technology, natural conditions, and government policies.

Graphing Demand and Supply

• Demand Curve: Shows the inverse relationship between price and quantity demanded; slopes downward.

• Supply Curve: Shows the direct relationship; slopes upward.

• Equilibrium: Point where demand and supply curves intersect; represents balance where quantity demanded equals quantity supplied.