Macroconomics3e-Ch03__1_

Chapter 3: Demand and Supply

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

• Demand: Amount of a good or service that consumers are willing and able to purchase at each price point.

• Price: Cost that consumers pay for a unit of a specific good or service.

• Quantity Demanded: Total number of units demanded at a specific price.

• Law of Demand:

  • As price increases, quantity demanded decreases.

  • As price decreases, quantity demanded increases.

3.2 Demand Schedule & Curve

• Demand Schedule: A table displaying a range of prices and the corresponding quantity demanded.

• Demand Curve: A graphical representation of the demand schedule, showing the inverse relationship between price (vertical axis) and quantity demanded (horizontal axis).

3.3 Graphing the Demand

• Demand curve slopes downward, reflecting the law of demand.

3.4 Supply of Goods and Services

• Supply: The amount of a good or service that producers are willing to supply at each price.

• Quantity Supplied: Total number of units suppliers are willing to sell at a given price.

• Law of Supply:

  • As price increases, quantity supplied increases.

  • As price decreases, quantity supplied decreases.

3.5 Supply Schedule & Curve

• Supply Schedule: A table showing quantity supplied at various prices.

• Supply Curve: Graphical portrayal of the quantity supplied against price, showing a direct relationship.

3.6 Graphing the Supply

• Supply curve slopes upward, illustrating the law of supply.

3.7 Equilibrium - Where Demand and Supply Intersect

• Equilibrium: Price and quantity combination where quantity demanded equals quantity supplied, with no surpluses or shortages.

• Equilibrium Price: Price at which quantity demanded equals quantity supplied.

• Equilibrium Quantity: Quantity where demand and supply lines intersect.

• Surplus: Occurs when quantity supplied exceeds quantity demanded at a given price.

• Shortage: Occurs when quantity demanded exceeds quantity supplied at a given price.

3.8 Shifts in Demand and Supply for Goods and Services

• Ceteris Paribus: Assumes other variables remain constant while analyzing shifts in demand or supply curves.

3.9 Factors that Affect Demand

• Demand can shift due to:

  • Changes in income.

  • Shifting tastes and preferences.

  • Population changes.

  • Price of substitutes or complements.

  • Expectations about future prices.

3.10 Types of Goods and Services

• Normal Goods: Demand increases as income increases.

• Inferior Goods: Demand decreases as income increases.

• Substitutes: Goods used in place of others.

• Complements: Goods consumed together.

3.11 Factors that Affect Supply

• Supply shifts due to:

  • Changes in production costs.

  • Technological advancements.

  • Natural conditions impacting production.

  • Government regulations or policies.

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

1. Draw initial demand and supply model.

2. Identify if the change affects demand or supply.

3. Assess the direction of the curve shift.

4. Determine the new equilibrium and compare.

3.13 Price Ceilings and Price Floors

• Price Controls: Regulatory laws to control pricing levels.

• Price Ceiling: Maximum price allowed, preventing prices from rising above this level.

• Price Floor: Minimum price set, preventing prices from falling below this level.

3.14 Consumer and Producer Surplus

• Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay.

• Producer Surplus: Difference between what producers are willing to accept and what they actually receive.

• Total Surplus (Social Surplus): Combined consumer and producer surplus.

• Deadweight Loss: Loss in total surplus that occurs when a market is not operating efficiently.