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This 5 page Bundle was uploaded by Samantha jose on Saturday February 6, 2016. The Bundle belongs to 101 at Washington State University taught by Dr. Love in Fall. Since its upload, it has received 50 views. For similar materials see Microeconomics in Economcs at Washington State University.
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Date Created: 02/06/16
Competitive Market (L3) Competitive Market – has many buyers and sellers of the same good or service, none of whom can influence the price • The supply and demand model is a model of how a competitive market behaves Demand • Demand represents the behavior of buyers • The demand curve shows the quantity demanded at various prices • The quantity demanded is the quantity that buyers are willing (and able) to purchase at a particular price Do not be sloppy in terminology: A “change in demand” (shift in curve) DOES NOT EQUAL A “change in quantity demanded” (movement on curve) The Demand Schedule and the Demand Curve • The law of demand: a higher price for a good or service leads people to demand a smaller quantity Shifts of Demand Curve • A DECREASE in demand is a leftward shift • A INCREASE in demand is a rightward shift Understanding Shifts of the Demand Curve • Important demand shifters: o Changes in the prices of related goods or services o Changes in income o Changes in tastes/preferences o Changes in expectations o Changes in the number of consumers Changes in Price of Related Goods: Substitutes • Two goods are substitutes if a decrease in the price of one leads to a decrease in demand for the other (or vice versa) Changes in Price of Related Goods: Complements • Two goods are complements if a decrease in the price of one goods leads to an increase in the demand for the other (or vice versa) • Consumers often have to buy goods together • Example: An increase in price of gasoline will decrease the demand for SUVs Changes in Income • The effect of changes in income on demand depends on the nature of the good in question o A normal good: § Demand decreases when income increases § Demand increase when income decrease o An inferior good: § Demand decreases when income increases § Demand increase when income decrease Changes in Tastes/Preferences • Tastes and preferences are subjective and vary among consumers • Seasonal changes or fads have predictable effects on demand Changes in Expectations • If consumers have a choice about the timing of a purchase, they buy according to expectations. • Buyers adjust current spending in anticipation of the direction of future prices in order to obtain the lowest possible price Changes in Number of Consumers • As the population of an economy changes, the number of buyers of a particular good also changes (thereby changing its demand). Supply Curve What is Supply Curve? Supply • Supply represents the behavior of sellers. • A Supply Curve shows the quantity supplied at various prices. • The Quantity Supplied is the quantity that producers are willing and able to sell at a particular price. o As price rises, the quantity supplied rises. Movement along the supply curve is not the same as a shift of the supply curve Movement along the supply curve IS NOT THE SAME AS A shift in supply curve o An increase in supply means rightward shift of the supply curve o A decrease in supply means leftward shift of the supply curve Understanding Shifts of the Supply Curve • Important supply shifters include changes in: o 1. Input prices o 2. The prices of related goods or services o 3. Technology o 4. Expectations o 5. The number of producers 1. Changes in Input Prices • A decrease in the price of an input (all else equal) increases profits and encourages more supply • An increase in the price of an input (all else equal) decreases profits and encourages less supply o Example: when the price of cotton drops, the supply of blue jeans increases 2. Changes in the Price of Related Goods or Services • Inputs used in production have opportunity costs. Sellers will choose to use inputs in products whose profit is highest. o Sellers will supply less of a good if its profitability falls (and vice versa) o There are substitutes and complements in production processes. 3. Changes in Technology • New, better technology makes sellers willing to offer more at a given price or sell their quantity at a lower price o A technological innovation lower costs & increases supply 4. Changes in Expectations • The expectation of a higher price for a good in the future decreases current supply of the good – if they can store the good. o Sellers will adjust their current offerings in anticipation of the direction of future prices in order to obtain the highest possible price • A change in producers expectations about profitability will affect supply curves o Ex: Windmill production increases as producers expect sales and profitability to increase 5. Changes in Number of Producers • As producers enter and exit the market, the overall supply changes. o Entry implies more sellers in the market, increasing supply (right shift) o Exit implies fewer sellers in the market, decreasing supply (left shift) Supply, Demand, and Market Equilibrium • When Q = Q (Quantity Supplied = Quantity Demanded means s d EQUILIBRIUM) at a certain price, the market is in equilibrium • That is, the amount consumers would purchase at this price is matched exactly by the amount producers wish to sell • Market Equilibrium occurs where the supply curve and the demand curve intersect Why Does the Market Price FALL if it is Above the Equilibrium Price? • The is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium. • Surpluses DO NOT last: sellers will reduce price so they can move goods off the shelves Why Does the Market Price RISE if it is Below the Equilibrium Price? • There is a shortage when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is bellows its equilibrium. • Shortages DO NOT last: sellers will increase price to increase revenue What happens when the Demand Curve Shifts? • An increase in demand…leads to a movement alone the supply curve due to a higher equilibrium price and higher equilibrium quantity What happens When the Supply Curve Shifts? • A decrease in supply…leads to a movement along the demand curve due to a higher equilibrium price and lower equilibrium quantity Simultaneous Shifts of Supply & Demand Simultaneous shifts Supply ↑ Supply ↓ if supply & demand Demand ↑ Price: Price: Up Ambiguous. Quant: Ambiguous Quant: Up Demand ↓ Price: Down Price: Ambiguous Quant: Quant: Down Ambiguous Competitive Markets- And Others • When markets are not competitive, things get more complicated • For instance, large sellers will have to predict how their production, marketing, and pricing decisions will affect others firms’ behavior and the entire market (and how this will affect their own profit).
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