Chapter 3 and 4 Notes
Chapter 3 and 4 Notes 106
Popular in Introductory Microeconomics
Popular in Economcs
ECON 105 001
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This 6 page Bundle was uploaded by Sarah Smithson on Thursday February 25, 2016. The Bundle belongs to 106 at University of New Mexico taught by David Van Der Goes in Spring 2016. Since its upload, it has received 22 views. For similar materials see Introductory Microeconomics in Economcs at University of New Mexico.
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Date Created: 02/25/16
Chapter 3 The Demand Side of the Market • Key assumption: the model of supply and demand assumed that we are analyzing a perfectly competitive market. ◦ A market that meets the conditions of having 1) many buyers and sellers 2) all firms selling identical products 3) no barriers to new firms entering the market • Price is main deciding factor in analyzing what consumers are buying ◦ What they want to buy ◦ What they are willing/able to buy Demand Schedules and Demand Curves • Demand Schedule: A table that shows the relationship between the price of a product and the quantity of the product demanded • Quantity Demanded: The amount of a good or service that a consumer is willing and able to purchase at a given price. • Demand Curve: A curve that shows the relationship between the price of a product and the quantity of the product demanded • Market Demand: The demand by all the consumers of a given good or service The Law of Demand • The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of a product will decrease What explains the Law of Demand • Common sense Substitution Effect • The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes. Income Effect • The change in the quantity demanded of a good that results from the effect of a change in the goods price on consumers purchasing power. Holding Everything Else Constant: The Ceteris Paribus Condition • The requirement that when analyzing the relationship between two variables-such as price and quantity demanded- other variables must be held constant Variables That Shift Market Demand • Income • Prices of related goods • Tastes • Population and demographics • Expected future prices Income • The income that consumers have available to spend affects their willingness and ability to buy a good • Normal Good ◦ A good for which the demand increases as income rises and decreases as income falls • Inferior Good ◦ A good for which the demand increases a income falls and decreases as income rises Prices of Related Goods • Substitutes ◦ Goods and services that can be used for the same purpose • Complements ◦ Goods and services that are used together Tastes • Consumers can be influenced by advertising • Subjective elements that can enter into a consumers decision to buy a product Population and Demographics • Demographics: The characteristics of a population with respect ti age, race, and gender. Expected Future Prices • Consumers choose which products to buy and when to buy them. • Decisions about expected price changes can effect demand A Change in Demand versus a Change in Quantity Demanded • A change in demand refers to a shift of the demand curve ◦ A shift occurs if there is a change in one of the variables other than price which affects the willingness of consumers to buy the product. • A change in quantity demanded happens when there is movement along the demand curve as a result of a change in the 2 products price. The Supply Side of the Market • Quantity supplied ◦ The amount of a good or service that a firm is willing and able to supply at a given price Supply Schedules and Supply Curves • Supply Schedule ◦ A table that shows the relationship between the price of a product and the quantity of the product supplied • Supply Curve ◦ A curve that shows the relationship between the price of a product and the quantity of the product supplied The Law of Supply • The rule that, holding everything else constant, increases in price cause increases in the quantity supplied and decreases in price cause decreases in the quantity supplied • Decreases move left on the graph, increases move right Variables that Shift Market Supply • Prices of inputs ◦ The factor most likely to cause the supply curve for a product to shift. • Technological change ◦ A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs • Prices of substitutes in production ◦ Firms often choose which good or service they will produce ◦ Alternative products that a firm could produce are called substitutes in production. • Number of firms in the market ◦ A change in the number of firms in the market will change supply ◦ When new firms enter a market, the supply curve shifts to the right ◦ When new firms exit a market, the supply curve shifts to the left • Expected future prices ◦ If a firm expects that the price of its product will be higher in the future, it has an incentive to decrease supply now and increase it in the future A Change in Supply versus a Change in Quantity Supplied • A change in supply refers to a shift of the supply curve ◦ Will shift when there is a change in one of the variables other than 3 price • A change in quantity supplied refers to a movement along the supply curve as a result of price change Market Equilibrium: Putting Demand and Supply Together • Market Equilibrium ◦ A situtation in which quantity demanded equals quantity supplied • Competitive Market Equilibrium ◦ A market with many buyers and sellers How Markets Eliminate Surpluses and Shortages • A market that is not in equilibrium moves toward equilibrium • Surplus ◦ A situtation in which the quantity supplied is greater than the quantity demanded ◦ Price adjustment will make quantity demanded go up, and supply will return to normal • Shortage ◦ A situation in which the quantity demanded is greater than the quantity supplied 4 Chapter 4 • Price Ceiling ◦ A legally determined maximum price that sellers may charge • Price Floor ◦ A legally determined minimum price that sellers may receive Consumer Surplus and Producer Surplus • Consumer Surplus ◦ The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays • Marginal Benefit ◦ The additional benefit to a consumer from consuming one or more unit of a good or service Producer Surplus • Supply curves show the willingness of firms to supply a product at different prices • Marginal Cost ◦ The additional cost to a firm of producing one more unit of a good or service • Producer Surplus ◦ The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives What Consumer Surplus and Producer Surplus Measure • Consumer surplus measures the benefit to consumers from participating in a market ◦ Equal to the total benefit consumers receive minus the total amount they must pay to buy the good or service • Producer surplus measures the benefit to producers from participating in a market ◦ Measures when the market is equal to the total amount firms receive minus the cost of producing the good or service The Efficiency of Competitive Markets • Economic surplus ◦ The sum of consumer surplus and producer surplus • Below demand curve and above equilibrium Deadweight Loss • The reduction in economic surplus resulting from a market not being in competitive equilibrium Economic Efficiency • A market outcome in which the marginal benefit to consumers to the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum Government Intervention in the Market: Price Floors and Price Ceilings • Not every individual will be better off if the market is at competitive equilibrium • Will benefit society as a whole • Government can intervene and set price floors and ceilings • Price Floor ◦ Requiring that a price be above equilibrium • Price Ceiling ◦ Requiring that a price be below equilibrium Black Markets and Peer-to-Peer Sites • Black Market ◦ A market in which buying and selling take place at prices that violate governmental price regulations Tax Incidence • The actual division of the burden of a tax between buyers and sellers in a market 2
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