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Topic 4: Demand and Supply

by: Ashley Notetaker

Topic 4: Demand and Supply 165

Marketplace > Missouri State University > Economcs > 165 > Topic 4 Demand and Supply
Ashley Notetaker
Principles of Microeconomics
Reed Olsen

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About this Document

It's the last topic before the first exam. Demand and Supply is one of the topics with the most information, and the least time to study before the exam. Here is everything you need to know about D...
Principles of Microeconomics
Reed Olsen
75 ?




Popular in Principles of Microeconomics

Popular in Economcs

This 6 page Bundle was uploaded by Ashley Notetaker on Tuesday September 15, 2015. The Bundle belongs to 165 at Missouri State University taught by Reed Olsen in Summer 2015. Since its upload, it has received 28 views. For similar materials see Principles of Microeconomics in Economcs at Missouri State University.


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Date Created: 09/15/15
Demand amp Supplv Topic 4 Demand Shows how much a consumer is willing quantity demanded and able to buy given its price of a good ceteris paribus Ceteris paribus All things are constant or equal Law of Demand Price and Quantity demanded are inversely related As price decreases quantity demand increases Substitution Effect When the price of a good falls consumers tend to buy more of that good because the price becomes less expensive relative to that good s substitute Income Effect When the price of a good falls individuals tend to buy more of that good because they indirectly have more money 2 Things affect Demand Price When price goes down quantity demand goes up Fi GE P1 l a PE quotquotquot quotquotquotquot quot n t PE 1 31 a 13 m ltjr Graph 2 irm uamti Eeman ledl Changing the slope of demand This only happens when something else besides the price of a good changes shift left decrease in demand shift right increase in demand F39Tl Graph 3 Ghana in Things that will affect demand 1 Tastes Preferences When Taste goes up demand goes up viceversa Prices of related goods Substitutes Goods separate from each other When price goes up demand goes up viceversa Compiments Goods that go together Ex bananas amp cereal When price goes up demand goes down viceversa Income Norma goods Ex sports cars Income increases demand increases viceversa Inferior goods Ex Ramen noodles Income increases demand decreases viceversa of Buyers in a market Number increases demand increases viceversa Expectations about future prices Right or wrong Expect price to increase demand increases viceversa Quantity Demand Increases the amount people buy Demand Why there is an increase in purchases Does it change the slope of demand Supply Shows how much a firm is willing to and able to sell of a good ceteris paribus given its price Law of supply Increase in price increases quantity supplied viceversa Why Firms maximize profit higher prices is good Less returns increase costs What affects supply Price change Increase in price increases quantity supplied l El 13 umliityr Graph 5 Ehangie in El nltilzf Supplied Shift slope Shift right increase in supply shift left decrease in supply F39il39l l Graph E Ehanrge in Supply Things that affect supply 1 Cost of Production f cost increases then supply decreases viceversa Prices of resources Increase in price of resource leads to increase of cost viceversa Technology Increase in technology decreases cost viceversa 2 Prices of related goods Substitutes in production Can easily stop producing one product and start producing the other with the same resources Ex corn and soybeans If price of one good increases the supply of the substitute goes down viceversa Compliments in production Products that tend to be naturally produced together Ex turning oil into gas also gets you motor oil If price of a compliment goes up the supply of both products increases 3 of sellers ncrease in number of sellers goes up supply goes up viceversa 4 Expectations of future prices If expect price to increase in future supply decreases viceversa Stock vs Flow of variables Stock Measured at a point in time Ex how much water in the lake Flow Measured across time Ex how much water flows through the canals The amount of time during which you measure the variable affects the outcome Demand and Supply are flows Therefore time affects demand and supply DEMAND Eta 39U L I I I l 11 g I13 Quantity Er lplli Shortterm When price changes from P2 to P1 in the shortterm quantity demand moves from Q3 to Q2 This is because people cannot quickly substitute the use of the good Ex If gas prices double overnight you will buy a little less gas but have not yet made arrangements to use less gas Longterm When price changes from P2 to P1 in the longterm quantity demand moves from Q3 to Q1 This is because over a longer period of time people can more easily substitute the use of a good Ex Price of gas goes up so you move closer to schoolwork SUPPLY P title 32 r 39 quot Il y l h quot i I Ii l 39 d j i i l39 Eh Eli I33 Quantity E mph 5 Shortterm When price increases from P2 to P1 in the shortterm quantity supply moves from Q1 to Q2 This is because it can take time for firms to increase resources to increase production LongTerm When price increases from P2 to P1 in the longterm quantity supply moves from Q1 to Q3 This is because over a longer period of time firms are able to increase the resources needed to increase production Equilibrium Allows us to predict both price and quantity in the market At the equilibrium there is no force that moves us away from the equilibrium Ex Teetertotter at rest When not at the equilibrium there is a force that works to move back to equilibrium Ex Friction and gravity working on a teetertotter to move it back to rest Stable equilibrium When you have both of these Unstable equilibrium When you are at equilibrium you never move When not at equilibrium you never go back Ex atomic bomb Equiibrium in a market occurs when quantity demanded quantity supplied Shortage When the quantity demand is more than quantity supplied Price competition Offering a higher price to ensure you get a product of high quantity demand When price competition by consumers increases price increases Surpus When quantity supply is more than quantity demanded


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