Chapter 4 Economics 110
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This 5 page Study Guide was uploaded by Fiona Coupe on Friday February 6, 2015. The Study Guide belongs to Economics 110 at University of Alabama - Tuscaloosa taught by Harold Elder in Winter2015. Since its upload, it has received 202 views.
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Date Created: 02/06/15
Chapter 4 The Market Forces of Supply and Demand 0 Supply and demand are the forces that make the market economy work 41 MARKETS AND COMPETITION Supply and demand refer to the behavior of people as they interact with one another in competitive markets 41a What is a Market Marketa group of buyers and sellers of a particular good or service 0 Buyers determine the demand for the product 0 Sellers determine the supply of the product 0 Each seller posts a price and each buyer choose which one to buy 41b What is Competition 0 Price and quantity are determined by all the buyers and sellers as they interact in the market price 0 Competitive market a market in which there are many buyers and many sellers so that each has negligible impact on the market place 0 No single buyer or seller has much impact on the entire market 0 To reach the highest point of competition markets must have two 2 things 0 1 The goods offered for sale are all exactly the same and o 2 The buyers and sellers are so numerous that no single buyer or seller has an in uence over the market price Said to be price takers Monopoly when one seller controls the market 0 Most markets fall between monopoly and perfect competition 42 DEMAND Examining the behavior of buyerdemand 42a The Demand Curve The Relationship between Price and Quantity Demanded 0 Quantity demanded amount of a goof that buyers are willing and able to purchase 0 Price of good plays central roll 0 Law of demandthe claim that other things being equal the quantity demanded of a good fails when the price of the good rises Demand schedule table that shows the relationship between price of a good and the quantity demanded Demand curve a graph of the relationship between the price of a good and the quantity demanded 42b Market Demand versus individual Demand 0 Market demand sum of all the individual demands for a particular good or service 0 To nd the total quantity demanded at any price we need to add the individual quantities Market demand curve shows how the total quantity demanded of a good varies as the price of a good varies 42c Shifts in the Demand Curve 0 Doesn t have to be stable over time lncome Normal good a good for which other things being equal an increase in income leads to an increase in demand or vice versa Inferior dood a good for which other things being equal an increase in income leads to a decrease in demand for the good or vice versa 0 Like less income means increased demand for bus rides Price of Related Goods Substitutestwo goods for which an increase in the price of one leads to an increase in the demand of the other or vice versa 0 Le frozen yogurt and ice cream 0 Complements two goods for which an increase in the price of one leads to a decrease in the demand for the other 0 Le peanut butter and jelly Tastes Most obvious determinant of demand is taste 0 Economists don t try and explain taste but do examine why changes occur Expectations Expectations about the future may effect your demand for a good or service today 0 Le saving or not saving pending a riase Number of Buyers o If there are more buyers the quantity demanded in the market would be higher at every price and the market demand would increase Summary 0 Demand curve shows what happens to the quantity demanded of a good when it s price varies holding all other variables constant 0 A curve shifts when there is a change in a relevant variable that is not measured on either axis 0 Because the price is on the vertical axis a change in price represents a movement along the demand curve Incomes the price of related goods tastes expectations and the number of buyers are not measured on either side so a change in one if these variables shifts the demand curve 43 SUPPLY Behavior of sellers 43a The Supply Curve Relationship between Price and Quantity Supplied Quantity supplied amount of a good that sellers are willing and able to sell 0 Law of supply claim that other things being equal the quantity supplied of a good rises when the price of a good rises 0 Price increases so does pro t 0 Supply schedule table that shows the relationship between the price of a good and the quantity supplied holding constant everything else that in uences how much producers of the good what to sell 0 Supply curve graph of the relationship between price of a good and the quantity supplied 43b Market Supply vs Individual Supply 0 Market supply is the sum of the two individual supplies 0 Markets supply curve shows how the total quantity supplied varies as the price of the good varies 43c Shifts in the Suoplv Curve 0 When one factor changes the supply curve shifts Anything that shifts the supply curve right is called an increase in supply 0 Anything that shifts the supply curve to the left is called a decrease in supply lnput Prices 0 When the input price of something used to create the product the price of the product rises Technoogy Technology that reveals the rm cost to create a certain product makes it more pro table and therefore increases production Expectations o If factory expects the price to rise in the future it will put some in storage Number of Sellers 0 Market supply depends on the number of sellers Summary 0 Price of good itself represents a movement along the supply curve 0 Input price technology expectations and the number of sellers create a shift in the supply curve 0 Price is on the vertical axis 44 SUPPLY AND DEMAN TOGETHER Determine how supply and demand determine the price and quantity of a good sold in a market 44a Equilibrium 0 Market equilibrium a situation in which the market has reached the level at which quantity supplied equals quantity demanded 0 Price at intersection is equilibrium price and quantity is called the equilibrium quantity 0 At equilibrium price the quantity of the goods that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell 0 When there is a surplus prices are brought down to try and sell the extra goods bringing the price lower towards equilibrium 0 When there is a shortage buyers can raise the price to produce more goods without loosing demand working towards equilibrium 0 Law of demand and supply price of any good adjusts to bring the quantity supplied and the quantity demanded for that good Prize of icertlrealm Gone 1 ELDp m E uilit ium Hiram llllul ll into baance AMquot Quantity mfliceaCrealme neg 44b Three Steps to Analyzing Changes in Equilibrium Must decide id the change changes the supply curve demand curve or both 0 Must decide whether the curve shifts to the right or left 0 Use the supply and demand diagram to compare the initial and new equilibrium which shows how the shift effects the equilibrium price and quantity Shifts in Curves vs Movements along curves 0 Supply refers to the position of the supply curve 0 Quantity supplied refers to the amount suppliers wish to sell 0 A shift in the supply curve is a change in supply 0 A shift in demand is a change in demand 0 Movement along a xed supply curve is called change in quantity supplied and movement along a xed demand curve is called a change in demand 45 CONCLUSION HOW PRICES ALLOCATRE RESOURCES Model of supply and demand is powerful for market analysis 0 Price of good and wages of worker adjust so that there are adequate amounts of both
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