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BU / College of Arts and Science / Col 101 / How does supply and demand affect equilibrium price?

How does supply and demand affect equilibrium price?

How does supply and demand affect equilibrium price?


School: Boston University
Department: College of Arts and Science
Course: Introductory Microeconomic Analysis
Professor: Manove
Term: Summer 2016
Tags: Microeconomic, Economics, and supply and demand
Cost: 25
Name: EC101 (Textbook & Lecture Notes) - Week 2
Description: These notes cover the suggested reading material for the week as well as what was covered during lecture. Covers aspects of Markets including the free market economy as well as covering aspects of supply & demand.
Uploaded: 09/17/2016
6 Pages 41 Views 2 Unlocks


How does supply and demand affect equilibrium price?



(Pgs. 35-38, 42-44; 45-55)

1. Chapter 2 – The Economic Problem: Scarcity or Choice  What gets produced & how? Who receives it?  How large, complex  societies act to  

 respond to these questions = “the economic problem”.

 A. Economic Systems and the Role of the Government  1. Command Economies

a. Central gov’t answers basic economic questions

*Directly/indirectly sets output targets, incomes, prices  through ownership of state enterprises & central  planning

 2. Laissez-Faire Economies: The Free Market

a. NO gov’t involvement  

 b. Firms/individuals w/o regulation sum of all indiv. decisions =  basic economic outcome

What is the problem of scarcity in economics?

*Uses market to answer basic “economic problem”  


*All markets involve buyers/seller engaging in exchange  c. Consumer Sovereignty  output decided by buyers’  tastes/preferences  “vote” (buy/not buy).  d. Individual Production Decisions: Free Enterprise

*Using markets = efficiency in production/response to  consumer wants

*Competition = producers w/ efficient ways of  

production/producing what the customer wants  e. Distribution of Output

*Individuals will work for wages sufficient enough to  

compensate for what they give up by working  (opportunity cost?!)

 f. Price Theory

*Weighing of costs/prices  focuses on influences 

determine price

What is the value of a good on the free market?

 3. Mixed Systems, Markets, and Governments

a. Tensions between unregulated markets & need for gov’t  involvement

2. Chapter 3 – Demand, Supply, and Market Equilibrium  A. Firms and Households: The Basic Decision-Making UnitsIf you want to learn more check out What does the supremacy clause state?

 a. Firms – producing a product: transformation of inputs  outputs

*Make decisions to maximize profits

 b. Entrepreneur – manages organization & risk assumption of  firm

 c. Households – consuming units; wide range of preferences


B. Input Markets and Output Markets: The Circular Flow  a. Product or Output markets – goods/services intended use for  households If you want to learn more check out When was the quran canonized?

*Firms supply; households demand

 b. Input or Factor Markets – resources bought by firms to  produce goods/services

*Households supply the inputs

 c. Labor market – households supply labor that firms demand for wages

 d. Capital Market – households supply funds to claim future  profits to firmsneed the funds to buy capital goods  e. Land Market – land/property supplied by households for rent  f. Inputs into production process = factors of production

 C. Demand in Product/Output Markets

a. Quantity demanded – number of units (amount) of a product  that a  

 household buys all that they want during a specific period @  current  

 market price 

 1. Changes in Quantity Demanded vs. Changes in Demand  a. Changes in price affect quantity demand per period  b. Changes elsewhere affect demand

 2. Price and Quantity Demanded: The Law of Demand  a. Demand schedule – shows amount of given product that a  household would be willing to buy @ different prices for  given time period We also discuss several other topics like How do you find the difference quotient of a quadratic function?

 b. Demand curve – relationship between price and quantity  demanded

 c. Law of demand – demand curve always has a negative slope  d. Utility – satisfaction

*each additional unit consumed  less satisfaction

 3. Other Determinants of Household Demand

 a. Income – sum of all forms of earnings received in given period of time  

 b. Wealth – total value minus what a household owes  c. Net worth – what a household would have after selling all   possessions/paying all debts

 d. Normal goods – goods where: income increases = demand  increases; income decreases = demand decreases  e. Inferior goods – goods where demand falls when income  increases

 f. Substitutes – goods that serve as replacements for others  when price of other increases

*Perfect substitute – identical replacement

 g. Complementary goods – price decrease in one = increase in  demand of other & vice versa We also discuss several other topics like How capsule is stretched?

 4. Shift of Demand vs. Movement along a Demand Curve a. Move along demand curve when price of good changes  b. Shift in demand curve – change that takes place  

corresponding to new relationship between quantity  demanded & price of specific good

 c. Movement along demand curve  occurs when price changes  5. From Household Demand to Market Demand a. Market demand – sum of all quantities of good/service  demanded per period by all households buying


1. Free Markets, Voluntary Exchange, and Money

 A. Economic Systems

 Each culture  different system (own rules/behaviors) *Can be like army: orders highest rank  lowest

*Can be completely decentralized

 Ex: Different types of economic systems:


*Command Economy (Soviet Union, N. Korea, etc.)

*Free Market System

 B. Basic Economic Choices

 1. Production Decisions

*What and how to produce  

 2. Distribution Decisions

*Who gets and who provides inputs

 C. Free Market System

 1. Most economic activity (production/distrib.) done voluntarily  *Production – volunt. activity of private firms Don't forget about the age old question of What would william james criticize for examining a movie frame by frame instead of seeing the motion?

*Distribution – volunt. exchange

 Ex: Opening Pizza Restaurant (voluntary production) *Leases space, buys ovens <--- voluntary exchange

*Hiring workers <--------------------‘ |

*Produce pizza  voluntary production |

*Selling the pizza <-----------------------------‘

 D. Real Free-Market Economies

 What most countries have

 1. Relies heavily on voluntary activities of households/private  firms

 2. Still has:

*Involuntary exchange/production

Ex: paying taxes for police protection

*Gov’t production

Ex: Gov’t runs many firms  

 (education/universities; hospitals; military; etc.)

 3. Free-Market Model

*All economic activities private & voluntary

 E. Voluntary Exchange

 1. Used within free-market economies to distribute  outputs/inputs

 2. Voluntary exchange increases welfare of both parties   3. Households, firms, gov’t exchange goods/servicesWe also discuss several other topics like How do you read an element symbol?

 4. Takes place mostly in markets

 F. Markets

 1. “Meeting places”

*Traditional markets


*Virtual markets (NASDAQ)

 2. Can exist in many places simultaneously  

*Petroleum market

*US labor market

 Ex: Person 1 has item A & wants B; Person 2 has item B & wants  A

  TRADE (outcome: both better off)

 3. Exception: Temptation, ignorance, poor info.

 G. Voluntary Exchange & Trust

 1. Seller has more info about product than buyer *Laws protect buyers from fraudulence

 2. Trust = social captal  required in voluntary exchange

 H. Voluntary Exchange Mechanisms

 1. Fundamental aspects of FMS

 2. Conducted in 2 methods:

*Barter (1 step) – direct exchange  

  MUST have “double coincidence of wants”

*Selling & buying (2 steps) – easier to find necessary  


 sell what you have for $

  $ buy what you want

 I. Advantages of Selling/Buying

 1. Easier to find/sell

 2. Important to complex societies

 J. Money

 1. Types:

*Commodity $ (ex: salt, gold, etc.)

*Fiat $ - declared as currency by state/institution

 & can be intangible (checkable, deposits, credit,  


 2. Acceptance

*Social agreement

 3. Legal Tender

*Accepted because others use/accept it

*Can be used to pay taxes

2. Markets, Prices, and Demand

 A. Competition – Selling/Buying

 *Driving force of the free market

 B. Prices

 1. Defined by use of $ to buy/sell 1 unit of something *Can compare opportunity costs for different goods

 2. Barter?

*Prices CANNOT be clearly defined

*Only defines exchange ratio 

 C. Perfect Competition – Many buyers/sellers

 1. Extreme cases = nonexistent in real world

*Model  more general free-market model

 2. Markets & characteristics of perfect competition model *1 homogeneous good

*Many buyers/sellers

*Voluntary exchange

*Full info; perfect foresight

*Rational, self-interested agents

*Free entry into market

 D. “Law” of One Price

 SAME PRICE at any given time for identical goods in a perfect  competition  


*Transactions at 2+ prices will NOT be completed

 E. Arbitrage – “Buy low, sell high”

*Brings prices closer together (Law of “One Price”)

*Common in financial markets

 F. Supply and Demand

 1. Can predict: $ price set & quantities to buy/sell at specific  price

*Demand – buyers’ willingness to buy at different prices *Supply – sellers’ willingness to sell at different prices

 G. Demand Schedule

 1. How much of a good a household will buy @ various prices  2. Demand curve

*Independent var. = y-axis

*Dependent var. = x-axis

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