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BROWN U / Economics / ECON 0110 / What are the factors that shift supply curve?

What are the factors that shift supply curve?

What are the factors that shift supply curve?

Description

School: Brown University
Department: Economics
Course: Principles of Economics I
Professor: Rachel friedberg
Term: Fall 2018
Tags:
Cost: 25
Name: week 2
Description: chapters 4-6
Uploaded: 12/06/2018
16 Pages 261 Views 1 Unlocks
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9/10/18


What are the factors that shift supply curve?



Chapter 4: Market Forces of Supply and Demand

Market - a group of buyers and sellers of a particular good or service

Competition - “competitive market”, how many other people are out there (many buyers and sellers so nobody has an impact on the overall market price)

Perfect Competition - ASSUME 1. All goods are identical, 2. Many buyers and sellers so no one person can influence the market price - price takers. (opposite extreme: monopoly)

Demand:

- Quantity demanded

- the amount of a good that buyers are willing (what they like) and able (what they can afford) to purchase If you want to learn more check out What is ticketron for?

- Relationship to price

- higher price = less quantity demanded

- Lower price = higher quantity demanded


What makes demand more price elastic?



- Inverse (negative relationship)

- LAW OF DEMAND - this relationship is almost always true

- Demand schedule: table that shows relationship of the price of a good and its quantity demanded

- Ice cream example demand curve

Don't forget about the age old question of What are the effects of colonialism?

- P = “price of ice cream cones” on y-axis

- Q = “quantity of ice cream cones” on x-axis

- Demand curve is downward sloping (negative slope = law of demand) - Demand is describing quantity as price changes


How much the quantity supplied of a good responds to a change in the price of that good?



- Market demand: the sum of all individual demands (quantities) for a particular good or service

- For every price ADD all quantities together

- ADD quantities horizontally on the graph

Factors that shift Demand Curve:

1. Income

a. Normal good: Increase income, increase Qd

b. Inferior good: Increase income, decrease Qd

2. Price of related goods

a. Substitutes: ex. blue pen, black pen, different brands of paper towels b. Complements: ex. Coffee and milk

3. Tastes (what you like)

4. Expectations

5. Market demand - total numbers of buyers

Rule of thumb: everything will shift the demand curve except price of the good - When price changes you just move along the demand curve Don't forget about the age old question of What is a bacteria found in mammals such as humans?

Supply:

- Quantity supplied

- The amount of a good that sellers are willing (max profit)

and able (given production technology and amount of

inputs - resources available) to sell

- Relationship to price

- Higher price = higher quantity supplied (Qs)

- Lower price = lower quantity supplied

- LAW OF SUPPLY - can describe relationship using supply

schedule

Factors that shift supply curve: We also discuss several other topics like What is the president’s veto power about?

1. Input prices -

2. Technology

3. Expectations

4. Market supply (total number of sellers)

Rule of thumb: “anything” that affects supply with SHIFT of curve except price of good

Equilibrium of Supply and Demand

Equilibrium: situation in which market price (p*) has reached the level where quantity supplied equals quantity demanded (q*)

If we are NOT in equilibrium we have either…

- SURPLUS: Qs>Qd

- SHORTAGE: Qd>Qs

Prices as the invisible hand: the claim that the price of any good adjusts to bring quantity supplied and quantity demanded into balance

9/12/18

Chapter 5: Elasticity

Elasticity measures the responsiveness of quantity demanded or quantity supplied to changes in prices.

Elasticity of Demand: consumers

- Price elasticity of demand: how much quantity demanded responds to a change in the price

- Measured by: absolute value of percentage change in quantity demanded / percentage change in price

- More elastic = more responsive

- Demand is elastic if changing the goods price results in a big change in Q demanded We also discuss several other topics like Enumerate the emergent properties.

- Demand is inelastic if changing the good’s price results in a small change in Q demanded

- What makes demand more price elastic?

1. Good is narrowly defined (ex. All caffeine is broadly defined, a specific starbucks drink is narrowly defined meaning it has substitutes (price will be less of an influence- ex. Dunkin donuts)

2. Close substitutes are available

3. There is a long time horizon (you aren’t in a rush so you have time to budget/make cheaper decisions - adjustment time to move away from consuming expensive things)

4. The good is a luxury, not a necessity

5. It’s a big part of your budget

Summary: Households are more elastic when it's something they can do without/find a substitute for/its a luxury

If you want to learn more check out Who wrote an article on “perception: an introduction to gestalt-theory”?

0<elasticity<1 = inelastic

Elasticity = 1 → unit elastic

1<elasticity<infinity = elastic

Infinity = Perfectly elastic (horizontal line)

Elasticity DOES NOT equal Slope → ratio of percentage change vs. ratio of changes

Price elasticity of demand - at the top of the demand curve, if you reduce the price it makes less of a difference than if you reduce the price at the bottom of the demand curve (elasticity is higher at the top than the bottom) - cutting a dollar makes more of a difference when the price is low to begin with

Revenue: the money received by sellers from buyers (total revenue = P * Q) Revenue and Elasticity - what happens to total revenue when price is raised? - It depends whether Qd falls by more or less than the increase in price - Inelastic demand? Revenue increases

- Elastic demand? Revenue decreases

- Total revenue (P*Q) is greatest where the elasticity of demand equals 1 Other elasticities of demand:

1. Income elasticity of demand: normal vs. inferior goods (ex. An inferior good is a bus ticket bc when you’re rich enough you have a car)

2. Cross price elasticity of demand: substitutes vs. complements

Elasticity of Supply: producers

How much the quantity supplied of a good responds to a change in the price of that good - Calculate price elasticity of supply: %changeQs / %changeP

- “Elastic” means quantity supplied responds a lot

- “Inelastic” means quantity supplied responds only a little

- What makes supply more price elastic

1. Flexibility to change supply

2. Long time horizon

- Supply curves: flatter = more elastic

9/14/18

Chapter 6: Supply, Demand, and Government Policies

Price Ceiling: a legal maximum on the price at which a good can be sold - Lead to shortages (ex. Gas prices, rent control

- Price ceiling causes a gap between its new point on the demand curve and its new point on the supply curve - that’s the shortage → more people are demanding a good than the amount that suppliers can supply

- Are price ceilings good for consumers?

- Some people get to pay a lower price (left section)

- Some people don’t get to buy at all (middle, right section)

- Rationing can be inefficient because the good doesn’t necessarily go to the people who value/need it the most

- Example: rent control

- Supply: no upkeep, no new apartments

- Landlords have no incentive because the price ceiling makes it so they make less money off their apartments

- Demand: more people move in to city

- More people want apartments because the prices are cheaper

- Rationing:

- Waiting lists

- Bribes

- Connections

- Discrimination by race, income…

- Better option: rent subsidies

Price Floor: a legal minimum on the price at which a good can be sold

- Price floors lead to surpluses

- Ex. cigarettes (to deter people from buying them or starting to smoke) - Minimum Wage

- US minimum wage is $7.25 per hour

- RI minimum wage is $10.10 per hour

- Is minimum wage good for workers?

- People with jobs get paid more

- Some people left without any job

- Poorly targeted

- Better to use: “Earned Income Tax Credit”

Price Controls distort the signals that guide societies allocation of resources. Prices are the “invisible hand”

Changed incentives → Changed behavior

Elasticity matters!

- If we have inelastic supply, then the shortage would get smaller

9/10/18

Chapter 4: Market Forces of Supply and Demand

Market - a group of buyers and sellers of a particular good or service

Competition - “competitive market”, how many other people are out there (many buyers and sellers so nobody has an impact on the overall market price)

Perfect Competition - ASSUME 1. All goods are identical, 2. Many buyers and sellers so no one person can influence the market price - price takers. (opposite extreme: monopoly)

Demand:

- Quantity demanded

- the amount of a good that buyers are willing (what they like) and able (what they can afford) to purchase

- Relationship to price

- higher price = less quantity demanded

- Lower price = higher quantity demanded

- Inverse (negative relationship)

- LAW OF DEMAND - this relationship is almost always true

- Demand schedule: table that shows relationship of the price of a good and its quantity demanded

- Ice cream example demand curve

- P = “price of ice cream cones” on y-axis

- Q = “quantity of ice cream cones” on x-axis

- Demand curve is downward sloping (negative slope = law of demand) - Demand is describing quantity as price changes

- Market demand: the sum of all individual demands (quantities) for a particular good or service

- For every price ADD all quantities together

- ADD quantities horizontally on the graph

Factors that shift Demand Curve:

1. Income

a. Normal good: Increase income, increase Qd

b. Inferior good: Increase income, decrease Qd

2. Price of related goods

a. Substitutes: ex. blue pen, black pen, different brands of paper towels b. Complements: ex. Coffee and milk

3. Tastes (what you like)

4. Expectations

5. Market demand - total numbers of buyers

Rule of thumb: everything will shift the demand curve except price of the good - When price changes you just move along the demand curve

Supply:

- Quantity supplied

- The amount of a good that sellers are willing (max profit)

and able (given production technology and amount of

inputs - resources available) to sell

- Relationship to price

- Higher price = higher quantity supplied (Qs)

- Lower price = lower quantity supplied

- LAW OF SUPPLY - can describe relationship using supply

schedule

Factors that shift supply curve:

1. Input prices -

2. Technology

3. Expectations

4. Market supply (total number of sellers)

Rule of thumb: “anything” that affects supply with SHIFT of curve except price of good

Equilibrium of Supply and Demand

Equilibrium: situation in which market price (p*) has reached the level where quantity supplied equals quantity demanded (q*)

If we are NOT in equilibrium we have either…

- SURPLUS: Qs>Qd

- SHORTAGE: Qd>Qs

Prices as the invisible hand: the claim that the price of any good adjusts to bring quantity supplied and quantity demanded into balance

9/12/18

Chapter 5: Elasticity

Elasticity measures the responsiveness of quantity demanded or quantity supplied to changes in prices.

Elasticity of Demand: consumers

- Price elasticity of demand: how much quantity demanded responds to a change in the price

- Measured by: absolute value of percentage change in quantity demanded / percentage change in price

- More elastic = more responsive

- Demand is elastic if changing the goods price results in a big change in Q demanded

- Demand is inelastic if changing the good’s price results in a small change in Q demanded

- What makes demand more price elastic?

1. Good is narrowly defined (ex. All caffeine is broadly defined, a specific starbucks drink is narrowly defined meaning it has substitutes (price will be less of an influence- ex. Dunkin donuts)

2. Close substitutes are available

3. There is a long time horizon (you aren’t in a rush so you have time to budget/make cheaper decisions - adjustment time to move away from consuming expensive things)

4. The good is a luxury, not a necessity

5. It’s a big part of your budget

Summary: Households are more elastic when it's something they can do without/find a substitute for/its a luxury

0<elasticity<1 = inelastic

Elasticity = 1 → unit elastic

1<elasticity<infinity = elastic

Infinity = Perfectly elastic (horizontal line)

Elasticity DOES NOT equal Slope → ratio of percentage change vs. ratio of changes

Price elasticity of demand - at the top of the demand curve, if you reduce the price it makes less of a difference than if you reduce the price at the bottom of the demand curve (elasticity is higher at the top than the bottom) - cutting a dollar makes more of a difference when the price is low to begin with

Revenue: the money received by sellers from buyers (total revenue = P * Q) Revenue and Elasticity - what happens to total revenue when price is raised? - It depends whether Qd falls by more or less than the increase in price - Inelastic demand? Revenue increases

- Elastic demand? Revenue decreases

- Total revenue (P*Q) is greatest where the elasticity of demand equals 1 Other elasticities of demand:

1. Income elasticity of demand: normal vs. inferior goods (ex. An inferior good is a bus ticket bc when you’re rich enough you have a car)

2. Cross price elasticity of demand: substitutes vs. complements

Elasticity of Supply: producers

How much the quantity supplied of a good responds to a change in the price of that good - Calculate price elasticity of supply: %changeQs / %changeP

- “Elastic” means quantity supplied responds a lot

- “Inelastic” means quantity supplied responds only a little

- What makes supply more price elastic

1. Flexibility to change supply

2. Long time horizon

- Supply curves: flatter = more elastic

9/14/18

Chapter 6: Supply, Demand, and Government Policies

Price Ceiling: a legal maximum on the price at which a good can be sold - Lead to shortages (ex. Gas prices, rent control

- Price ceiling causes a gap between its new point on the demand curve and its new point on the supply curve - that’s the shortage → more people are demanding a good than the amount that suppliers can supply

- Are price ceilings good for consumers?

- Some people get to pay a lower price (left section)

- Some people don’t get to buy at all (middle, right section)

- Rationing can be inefficient because the good doesn’t necessarily go to the people who value/need it the most

- Example: rent control

- Supply: no upkeep, no new apartments

- Landlords have no incentive because the price ceiling makes it so they make less money off their apartments

- Demand: more people move in to city

- More people want apartments because the prices are cheaper

- Rationing:

- Waiting lists

- Bribes

- Connections

- Discrimination by race, income…

- Better option: rent subsidies

Price Floor: a legal minimum on the price at which a good can be sold

- Price floors lead to surpluses

- Ex. cigarettes (to deter people from buying them or starting to smoke) - Minimum Wage

- US minimum wage is $7.25 per hour

- RI minimum wage is $10.10 per hour

- Is minimum wage good for workers?

- People with jobs get paid more

- Some people left without any job

- Poorly targeted

- Better to use: “Earned Income Tax Credit”

Price Controls distort the signals that guide societies allocation of resources. Prices are the “invisible hand”

Changed incentives → Changed behavior

Elasticity matters!

- If we have inelastic supply, then the shortage would get smaller

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