Chapter 4 Study Guide
Chapter 4 Study Guide Econ 2-01
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This 4 page Study Guide was uploaded by Nolan Shapiro on Tuesday October 13, 2015. The Study Guide belongs to Econ 2-01 at University of California - Santa Cruz taught by Aaron Meininger in Summer 2015. Since its upload, it has received 76 views. For similar materials see Intro to Macroeconomic in Economcs at University of California - Santa Cruz.
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Date Created: 10/13/15
Lecture Notes from Chapter 4 Chapter 4 Key Ideas 1 IN a perfectly competitive market 1 sellers all sell an identical good or service and 2 any individual buyer or any individual seller isn39t powerful enough on his or her own to affect the market price of that good or service price takers 2 The demand curve plots the relationship between the market price and the quantity of a good demanded by buyers 3 The supply curve plots the relationship between the market price and the quantity of a good supplied by sellers 4 The competitive equilibrium price equates the quantity demanded and the quantity supplied 5 When prices are not free to fluctuate markets fail to equate quantity demanded and quantity supplied The market price is the price at which buyers and sellers conduct transactions IN a perfectly competitive market every buyer pays and every seller charges the same price Quantity demanded amount of a good that buyers are willing to purchase at a given price Demand schedule a table that reports the quantity demanded at different prices holding all else equal Demand curve plots the quantity demanded at different prices Market demand curve sum of the individual demand curves Shifts on the demand curve Tastes and preferences 0 Income and wealth availability and prices of related goods 0 number and scale of buyers 0 buyers expectations about the future Only price changes move you along the demand curve and changes the QD Shifts in curve changes Quantity quantity supplied amount of a good that buyers are willing to sell at a given price supply schedule a table that reports the quantity supplied at different prices holding all else equal supply curve plots the quantity supplied at different prices Shifts of the supply curve 0 input prices 0 technology 0 number and scale of sellers seller39s expectations about the future Good changes prices will cause an initial change along the curve Competitive Equilibrium point at which the market comes to an agreement about what the price will be competitive equilibrium price and how much will be exchanged competitive equilibrium quantity at that price Excess demand occurs when consumers want more than suppliers provide at a given price This situation results in a shortage Excess supply occurs when suppliers provide more than consumers want at a given price this is surplus 0le thing that changes quantity supplied and or demanded is price everything else changes the curve if the market doesn39t control the price there will be shortages and surplusss Book Notes from Chapter 4 41 Markets 0 A market is a group of economic agents who are training a good or service and the rules and arrangements for trading 0 ln markets all exchanges occur voluntarily at flexible prices o If all sellers and all buyers face the same price it is referred to as the market price 0 In a perfectly competitive market sellers all sell an identical good or service and any individual buyer or any individual seller isn t powerful enough on his or her own to affect the market price of that good or service 0 A price taker is a buyer or seller who accepts the market price buyers can t bargain for a lower price and sellers can t bargain for a higher price 0 Although many markets aren t perfectly competitive many of them are nearly perfect 42 How do markets behave 0 Quantity demanded is the amount of a good that buyers are willing to purchase at a given price 0 A demand schedule is a table that reports the quantity demanded at different prices holding all else equal 0 Holding all else equal implies that everything else in the economy is held constant The latin phrase ceteris paribus means with other things the same and is sometimes used in economic writing to mean the same thing 0 The demand curve plots the quantity demanded at different prices A demand curve plots the demand schedule 0 Two variables are negatively related if the variables move in the opposite directions 0 Law of demand In almost all cases the quantity demanded rises then the price falls holding all else equal Willingness to pay is the highest price that a buyer is willing to pay for an extra unit of a good Diminishing marginal benefit As you consume more of a good your willingness to pay for an additional unit declines To study the behavior of the worldwide energy market economists study the aggregate demand curves The market demand curve is the sum of the individual demand curves of all the potential buyers lt plots the relationship between the total quantity demanded and the market price holding all else equal 5 shifts in the demand curve 0 changing tastes and preferences ex demand for oil prices would fall if you become convinced global warming is bad 0 The demand curve shifts only when the quantity demanded changes at a given price o If a good s own price changes and its demand curve hasn t shifted the own price change produces a movement along the demand curve 0 changing income or changing wealthex getting a job right out of college 0 For a normal good an increase in income causes the demand curve to shift to the right 0 For an inferior good an increase in income causes the demand curve to shift to the left 0 Changing availability and prices of related goods exif a city cuts the price of public transportation gt less demand for gas 0 Two goods are substitutes when the fall in the price of one leads to a left shift in the demand curve for the other 0 Two goods are complements when the fall in the price of one leads a right shift in the demand curve for the other 0 Changing number and scale of buyers ex small company slashing prices compared to apple 0 Changing buyer39s beliefs about the future ex fear of a recession would cause a decrease in demand for everything 43 How do sellers behave Quantity supplied is the amount of a good or service that sellers are willing to sell at a given price The supply curve plots the quantity supplied at different prices A supply curve plots the supply schedule Two variables are positively related if the variables move in the same direction Law of supply In almost all cases the quantity supplied rises when the price rises holding all else equal As long as an oil producer is paid at least its marginal cost per barrel it should be willing to supply another barrel of oil Willingness to accept is the lowest price that a seller is willing to get paid to sell an extra unit of a good willingness to accepts is the same as the marginal cost of production For an optimizing firm willingness to accept is the same as the marginal cost of production The market supply curve is the sum of the individual supply curves of all the potential sellers it plots the relationship between the total quantity supplied and the market price holding all else equal Shifting the supply curve 0 Changing the prices of inputs used to produce the goods ex if the price of steel goes up car makers will produce less An input is a good or service used to produce another good or service The supply curve shifts only when the quantity supplied changes at a given price If a good s own price changes and its supply curve hasn t shifted the own price change produces a movement along the supply curve Changes in technology used to produce the good ex fracking has caused an increased supply curve changes in the number and scale of seller39s ex war causes people to flee their homes causes a decrease in supply changes in seller s beliefs about the future ex natural gas prices sky rocket bc home heating 44 supply and demand in equilibrium Competitive markets converge to the price at which quantity supplied and quantity demanded are the same The competitive equilibrium is the crossing point of the supply curve and the demand curve When the market price is above the competitive equilibrium price quantity supplied exceeds quantity demanded creating surplus When the market price is below the price qdgtqs creating shortage
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