Popular in Micro Economics
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This 4 page Class Notes was uploaded by megan bates on Thursday February 5, 2015. The Class Notes belongs to Econ 101 at Washington State University taught by Alejandro Prera in Spring2015. Since its upload, it has received 43 views. For similar materials see Micro Economics in Economcs at Washington State University.
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Date Created: 02/05/15
Econ Chapter 3 Microeconomics is referred to as price theory because it is so concerned with the workings of the price system 0 A system whereby each good and service has a price and which carries out the basic function Learning objectives 0 Understand and illustrate 0 Demand 0 Supply 0 Market equilibrium 0 Understand the difference between a shift and a movement along the curve Predict the effect on prices and quantity from changes in the market Price is an important signal in the market o It tells producers what to do regarding supply o It tells consumers what to do regarding demand 0 The relative value of materials and equipment Assumptions we are making 0 Perfectly Competitive Markets 0 Many buyer and sellers no market power price makers o All goods and services are identical homogenous o No barriers to enter or exit the market driven by policy makers reduction in buyers then turns into a monopoly 0 Perfect information full idea of the quality of the object 0 Not very realistic but a nice way to introduce the market basic and easiest market structure to look at 0 Two variables Price and Quantity 0 What can be controlled the market controls these two variables 0 Determine if changes are a shift or movement along the curve want to get to the bare bones then go from there Demand o If there s no demand then there s no market 0 Consumers determine what goods and services will be produced 0 Consumers are the one s who tell the economy what they want and usually suppliers will make what they want Suppliers will follow what the consumers are demanding We analyze the consumer is willing and able to buy NOT what the consumer wants to buy 0 Consumers are restricted by income scarcity in the face of unlimited wants and needs 0 Prices tell us what goods and services we can afford Quantity Demanded The amount of the good or service a consumer is willing and able to purchase at a given price 0 The higher you charge the lower the demand will be Demand Curve 0 The relationship between the price of a produce and the quantity demanded 0 True for the market Law of Demand Ceteris paribus when the price of product falls the quantity demanded increases 0 The demand by aH the consumers Slopes down and to the right o It is a snapshot 0 Current preferences current income 0 When things change you have to rewrite the demand curve you will be shifting up or down something out of the market 0 Changes of prices will not affect the demand curve Market Demand 0 All consumers 0 Add them together Supply 0 Price will determine whether or not a supplier can at least cover the cost of production marginal cost 0 We assume increasing marginal cost 0 As you produce one more unit of a good or service the cost increases 0 Notice you are not restricted by income you have to at least cover your costs of production You can ask any price after that 0 Ex natural disasters water usually a dollar a bottle but when people need it you can increase your cost for example 5 if there s someone that is willing to buy that 5 bottle of water Quantity Supplied o The amount a rm is willing and able to supply at a given price 0 Positive curve Supply Curve 0 The relationship between the price of a product and the quantity of the product supplied Law of Supply Ceteris paribus an increase in the price leads to an increase in the quantity supplied 0 The supply by all producers of a given good or service Slopes up to the right 0 Increasing marginal costs o It is also a snapshot here and now 0 You can become more efficient redraw your supply curve 0 If price changes you just have to go up or down 0 Natural disaster resources are scarcity you shift to a new supply curve not in this market Equilibrium You need to know what the demand is then the supply then bring it all together Occurs when Quantity Demand is the same as Quantity Supplied 0 One point on the graph when the two lines intersect that is the market equilibrium 0 Market price is on the yaxis Prices below the equilibrium will go down because there is excess items 0 At equilibrium you get rid of all excess and all shortages at this point in time Recap Demand measures the maximum you are willing to pay for a good or service 0 Don t tell anyone what you are willing to pay if you say your max is 10 and if it costs 1001 it s over your max and you wont buy it because it s over your maximum 0 Market demand is the sum of individual demands for a given price 0 Supply measures the minimum you are willing to accept for a good or service 0 Market supply is the sum of individual supply for a given price Change in quantity demanded or supplied Movement along the curve 0 Any changes in price and quantity will lead to a movement along the curves 0 Price and quantity are the two endogenous By the law of demand or supply a change in price leads to an increase decrease in quantity demanded On or supplied Shifts in demand or supply 0 What happens in the model is a change in quantity demanded or quantity supplied the price of the good or service 0 If supply shifts and Demand remains constant then there is a movement along the demand curve a change in quantity demanded o If demand shifts and supply remains constant then there is a movement along the supply curve a change in quantity supplied 0 What shifts demand or supply 0 Outside forces exogenous variables Shifters exogenous variables 0 Demand 0 Income Normal vs Inferior 0 Price of related goods Complements vs Substitutes Tastes or preferences Population and demographics age 0 Expected future prices In ation vs de ation OO Supply 0 Price of inputs 0 Technological change or productivity Positive vs negative change 0 Price of substitutes in production 0 Competition 0 Expected future prices In ation vs de ation Normal good income goes up demand goes up income goes down demand goes down Inferior goods opposite of normal goods Surpluses and shortages o A market is not in equilibrium moves toward equilibrium markets will correct themselves 0 Once a market is in equilibrium it remains in equilibrium 0 When it s not there is a surplus or shortage o Surplus quantity supplied is greater than quantity demanded market price is above equilibrium 0 Shortage quantity demanded is greater than quantity supplied market price is below equilibrium price Change in Demand and Supply 0 When either Demand or supply changes the effect on equilibrium is easy to predict 0 When both Demand and supply change it is harder to predict the effect on equilibrium
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