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Supply and Demand

by: Danielle White

Supply and Demand Economics 222

Danielle White

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About this Document

These notes cover Chapter 3, and Week 2 of Notes
Principles of Macroeconomics
Marian Manic
Class Notes
25 ?




Popular in Principles of Macroeconomics

Popular in Economcs

This 4 page Class Notes was uploaded by Danielle White on Tuesday January 19, 2016. The Class Notes belongs to Economics 222 at University of South Carolina taught by Marian Manic in Spring 2016. Since its upload, it has received 25 views. For similar materials see Principles of Macroeconomics in Economcs at University of South Carolina.


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Date Created: 01/19/16
January 20, 2016 A Competitive Market has many buyers and sellers of the same good and services, none of whom can influence the price. The Supply and Demand model is a model of how a competitive market behaves. Demand represents the behavior of buyers. A demand curve shows the quantity demanded at various prices. The quantity demanded: the quantity the buyers are willing (and able) to purchase at a particular price. “a change in demand” is NOT the same as “a change in quantity demanded” Shift to the right- demand increase Greater willingness to pay for the same quantity Higher quantity demanded at same price Shift to the left- demand decreases Lower willingness to pay for the same quantity Less quantity demanded at same price Shift on the line is a change in quantity demand Effected by prices: o Price decrease- quantity demand increases o Price increases- quantity demand decreases The Law of Demand- a higher price for a good or service leads people to demand a smaller quantity TOP HAT QUIZ Important Demand Shifters:  Changes in the prices of related goods or services o Two goods are substitutes if a decrease in the price of one leads to a decrease in demand for the other (or vise versa) o Two goods are complements if a decrease in the price of one good leads to an increase in the demand for the other (or vice versa)  Changes in income o The effect of changes in income on demand depends on the nature of the good in question o A normal good: Demand increases when income increases (and vice versa)  Something luxurious such as a car or vacation o An inferior good: Demand decreases when income increases (and vice versa)  Something that isn’t as desirable such as a used textbook, or used computer (Because you can afford a normal good)  Changes in tastes o Tastes and preferences are subjective and vary among customers i.e. fashion  Changes in expectations o If consumers have a choice about the timing of a purchase, they buy according to expectation  Buyers adjust current spending in anticipation of the direction of future prices in order to obtain the lowest possible price.  Changes in number of consumers o As the population of an economy changes, the number of buyers of a particular good also changes (thereby changing its demand). Supply represents the behavior of sellers. A supply curve shows the quantity supplied at various prices. The quantity supplied is the quantity that producers are willing and able to sell at a particular price. Shifts along the curve: As prices rise, the quantity supplied rises/increases. As prices decrease, the quantity supplied decreases. An increase in supply means a rightward shift of the supply curve. A decrease in supply means a leftward shift of the supply curve. Important supply shifters include changes in:  input prices. 1. A decrease in the price of an input (all else equal) increases profits and encourages more supply (and vice versa).  the prices of related goods or services. 1. i.e. When the price of cotton drops, the supply of blue jeans increases.  technology. 1. A technological innovation lowers costs and increases supply.  expectations. 1. The expectation of a higher price for a good in the future decreases current supply of the good – if they can store the good (and vice versa).  the number of producers. 1. A change in producers’ expectations about profitability will affect supply curves. 2. Windmill production increases as producers expect sales and profitability to increase. There is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level. Surpluses do not last: sellers will reduce price so they can move goods off the shelves. There is a shortage when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level. Shortages do not last: sellers will increase price to increase revenue.


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