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Principles of Microeconomics Week 3

by: Oya Zaimoglu

Principles of Microeconomics Week 3 ECON 1011

Marketplace > George Washington University > Economcs > ECON 1011 > Principles of Microeconomics Week 3
Oya Zaimoglu
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About this Document

These notes cover the material from the lectures of week 3.
Principles of Microeconomics I
Henry Terrell
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This 3 page Class Notes was uploaded by Oya Zaimoglu on Tuesday January 26, 2016. The Class Notes belongs to ECON 1011 at George Washington University taught by Henry Terrell in Winter 2016. Since its upload, it has received 14 views. For similar materials see Principles of Microeconomics I in Economcs at George Washington University.


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Date Created: 01/26/16
Microeconomics Week 3 The Supply Schedule and the Supply Curve Understanding Shifts of the Supply Curve: 1. Input Prices: A decrease in the price of an input (all else equal) increases profits and encourages more supply (and vice versa). 2. Changes in the Price of Related Goods and Services: Sellers will choose to use inputs whose profit is the highest. Sellers will supply less of a good if its profitability falls (and vice versa). There are substitutes and complements in production processes. Complement in pork processing? –Lard Substitute in corn production? –Cotton 3. Changes in Technology: New, better technology makes sellers willing to offer more at a given price or sell their quantity at a lower price. A technological innovation lowers costs and increases supply. Good technology shifts supply curve out, which is a big deal in shifting the supply curve. 4. Changes in Expectation: The expectation of a higher price for a good in the future decreases current supply of the good –if they cab store the good (and vice versa). 5. Changes in Number of Producers: As producers enter and exit the market, the overall supply changes. Entry implies more sellers in the market, increasing supply. Exit implies fewer sellers in the market, decreasing supply. Finding the Equilibrium Price and Quantity Market equilibrium occurs at point E, where the supply curve and the demand curve intersect. What people want=what producers produce. Why do all sales and purchases in a market take place at the same price? -Where consumers don’t have time to compare prices (tourist traps). Surplus: 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 don’t last: sellers will reduce price so they can move goods off shelves. Shortage: 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. On its own, a market system will head back to equilibrium. What happens when the demand curve shifts? An increase in demand leads to movement along the supply curve due to a higher equilibrium price and higher equilibrium quantity. Demand Demand Price Price 2 Quantity Quantity What happens when the supply curve shifts? A decrease in supply leads to a movement along the demand curve due to a higher equilibrium price and lower equilibrium quantity. Supply Price Quantity How do you know what caused a price change? Look at the outcome: If the price and quantity move together, it was a demand curve. Simultaneous Shifts of Supply and Demand Two opposing forces determining the equilibrium quantity: -The increase in demand dominates the decrease in supply. -The decrease in supply dominates the increase in demand. 3


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