Chapter 4 Notes
Chapter 4 Notes EC 111
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This 3 page Class Notes was uploaded by Julie Palatella on Thursday January 28, 2016. The Class Notes belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 36 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 01/28/16
Chapter 4 Notes Competitive market: Has many buyers and sellers, each has a negligible effect on price Quantity demanded: (the point on the demand curve) Amount of the good buyers are willing and able to purchase at a specific price. Law of Demand: quantity demanded of a good falls when the price of the good rises When price goes up, quantity goes down When price goes down, quantity goes up Demand Schedule: A table showing the relationship between the price of a good and the quantity demanded On the curve the price is always on the vertical axis and the quantity is always on the horizontal Demand Curve Shifters: Shows how price affects quantity demanded. A change in the price of the good changes the quantity demanded and results in a movement along the demand curve. Demand curve shifts right because of the increase in demand Demand curve shifts left because of decrease in demand Change in income shifts demand curve Normal good = positive relation to income (ex: eating out at a restaurant) o Increase in income causes increase in quantity demanded at each price which shifts the demand curve to the right Inferior good= negative relation to income o An increase in income shifts the demand curve for inferior goods to the left. Substitutes: an increase in the price of one causes an increase in the demand for the other. Ex: increase in the price of Coke increases the demand for Pepsi, shifting the demand curve to the right. Complements: an increase in the price of one causes a fall in the demand of the other. (Things you consume together) Ex: if the price of peanut butter rises, people will buy less peanut butter, therefore less jelly. Jelly demand curve shifts left. Quantity Supplied: (a point on the supply curve) the amount that sellers are willing and able to sell at a specific price. Law of Supply: quantity supplied of a good rises when the price of the good rises Supply Curve Shifters: A change in the price of the good changes quantity supplied and results in a movement along the supply curve. Shift left= decrease in supply Shift right= increase in supply Input prices: fall in input price= more profitable at output price, firms supply large quantities at each price so the supply curve shifts to the right. Ex: wages, price of raw materials Technology/Production: Advancement in technology or anything that increases efficiency automatically shifts the supply to the right. Always makes production better off. Equilibrium: Price has reached the level where quantity supplied = quantity demanded Equilibrium price: the price = quantity supplied with quantity demanded Equilibrium quantity: quantity supplied and quantity demanded at equilibrium price Surplus: Quantity supplied is greater than Quantity Demanded On a graph surplus is above equilibrium- caused by price being too high If there is a surplus the price will automatically start to fall until hitting equilibrium Sellers want to increase sales by cutting price Equilibrium = market clearing (same thing) Ex: Walmart after Halloween, Walmart lowers the price of Halloween candy so they can sell it Shortage: quantity demanded is greater than quantity supplied On a graph it is below equilibrium A shortage is caused by the price being too low Ex: Black Friday ---items being sold too low (only a limited # of people in line get the cheap TV because of the high demand) Prices rise until market hits equilibrium Supply & demand Market is always changing Events = determinants of demand o Taste and preference takes over (even substitutes) Example: Hybrid Cars o If the price of gas rises, people will prefer more fuel efficient vehicles o Demand curve Shifts to the right o Price and quantity both go up o (Know difference between a shift and movement on the curve) Example: Frozen Yogurt o They are substitutes o Milk is an input to ice cream o Price and quantity drops o Milk is cheaper- input price lower- shift to the right because you can make more o Price falls, quantity rises Fall in froyo and fall in milk When Supply and Demand are shifting in the same direction price will be unknown or ambiguous. Quantity has to be changed When Supply and Demand are shifting in opposite directions quantity is unknown/will be unknown Shift vs. Movement Along Curve 1. Change in Supply: shift in supply curve when a non-price determinant of supply changes (technology/costs) 2. Change in quantity supplied: movement along a fixed supply curve occurs when price changes 3. Change in demand: shift in demand curve when non-price determinant of demand changes (income/ # of buyers) 4. Change in quantity demanded: movement along a fixed demand curve only when price changes 5. When supply and demand are shifting in opposite directions quantity will be ambiguous but price will have to change
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