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Chapter 4 Notes

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by: Julie Palatella

Chapter 4 Notes EC 111

Julie Palatella
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The Market Forces of Supply and Demand (Chapter 4)
Principles of Macroeconomics
Class Notes
Macroeconomics, Zirlott




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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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