Supply and Demand notes
Supply and Demand notes Econ 22060-002
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This 5 page Class Notes was uploaded by Jacquelyn McGee on Wednesday February 3, 2016. The Class Notes belongs to Econ 22060-002 at Kent State University taught by Jeremiah Harris in Spring 2016. Since its upload, it has received 69 views. For similar materials see Microeconomics in Economcs at Kent State University.
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Date Created: 02/03/16
Supply and Demand Notes 2/1/16 Economic Profit: is the difference between what we get and what we give up Three slide summary from last class Slope of the line is what we give up over what we get which equals marginal cost of the x axis good. Points on the frontier are efficient Production efficiency: producing at lowest cost(on the curve) Allocative efficiency: Using resources where they have highest value Demand and Supply Diminishing marginal return: the tendency for additional units to provide less satisfaction than previous units Demand: Maximum quantity a consumer is willing and able to purchase at various prices Law of demand: inverse relationship between price and quantity demand; ie higher price, less demanded o Generally we assume a liner relationship between price (P) and quantity demanded (Qd) o Qd=mP+b ;quantity demanded =slope*price+ y-intercept o P=mQd+b ;price=slope*quantity demanded+ y-intercept o When price is on the y use the P= equation o When Qd is on the y use the Qd= equation Demand as Marginal benefit The demand gives us the marginal benefit of the last good purchase Value of the good = marginal benefit Inverse relationship; the quantity goes up and the marginal benefit then goes down Changes in demand Movements along the demand curve are caused by a change in price o Decrease in demand, the graph shifts left o Increase in demand, the graph shifts right What causes Changes in Demand? 5 Main Factors o The process of related goods Substitutes: goods that are related to each other; ie Nike and adidas Definition: of the price increases for one good the demand of another good then increases: the curve sifts outward Compliments: goods that are used together Definition: The price increase for the one good increases then the demand for another good decreases; curve shifts inward Example of this is if the price of milk increases the demand for cereal will decrease o Income Normal Good: good where demand rises when income rises and falls when income falls Inferior Good: good where demand rises when income falls and demand falls when income rises o Expectations Price Expected price to rise and see an increase current demand Expect price to fall and see a decrease in current demand Income Expect income to rise Demand for normal goods increase and demand for inferior goods decrease o Number of buyers More buyers, demand increases Less buyers, demand decreases o Tastes and preferences Consider extremes; ie iPod vs. Walkmen Supply Supply is the maximum quantity a seller is willing and able to sell at various prices(P=Mc; price=marginal cost) The Law of Supply is the positive relationship between price and quantity supplied; ie higher prices result in more goods supplied Similar to demand, we usually assume a liner relationship between price and quantity supplied (Qs) Supply as Marginal Cost Marginal cost is the cost of producing one or more units of a good Supply price=Marginal Cost Positive slope of supply implies that marginal cost is increasing while the output is increasing The lowest price a seller would be willing to take is a price that just covers the cost of production(marginal cost of production) Changes in Supply As supply increases the graph shifts to the right o Supply more at every price level o Supply increases causes marginal cost decreases As supply decreases the graph shifts to the left o Supply less at every price level o Decrease in supply causes an increase in marginal cost Causes of Supply Changes The prices of Factors of Production or the input price The prices of related goods being produced The number of suppliers State of nature Expected Future prices Technology Changes in Supply Continued Input prices o Increase wages paid to labor causes a decrease in supply(shift left) o Decrease in wages paid to labor causes an increase in supply(shift right) Expectations o Price Expect price to rise as the current supply decreases Expect price to fall as the current supply increases Prices of related good in production; the prices other goods the firm produces with the same resources o Substitutes in production; goods that can be produced by using the same resources o Example would be corn and soybeans because they both require farmland The price of soybeans increases then the supply of corn decreases because as the price of soybeans increase the farmers are going to choose to designate more of their farmland to soybeans over corn the value of the next best alternative to corn increases thus there is an increase in the opportunity cost of corn Complements in Production: two goods produced at exactly the same time; good that must be produced together(by-products) o Example would be beef and leather As the price of beef increases then the supply of leather increases Leather is a by-product of beef Number of suppliers o More sellers increases the supply o The fewer sellers decreases the supply Technology o Advances in technology creates new products and lower the cost of producing existing products o The changes in marginal cost of production o A decrease in costs causes an increase in supply State of Nature o Production influenced by weather events Combine Supply and Demand Market Equilibrium Equilibrium: a situation in which opposing forces balance each other; equilibrium in market occurs when the prices balances the plans of buyers and sellers Equilibrium Price: The price at which the quantity demanded equals the quantity supplied. (P*) Equilibrium Quantity: The quantity bought and sold at the equilibrium price. (Q*) Market Equilibrium The following are Demand/Supply Functions to be considered o Qd=mP+inverse slope; the quantity demanded=slope*Price+inverse slope o Qs=mP+inverse slope; the quantity supplied=slope*price+inverse slope Solve for P P is the y and b is is the inverse slope not the y-intercept in this case An increase in demand o The price rises, and the quantity supplied increases along the supply curve Shortage/Surplus Shortage: not enough supply to meet needs o Qs<Qd o P<P* o Price will serve as the regulator and price will rise until P=P* Surplus: More supply then demand o Qs>Qd o P>P* o Price will fall until P=P* Predicting Changes in Price and Quantity An increase in Supply o The price falls, and the quantity demanded increases along the demand curve All possible changes in demand and supply o A change in demand, supply, or both changes the equilibrium price and the equilibrium quantity Changes in demand with no change in supply o When demand increases, equilibrium price rises and the equilibrium quantity increases o When demand decreases, the equilibrium price falls and the equilibrium quantity decreases Changes in supply with no changes in demand o When supply increases, the equilibrium price falls and the equilibrium quantity increases o When supply decreases, the equilibrium price rises and the equilibrium quantity decreases Increase in both demand and supply o An increase in demand and an increase in supply increases the equilibrium quantity o The change in equilibrium price is uncertain because the increase in demand raises the equilibrium price and the increase in supply lowers it Decrease in both supply and demand o A decrease in both supply and demand decreases the equilibrium quantity o The change in equilibrium price is uncertain because the decrease in demand lowers the equilibrium price and the decrease in supply raises it Decreases in demand and increase in Supply o A decrease in demand and an increase in supply lowers the equilibrium price o The change in equilibrium quantity is uncertain because the decrease in demand decreases the equilibrium quantity and the increase in supply increases it Increase in demand and decrease in supply o An increase in demand and a decrease in supply raises the equilibrium price o The change in equilibrium quantity is uncertain because the increase in demand increases the equilibrium quantity and the decrease in supply decreases it.