Economics 1051 Chapter 3
Economics 1051 Chapter 3 Economics 1051
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This 6 page Class Notes was uploaded by Ashley Albers on Thursday February 4, 2016. The Class Notes belongs to Economics 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Spring 2016. Since its upload, it has received 11 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.
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Date Created: 02/04/16
Chapter 3: Demand, Supply, and Market Equilibrium Markets Interaction between buyers and sellers (producers and consumers) Markets may be: o Local o National o International (world wide market) o Also could be virtual and not be a physical market Price is discovered in the interactions of buyers and sellers o Buyers want to buy at lowest price but the sellers want to make a profit so there’s a conflict of interest… through the interaction both sides dictate the price not just one or the other Demand (buyer side) Schedule or curve Amount (cost of a certain good) consumers are willing and able to purchase at some given price Individual demand (what each individual is willing to buy at individual price) Market demand o Sum of the quantity of what all the consumers want Ice Cream example o Individual demand If $10 only one of the three people would buy; if $5 two would buy two per week and one would buy one a week; if $2 two would buy five per week and one would buy four per week; if $.50 one would buy 14 per week and one 7 per day and the last 21 per week. (Demand schedule for each consumer) o Market demand $10 – 1; $5 – 5; $2 – 14; $.50 – 42 Law of demand: willing to buy more as price drops but buying less as price goes up (negative relationship between price and quantity) o Law because applies to every consumer o Other things equal, as price falls, the quantity demanded rises, and as price rises the quantity demanded falls o Demand curve: as price decreases quantities increase Figure 1http://www.crawfordsworld.com /rob/ape/APEMcConnellNotes/M1 McConnell003.htm Right shift relates to increase in demand Left shift relates to decrease in demand Changes in Demand o What could be a factor that could change the demand for ice cream? o Change in consumer tastes and preferences Diet? Weather? Income? o Change in number of buyers o Change in income Normal goods (cars) More money you have the better cars you want, the more entertainment you want) Inferior goods (fast food, old navy) When you make more money you start going to other stores instead of discount options (Normal and inferior goods could change based on the person) o Change in prices of related goods Complements (DVD discs and DVD players, hot dogs and buns) DVD prices go up so demand goes down and DVD players go down to supplement The price of one will decide the other Substitutes (Pepsi and coke, Ford trucks and GM trucks) Demand for coke will go up if Pepsi’s prices go up and vice versa Price will effect demand of other good o Changes in consumers expectations Future prices Relates more to bigger purchase rather than impulse purchase Change in Demand Will there be a sale or discount? Vs. Quantity Future incomes Demanded Savings accounts, how much they’re saving for Change in demand is their future the change in any Example if you think you’ll have a steady job variable not for a few years then you may take on a new car including price where payment, versus if you’re struggling then you as change in will want a cheaper car payment for a less quantity demanded fancy car relates to the price. When there’s a change in demand we move the entire curve left or right - What will increase the demand for a good? – The increase of a substitute good - When an economist says that the demand for a product has decreased this means consumers desire to purchase less of the product Changes in Quantity Demanded o Change in demand is a shift of the demand curve o Change in quantity demanded is a movement from one point to another point on a fixed demand Supply Schedule or curve o As you sell more you up the price The amount producers are willing to sell Law of Supply: o As price goes up sellers always want to sell more at the higher price o It’s a law because it applies to almost everyone/thing o Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls o Reason: Price acts as an incentive to producers (profit = goal) more reward more production Figure 2https://www.quora.com/Will- At some point, cost will rise there-be-a-change-in-supply- Determinants of supply with-decrease-in-price-of- o A change in resource prices substitute-goods Higher price in resources they will produce less o A change in technology If they discover a better way of making it they will produce more because its either easier or cheaper or both o A change in the number of sellers o A change in taxes and subsidies How much businesses taxes they have to pay when they sell it will change how much they make Subsidies give you money for your sales o A change in price of other goods Supply of laptops will decrease because apply can sell more iPhones for a higher price o A change in producer expectations If they think the sales will decrease they will try to sell as many as they can now before the demand crashes What would decrease the market supply of cars in the US? – auto workers union going on strike and successfully bargain for higher wages Changes in quantity supplied o Change in supply is a shift in the supply curve o Change in the quantity supplied represents a movement along a supply curve o “Other factors”, determine the position of supply curve (where is it going to be?) o Price of the good or service determines a point or specific location on a given supply curve Market Equilibrium Equilibrium occurs where the demand curve and supply curve intersect o The interaction between the buyer and seller decides the price ultimately, If you asked the seller they’d bump the price if you asked the buyer they’d lower the price so it has to be the interaction between both of them At equilibrium price, quantity demanded equals to quantity supplied. That is, market clears Surplus and shortage o Sellers have a surplus if the quantity of supply exceeds the quantity of demand o There would be a shortage if the demand is higher then the quantity supplied (quantity demanded exceeds quantity supplied) Only time there wont be shortage if the market clears If there’s a large line every morning they will raise the price because everyone will want to get one of the limited cups of coffee o We shouldn’t expect surpluses and shortages because the competition will almost always end up in equilibrium Government set prices o Price control – when the government intervenes and sets prices by law o Price Ceilings Set below equilibrium price Cant set prices higher than government says Think prices are too expensive for consumers to afford Has to be set below equilibrium: say equilibrium is 5 the price ceiling will be set at like 3 Rationing problem Black markets Side effect of government interference Bribes and under table payments, underground economy Terrible quality Another side effect If you’re a property owner and there’s a price ceiling, there’s no pressure to improve quality since there’s such a huge waiting list for apartments If market is at equilibrium and it was in terrible quality you could go somewhere else but in a shortage there’s no where else to go Example: rent control College town, so many students only limited amount of apartments o Price floors Prices are set above the market price Chronic surpluses Example: Minimal wage laws Selling your service, your labor so government says you cant be paid less than this Example: agricultural price subsidies (supports) Artificially increases prices of milk, cheese, etc. Because of price floors, quantity demanded decreases and farmers will produce more since they are paid more per corn sale How do these events effect the market demand of corn US government now mandates that regular gas should have at least 20% ethanol o Increases demand for corn (right) Us government now mandates that seasonal workers now should be paid at least minimum wage o Decrease in supply because cost of workers is more In this case the effect on quantity depends on relative magnitudes of change, effect of price is the same regardless of supply and demand change *Red text are the clicker questions*
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