Week 3 - Principles of Microeconomics Reading Notes
Week 3 - Principles of Microeconomics Reading Notes ECON:1100:0AAA
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This 6 page Class Notes was uploaded by Kelsy Lartius on Sunday February 8, 2015. The Class Notes belongs to ECON:1100:0AAA at University of Iowa taught by Stacey Brook in Spring2015. Since its upload, it has received 487 views. For similar materials see Principles of Microeconomics in Economcs at University of Iowa.
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Date Created: 02/08/15
Microeconomics Week 3 Reading Notes Chapter 4 Reading The Market Forces of Supply and Demand 0 supply and demand are the forces that make market economies work 0 they determine the quantity of each good produced and the price at which it is sold Markets and Competition 0 the terms supply and demand refer to the behavior or people as they interact with one another in competitive markets 0 What is a Market 0 market a group of buyers and sellers of a particular good or service I the buyers determine the demand I the sellers determine the supply 0 markets take many forms I highly organized 0 Le markets for agricultural commodities 0 they meet at a specific time and place where an auctioneer helps set prices and arrange sales I less organized 0 Le the market for ice cream in a specific town 0 buyers don39t meet together 0 sellers are in different locations and offer somewhat different products 0 What is Competition 0 most markets in the economy like the market for ice cream are highly competitive 0 because each buyer knows there are several sellers to choose from and each seller is aware their product is similar to that offered by other sellers the price and quantity of ice cream sold are not determined by any single buyer or seller but by all buyers and sellers as they interact in the marketplace o competitive market a market in which there are many buyers and many sellers so that each has a negligible impact on the market price 0 perfectly competitive markets I 1 the goods offered for sale are all exactly the same I 2 the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price 0 monopoly the seller in a market that is dominated by this one seller the seller sets the price Demand 0 The Demand Curve The Relationship between Price and Quantity Demanded 0 quantity demanded the amount of a good that buyers are willing and able to purchase I the price of the good is the key determinant of the quantity demanded 0 law of demand the claim that other things being equal the quantity demanded of a good falls when the price of the good rises o demand schedule a table that shows the relationship between the price of a good and the quantity demanded o demand curve a graph of the relationship between the price of a good and the quantity demanded I price on vertical axis I quantity demanded on horizontal axis I the demand curve slopes downward because other things being equal a lower price means a greater quantity demanded 0 Market Demand versus Individual Demand 0 market demand the sum of all the individual demands for a particular good or service 0 Shifts in the Demand Curve 0 if something happens to alter the quantity demanded at any given price the demand curve shifts I ie the American Medical Association discovers people who regularly eat ice cream live longer healthier lives This discovery would raise the demand for ice cream so the demand curve would shift 0 increase in demand any change that increases the quantity demanded at every price shifts the demand curve to the right 0 decrease in demand any change that reduces the quantity demanded at every price shifts the demand curve to the left 0 many variables that can shift the demand curve I Income 0 normal good a good for which other things being equal an increase in income leads to an increase in demand direct relationship 0 inferior good a good for which other things being equal an increase in income leads to a decrease in demand inverse relationship I Prices of Related Goods 0 substitutes two goods for which an increase in the price of one leads to an increase in the demand for the other ie price of froyo falls below price of ice cream and since these are very similar we will start buying more froyo than ice cream according to the law of demand 0 complements two goods for which an increase in the price of one leads to a decrease in the demand for the other 0 often complements are pairs of goods that are used together such as gas and cars computers and software and peanut butter and jelly I Tastes if you like it you buy more of it economists don39t analyze this bc it depends on historical and psychological forces however they do examine what happens when tastes change I Expectations 0 your expectations about the future may affect your demand for a good or service today 0 if you expect to get a higher income next month you may save less and buy more now I Number of Buyers 0 quantity demanded at every price goes up if the number of buyers goes up market demand would increase Supply 0 The Supply Curve The Relationship between Price and Quantity Supplied 0 quantity supplied the amount of a good that sellers are willing and able to sell I many determinants of quantity supplied with price playing a special role in the analysis I when price of ice cream is high selling is profitable so the quantity supplied is large I when price of ice cream is low the business is less profitable so the quantity supplied is less 0 Professor Brook disagrees With this law law of supply the claim that other things being equal the quantity supplied of a good rises when the price of the good rises 0 supply schedule a table that shows the relationship between the price of a good and the quantity supplied 0 supply curve a graph of the relationship between the price of a good and the quantity supplied 0 Market Supply versus Individual Supply 0 market supply is the sum of all sellers 0 Shifts in the Supply Curve 0 increase in supply any change that raises quantity supplied at every price shifts the supply curve to the right 0 decrease in supply any change that reduces the quantity supplied at every price shifts the supply curve to the left 0 many variables that can shift the supply curve I Input Prices 0 inputs are things that are needed to produce the good ie for ice cream sugar cream buildings where the ice cream is made workers to operate the machines etc 0 when the price of one or more of these inputs rises the production of the good is less profitable so firms supply less o if input prices rise substantially a firm may shut down and not supply any product I Technology 0 Le invention of the mechanized ice cream machine reduced the amount of labor necessary to make ice cream 0 the advance in technology raises the supply of the ice cream I Expectations 0 if a firm expects the price of ice cream to rise in the future it will put some of its current production into storage and supply less to the market today I Number of Sellers 0 market supply depends on the number of sellers if the number of sellers decreases supply decreases Supply and Demand Together 0 Equilibrium o equilibrium a situation in which the market price has reached the level at which quantity supplied equals quantity demanded o equilibrium price the price that balances quantity supplied and quantity demanded 0 At the equilibrium price the quantity of the good that buyers are Willing and able to buy exactly balances the quantity that sellers are Willing and able to sell 0 equilibrium price sometimes called the marketclearing price because at this price everyone in the market buyers and sellers has been satisfied 0 The Equilibrium of Subply and Demand Edce 4 Summit V quuiIibrium Equlibrium Pith45 39 l I I l l I 3 imam l Equ librilJl39Ilu39l Uuamity iDIIarIti ty39 o surplus a situation in which quantity supplied is greater than quantity demanded I sometimes called a situation of excess supply I sellers respond to the surplus by cutting their prices which then results in an increase in the quantity demanded and a decrease in the quantity suppHed O I these changes represent movements along the supply and demand curves not shifts I prices will fall until the market gets to equilibrium shortage a situation in which quantity demanded is greater than quantity suppHed I sometimes called a situation of excess demand I sellers can respond by raising prices without losing sales because there is such a high demand for the product I again these changes represent movements along the supply and demand curves not shifts I the price increases cause the quantity demanded to fall and the quantity supplied to rise the activities of the buyers and sellers automatically push the market price toward equilibrium price law of supply and demand the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance 0 Three Steps to Analyzing Changes in Equilibrium O O equilibrium price and quantity depend on the position of the supply and demand curves 1st step decide whether the event shifts the supply or demand curve or perhaps both 2nd step decide whether the curve shifts to the right or to the left 3rd step use the supplyanddemand diagram to see how the shift changes the equilibrium price and quantity Example A Change in Market Equilibrium Due to a Shift in Demand I Scenario Hot weather arrives and drives up the demand for ice cream I demand curve is affected because more people want ice cream since it s hot out I supply curve is not affected hot weather doesn t affect the ice cream firms I demand curve shifts to the right the quantity demanded is higher at every price I supply curve does not move I hot weather increases the price of ice cream and the quantity of ice cream sold Shifts in Curves versus Movements along Curves I a shift in the supply curve is a change in supply I a shift in the demand curve is a change in demand I a movement along a fixed supply curve is a change in quantity suppHed I a movement along a fixed demand curve is a change in quantity demanded 0 Example A Change in Market Equilibrium Due to a Shift in Supply Scenario A hurricane destroys part of the sugarcane crop and drives up the price of sugar change in price of sugar an input for ice cream affects the supply curve it s more expensive for firms to produce ice cream so supply decreases demand curve is not affected higher cost of inputs does not directly affect the amount of ice cream people want to buy supply curve shifts to the left the amount that firms are willing and able to sell is reduced demand curve does not move sugar price increases so the price of ice cream increases and the quantity sold falls 0 Example Shifts in Both Supply and Demand Scenario Heat wave and a hurricane occur during the same summer Both curves shift Hot weather affects the demand curve and the hurricane affects the supply curve Demand curve shifts to the right supply curve shifts to the left two possible outcomes equilibrium price rises in both cases 0 demand increases substantially while supply falls just a little equilibrium quantity also rises 0 supply falls substantially while demand rises a little equilibrium quantity falls I price will rise but amount of ice cream sold could go either way 0 What happens to price and quantity when supplydemand shifts No Change in Increase in Decrease in Supply Supply Supply No Change in P gt same P gt down P gt up Demand Q gt same Q gt up Q gt down Increase in P gt up P gt either way P gt up Demand Q gt up ambiguous Q gt ambiguous Q gt up Decrease in P gt down P gt down P gt ambiguous Demand Q gt down Q gt ambiguous Q gt down
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