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Econ 1 Chapter 4 Notes

by: Daniel Ochs

Econ 1 Chapter 4 Notes econ 1

Daniel Ochs

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Chapter 4 Notes
Principles of Economics
Class Notes
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This 5 page Class Notes was uploaded by Daniel Ochs on Thursday April 14, 2016. The Class Notes belongs to econ 1 at University of California - Los Angeles taught by Convery in Spring 2016. Since its upload, it has received 7 views. For similar materials see Principles of Economics in Economcs at University of California - Los Angeles.

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Date Created: 04/14/16
Tuesday, April 12, 2016 Chapter 4 Supply and Demand - Markets and Competition • Supply and Demand are the forces that make market economies work - Determine the quantity of each good produced and the price at which it is sold • Market: group of buyers and sellers of a particular good or service - Buyers determine demand of product - Sellers determine the supply of the product - Markets and Competition • Competitive Market: a market with many buyers and sellers, where each has a negligible effect on the market price • Perfectly competitive market: all goods are exactly the same - Demand: represents the behavior of buyers • Quantity Demand: amount of a good that buyers are willing and able to purchase • Law of Demand: the claim that the unity demanded of a good falls when the price of the good rises Demand Schedule: table which shows the price of a good and the unity demanded • - Demand Curve: graph of the relationship between the price of a good and the quantity demanded Horizontally: how much buyers are willing to purchase at a certain price • • Vertically: highest price buyers are willing to pay for a certain quantity • Consumer Surplus: consumer’s gain from exchange - Total consumer surplus: sum of consumer surplus of all buyers - Demand Shifters (Price: Cause a movement along the D curve) • Income 1 Tuesday, April 12, 2016 - Normal good: a good for which other things equal, an increase in income leads to and increase in demand - Inferior good: a good for which other thing equal, an increase in income leads to a decrease in demand Price of Substituents • - Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the others • Price of Complements - Complements: two goods for which an increase in the price of one, leads to a decrease in the demand for the other • Expectations (about the future) • Population (number of buyers) Tastes • - Supply • Quintet Supplied: amount of a good that sellers are willing and able to sell • Law of Supply: claim that the quantity suppled of a good rises when the price of the good rises, other things equal • Supply Schedule: table that shows relationship between price of a good and the quantity supplied - Supply Curve: graph of the relationship between price of a good and the unity suppled • Horizontally: how much supplies are willing to sell at a certain price • Vertically: minimum price for which suppliers are wiling to sell certain quantities • Producer Surplus: producer’s gain from exchange - Market price - minimum price a producer is willing to sell Total Producer Surplus: area above the supply curve and below the price • - Supply Shifters • Technological Innovations 2 Tuesday, April 12, 2016 • Input Prices • Taxes and Subsidies - Subsidy on production makers sellers willing to supply a greater quantity at a given price - Subsidy on production lowers costs and increases supply • Expectations - Change in producers’ expectations about profitability will affect supply curve • Entry or Exit of Producers - Entry implies more sellers are coming in to the market (increasing supply) - Exit implies fewer sellers in the marker (decreasing supply) Changes in Opportunity Costs • - Producers have the ability to produce other goods - Equilibrium: a Situation in which the market price has reached the level at which unity supplied equals quantity demanded (Qs = Qd) • Equilibrium Price: price that balances unity supplied and quantity demanded Equilibrium Quantity: quantity supplied and the quantity demanded at the • equilibrium price • Surplus: quantity supplied is greater than quantity demanded. • Shortage: quantity demanded is greater than quantity supplied - Law of Supply and Demand: claim that the price of any good adjusts to bring the quantity suppled and quantity demanded for that good into balance - Surplus: excess supply (quantity supplied > quantity demanded) • When facing a surplus, sellers increase sales by cutting prices - Prices continue to fall until market reaches equilibrium • When facing a shortage, sellers raise the price - Prices continue to rise until market reaches equilibrium - Shifting Demand and Supply Curve 3 Tuesday, April 12, 2016 • Increase in demand: equilibrium to change to a higher price and quantity • Decrease in demand: equilibrium to change to a lower price and quantity • Increase in supply: equilibrium to change to a lower price and higher quantity • Decrease in supply: equilibrium to change to a higher price and lower quantity - Terms for Shift Of vs. Movement Along Curve • Change in supply: a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs) • Change in the quantity supplied: a movement along a fixed S curve occurs when P changes • Change in demand: a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers) • Change in the quantity demanded: a movement along a fixed D curve occurs when P changes. • Changing Price causes a change in Quantity = Movement Along the Curve • A shift in a demand (supply) curve is called a “Change in Demand (Supply)” • Movement along a demand (supply) is called a “Change in Quantity Demanded (Supplied)” - Equilibrium and Total Surplus • Equilibrium in a free market yields two important results: - Goods must be produced at the lowest possible cost - Goods must satisfy the highest valued demands • These results indicate that total surplus (both of the consumer and producer) is maximized in free markets - Conclusion • Markets are usually a good way to organize economic activity • In market economies, prices adjust to balance supply and demand • These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources 4 Tuesday, April 12, 2016 - Summary • A competitive market has many buyers and sellers, each of whom has little or no influence on the market price. • Economists use the supply and demand model to analyze competitive markets. • The downward-sloping demand curve reflects the law of demand, which states that the quantity buyers demand of a good depends negatively on the good’s price. • Besides price, demand depends on buyers’ incomes, tastes, expectations, the prices of substitutes and complements, and number of buyers. If one of these factors changes, the D curve shifts. • The upward-sloping supply curve reflects the Law of Supply, which states that the quantity sellers supply depends positively on the good’s price. • Other determinants of supply include input prices, technology, expectations, and the # of sellers. Changes in these factors shift the S curve. • We can use the supply-demand diagram to analyze the effects of any event on a market: - First, determine whether the event shifts one or both curves. - Second, determine the direction of the shifts. - Third, compare the new equilibrium to the initial one. • In market economies, prices are the signals that guide economic decisions and optimally allocate scarce resources. • The intersection of S and D curves determines the market equilibrium. At the equilibrium price, quantity supplied equals quantity demanded. • If the market price is above equilibrium, a surplus results, which causes the price to fall. If the market price is below equilibrium, a shortage results, causing the price to rise. • 5


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