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Econ 201 Ch.4 Reading Notes

by: Samantha Shea

Econ 201 Ch.4 Reading Notes ECON 201

Marketplace > Michigan State University > Microeconomics > ECON 201 > Econ 201 Ch 4 Reading Notes
Samantha Shea
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About this Document

These are some notes that I took while reading chapter 4 of the book.
Micro Economics
Professor Liedholm
Class Notes
Microeconomic, Reading, notes




Popular in Micro Economics

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This 4 page Class Notes was uploaded by Samantha Shea on Friday September 9, 2016. The Class Notes belongs to ECON 201 at Michigan State University taught by Professor Liedholm in Fall 2016. Since its upload, it has received 13 views. For similar materials see Micro Economics in Microeconomics at Michigan State University.


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Date Created: 09/09/16
Chapter  4  Reading  Notes Wednesday,  September   7,  20166:32  PM The  Market  Forces  of  Supply  and  Demand ► Markets  and  Competition • Supply  and  demand:  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  the  demand ○ ○ Sellers  determine  the  supply ○ Markets  can  be  organized  or  not • Price  and  quantity  are  determined  by  all  buyers  and  sellers  as  they  interact  in   marketplace • Competitive  market-­‐ market  in  which  there  are  so  many    buyers  and  so  many   sellers  that  each  has  a  negligible  impact  on  the  market  place ○ Assume  markets  are  perfectly  competitive • To  reach  highest  form  of  competition: 1. Goods  are  all  exactly  the  same 2. Buyers  and  sellers  are  so  numerous  that  no  single  one  has  influence  over   market  price • Monopoly-­‐when  a  market  has  only  one  seller ► Demand • Quantity  demanded-­‐amount  of  any  good  that  buyers  are  willing  and  able  to   purchase   One  thing  that  determines  the  quantity  demanded  of  a  good  is  the  price   ○ of  the  good • Law  of  demand-­‐the  quantity  demanded  of  a  good  falls  when  the  price  of  the   good  rises • Demand  schedule -­‐ a  table  that  shows  the  relationship  between  the  price  of  a   good  and  the  quantity  demanded • Demand  curve-­‐a  graph  of  the  relationship  between  the  price  of  a  good  and  the   quantity  demanded • There  is  individual  demand  and  market  demand ○ To  analyze  how  markets  work  we  need  to  determine  the  market  demand § Market  demand-­‐sum  of  all  the  individual  demands  for  a  particular   good  or  service • Demand  curve-­‐a  graph  of  the  relationship  between  the  price  of  a  good  and  the   quantity  demanded • There  is  individual  demand  and  market  demand ○ To  analyze  how  markets  work  we  need  to  determine  the  market  demand § Market  demand-­‐sum  of  all  the  individual  demands  for  a  particular   good  or  service • Demand  curve  may  not  be  stable  over  time,  it  can  shift ○ Increase  in  demand -­‐shifts  of  demand  curve  to  the  right ○ Decrease  in  deman-­‐change  reduces  the  quantity  demanded  at  every   price  and  shifts  the  demand  curve  to  the  left • Variables  that  shift  the  demand  curve 1. Income ○ If  the  demand  for  a  good  falls  when  income  falls  the  good  is  called  a   normal  good ○ If  the  demand  for  a  good  rises  when  income  finferior    good  is  an good 2. Prices  of  Related  Goods ○ When  a  fall  in  the  price  of  one  good  reduces  the  demand  for  another   good,  the  two  goods  are  called  substitutes § Often  pairs  of  goods  that  are  used  in  place  of  each  other ○ When  a  fall  in  the  price  of  one  good  raises  the  demand  for  another  good,   the  two  goods  are  called  complements § Often  pairs  of  goods  that  are  used  together 3. Tastes ○ Most  obvious  determinant  of  your  demand 4. Expectations ○ Your  expectations  about  the  future  may  affect  your  demand  for  a  good  or   service  today § Ex.  If  you  think  something  will  be  cheaper  the  next  day,  you  may  be   less  willing  to  buy  that  product  today 5. Number  of  Buyers ► Supply • Quantity  supplied-­‐ the  amount  of  a  good  that  sellers  are  willing  and  able  to  sell ○ Determinant  of  quantity  supplied  is  price • Law  of  supply-­‐the  quantity  supplied  of  a  good  rises  when  the  price  of  a  good   rises • Supply  schedule-­‐ a  table  that  shows  the  relationship  between  the  price  of  a   good  and  the  quantity  supplied • Supply  curve-­‐ a  graph  of  the  relationship  between  the  price  of  a  good  and  the   quantity  supplied • Market  supply  is  the  sum  of  the  supplies  of  all  sellers • Increase  in  supply -­‐any  change  that  raises  quantity  supplied  at  every  price  shifts   the  supply  curve  to  the  right • Decrease  in  sup-­‐any  change  that  reduces  the  quantity  supplied  at  every   • Supply  curve-­‐ a  graph  of  the  relationship  between  the  price  of  a  good  and  the   quantity  supplied • Market  supply  is  the  sum  of  the  supplies  of  all  sellers • Increase  in  supply -­‐any  change  that  raises  quantity  supplied  at  every  price  shifts   the  supply  curve  to  the  right • Decrease  in  sup-­‐any  change  that  reduces  the  quantity  supplied  at  every   price  shifts  the  supply  curve  to  the  left • Variables  that  shift  the  supply  curve 1. Input  Prices ○ Inputs  for  ice  cream -­‐ cream,  sugar,  flavoring,  labor  of  workers,  etc. ○ When  the  price  of  one  or  more  of  these  inputs  rises,  producing  ice  cream   is  less  profitable,  and  firms  supply  less  ice  cream 2. Technology ○ Machines  can  reduce  the  amount  of  labor  necessary  to  make  something,   raising  the  supply 3. Expectations ○ If  a  firm  expects  the  price  of  something  to  rise  in  the  future,  it  will  put   some  of  its  current  production  into  storage  and  supply  less  to  the  market   today 4. Number  of  Sellers ► Supply  and  Demand  Together • Equilibrium-­‐ a  situation  in  which  the  market  price  has  reached  the  level  at  which   quantity  supplied  equals  quantity  demanded ○ Supply  and  demand  curves  intersect • Equilibrium  pri-­‐ price  at  this  intersection • Equilibrium  quantit-­‐quantity  at  this  intersection • 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 ○ Also  called  the  market -­‐ clearing  price:  everyone  in  the  market  is  satisfied • Surplus-­‐a  situation  in  which  quantity  supplied  is  greater  than  quantity   demanded ○ Sometimes  called  excess  supply ○ Sellers  respond  by  cutting  their  prices ○ Falling  prices  increase  the  quantity  demanded  and  decrease  the  quantity   supplied § Changes  represents  movementsalongthe  supply  and  demand   curves,  not  shifts • Shortage-­‐a  situation  in  which  quantity  demanded  is  greater  than  quantity   supplied ○ Sometimes  called  a  situation  of  excess  demand ○ With  too  many  buyers  chasing  too  few  goods,  sellers  can  respond  to  the   shortage  by  raising  their  prices  without  losing  sales ○ Price  increases  cause  the  quantity  demanded  to  fall  and  the  quantity   supplied  to  rise supplied ○ Sometimes  called  a  situation  of  excess  demand ○ With  too  many  buyers  chasing  too  few  goods,  sellers  can  respond  to  the   shortage  by  raising  their  prices  without  losing  sales ○ Price  increases  cause  the  quantity  demanded  to  fall  and  the  quantity   supplied  to  rise • Law  of  supply  and -­‐the  claim  that  the  price  of  any  good  adjusts  to  bring   the  quantity  supplied  and  the  quantity  demanded  for  that  good  into  balance • Three  Steps  to  Analyzing  Changes  in  Equilibrium 1. Decide  whether  the  event  shifts  the  supply,  curve,  the  demand  curve,  or  both   curves. 2. Decide  whether  the  curve  shifts  to  the  right  or  left. 3. Use  the  supply -­‐and-­‐demand  diagram  to  compare  the  initial  and  the  new   equilibrium,  which  shows  how  the  shift  affects  the  equilibrium  price  and   quantity. • A  shift  in  the  supply  curve  is  called  a  "change  in  supply" • A  shift  in  the  demand  curve  is  called  a  "change  in  demand" • A  movement  alonga  fixed  supply  curve  is  called  a  "change  in  the  quantity   supplied" • A  movement  alonga  fixed  demand  curve  is  called  a  "change  in  the  quantity   demanded" No  Change  in   Increase  in  Supply Decrease  in  Supply Supply No   Price  =  same Price  =  Down Price  =  Up Change Quantity  =  Same Quantity  =  Up Quantity  =  Down In   Demand Increase   Price  =  Up Price  =  ambiguous Price  =  Up In   Quantity  =  Up Quantity  =  Up Quantity  =   Demand ambiguous Decrease Price  =  Down Price  =  Down Price  =  ambiguous In   Quantity  =  Down Quantity  =   Quantity  =  Down Demand ambiguous


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