Econ 2005 Week 3 notes Day 1 and 2
Econ 2005 Week 3 notes Day 1 and 2 Econ 2005
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Popular in Economics
This 6 page Class Notes was uploaded by brianc8 on Sunday September 11, 2016. The Class Notes belongs to Econ 2005 at Virginia Polytechnic Institute and State University taught by Steven C. Trost in Fall 2016. Since its upload, it has received 10 views. For similar materials see Principles of Economics in Economics at Virginia Polytechnic Institute and State University.
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Date Created: 09/11/16
1 Output markets: demand and the command curve a. Demand i. Demand A relationship between the price of a good and the quantity of that goods that consumers are willing and able to buy per period, other things constant (ex. Hot chocolate sales) ii. Quantity Demand The amount of a product that a consumer would buy in a given period if it could buy all it wanted at the current market price iii. Law of demand Price and quantity are inversely related. As price goes up quantity people want to buy goes down b. Substitution and income effects i. As prices of goods rise, people buy less of that good because of the 1. “Substitution effect” As the price of one good rises, people switch from buying that good to buying other goods (usually a substitute) 2. “Income effect” as prices of anything you buy goes up, you feel poorer so you buy less of everything c. Demand in Product/output markets i. Price and quantity demand: the law of demand 1. Demand Schedule a table showing how mu of a given product a household would be willing to buy at different prices 2. Demand curve A graph illustrating how much of a given product a household would be willing to buy at different prices 3. Shift of a demand curve the change that take place in a demand curve corresponding to a new relationship between quantity demand and price of that good 4. Movement along a demand curve the change in quantity demanded brought about by a price change ii. Demand Curve slope downward 1. Law of demand the negative relationship between price and quantity demanded: as price rises, quantity demanded decreases 2. All demand curves will intersect the price axis. For every good there is always a price above which a household will not or cannot pay 3. Demand curves also intersect the quantity axis. Demand in a given period of time is limited, even at zero price. iii. Moving from household demand to market demand 1. Market demand the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service. d. Changes in “quantity demand” vs. “demand” i. Change in price is quantity demand ii. Change in any other factor changes the demand iii. e. A change in society’s demand for a good can be caused by i. A change in consumer's income or wealth 1. Income Sum of all household wages, salaries, profits, interest payments, rents and other forms of earnings given a period of time 2. Wealth or net worth Total value of what a household owns what they owe at one point in time (it is a stock measure) 3. Normal goods goods for which demand goes up when income is higher (ex. CD’s, MP3’s, movies, clothing,etc.) 4. Inferior goods goods for which demand tends to fall when income rises (ex. Potatoes, ramen noodles, used cars, etc.) ii. A change in the price of other available products 1. Perfect substitutes identical or interchangeable products 2. Complementary goods a decrease price of one results in the increase demand of the other (ex. Peanut butter and Jelly) iii. A change in consumers tastes iv. A change in consumers expectations about things like future income or prices 1. Ex. If you think you’ll lose your job in a month you won’t buy a new car v. A change in the number of composition of consumers 1. Ex. More elderly = higher demand for adult diapers 1 Output markets: supply and the supply curve a. Price and quantity supplied: the law of supply i. Quantity supplied the amount of a particular product that a firm will be willing and able to offer for sale at a particular price during a given period ii. Supply A relation between the price of a goods and the quantity that firms are willing and able to sell per period, other things constant iii. Law of supply the positive relationship between price and quantity of a good supplied : an increase in market price will lead to an increase in market price and a decrease in price will lead to decrease in quantity b. Supply in product and output markets i. Supply schedule a table showing how much of a product firms will sell at different prices 1. ii. Market supply the sum of all that is supplied each period by all producers of a single product c. Shift of a supply curve vs. movement along a supply curve i. Movement along a supply curve the change in quantity supplied brought about by change in price ii. Shift of a supply curve the change that takes place in a supply curve corresponding to a new relationship between quantity supplied of that good and price, brought by change in original conditions 2. Supply curve a. Supply curve a graph illustrating how much of a product a firm will sell at different prices i. Supply curves are usually smooth upward sloping lines ii. Supply curves can be vertical is there is only one of something 1. No matter how high the price goes, there can never be any more than one supplied iii. Supply curves can also be L shaped 1. Say tickets for a concert are $25 but they cannot sell more than the capacity of the club (1200 people). b. 5 things that affect the supply (only price moves us along supply curve) i. Change in technology a breakthrough would cause the supply curve to shift right. (ex. Henry Ford and the assembly line) ii. A change in the price of inputs an increase in the price of cheese would cause the supply curve of pizzas to shift left iii. Change in the price of other alternative goods If you own a dairy and the price of skim milk increases, you and other producers would increase production of skim milk. To do this, you would have to make less chocolate milk at any given price, causing the supply curve for chocolate milk to shift left iv. Change in producer's expectations if producers think their product will become very popular in the future, they will withhold or decrease supply today so they will have more left over to sell tomorrow v. Change in the number of producers if more firms start making a good, supply will shift out, all else equal. 3. Market Equilibrium a. Equilibrium the condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change i. Need curves to be intersecting—at that point, quantity supplied is equal to quantity demanded. b. Excess demand or shortage the condition that exists when quantity demanded exceeds quantity supplied at the current price i. c. Excess supply or surplus the condition that exists when quantity supplied exceeds quantity demanded at the current price i. 4. Supply and demand model a. Adjustment in the supply and demand model i. model predicts that in a pure market there will be no sustained surpluses or shortages. ii. That is the price will adjust over time to allow the market to reach equilibrium. iii. This does not mean that all markets clear immediately, some take time to adjust. (ex. the housing market) 1. People do not want to sell their house for less than they bought it for. Due to this, prices take a REALLY long time to adjust to surpluses