Economics Chapter 3
Economics Chapter 3 2201
Popular in Principles of Economics I
Popular in Macro Economics
This 7 page Class Notes was uploaded by Taylor Notetaker on Tuesday September 13, 2016. The Class Notes belongs to 2201 at University of Northwestern - St. Paul taught by Gwen Cossin in Fall 2016. Since its upload, it has received 3 views. For similar materials see Principles of Economics I in Macro Economics at University of Northwestern - St. Paul.
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Date Created: 09/13/16
Video Notes: (https://youtu.be/g9aDizJpd_s) ● Market any place where buyers and sellers meet to exchange goods and services ● The key to markets is voluntary exchange buyers and sellers willing to make a transaction ● Ex. you buy strawberries from a farmer at a farmers market you benefit from the strawberries more than the money and he benefits from the money more than the strawberries ● Markets are everywhere and most are based off of voluntary exchange ● In a free market every dollar that is spent signals the producer what should be produced and how it should be produced ● The law of demand when the price goes up people buy less, when the price is less people buy more ● The law of supply if price goes up than farmer will make more profit, if the price goes down than the farmer will not want to produce any ● Surplus ● Shortage ● Equilibrium price quantity supplied = quantity demanded ● Equilibrium quantity the quantity demanded or supplied at the equilibrium price ● Outside factors can contribute to the changes ● Four market behaviors ○ Supply can decrease ○ Supply can increase ○ Demand can decrease ○ Demand can increase ● Ex of supply and demand gas prices shifting prices all the time ● Free markets cannot solve all our problems; sometimes they need to be regulated and sometimes avoided ● Our own actions influence supply and demand Chapter 3 Demand and Supply I. 3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services ○ Terms ■ demand curve a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis ■ demand schedule a table that shows a range of prices for a certain good or service and the quantity demanded at each price ■ Demand the relationship between price and the quantity demanded of a certain good or service ■ equilibrium price the price where quantity demanded is equal to quantity supplied ■ equilibrium quantity the quantity at which quantity demanded and quantity supplied are equal for a certain price level ■ Equilibrium the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change ■ excess demand at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage ■ excess supply at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus ■ law of demand the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant ■ law of supply the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant ■ Price what a buyer pays for a unit of the specific good or service ■ quantity demanded the total number of units of a good or service consumers are willing to purchase at a given price ■ quantity supplied the total number of units of a good or service producers are willing to sell at a given price ■ Shortage at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand ■ supply curve a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis ■ supply schedule a table that shows a range of prices for a good or service and the quantity supplied at each price ■ Supply the relationship between price and the quantity supplied of a certain good or service ■ Surplus at the existing price, quantity supplied exceeds the quantity demanded; also called excess supply ○ Notes ■ Demand for Goods and Services ● Demand is based on needs and wants as well as ability to pay ● Rise in price=decreased quantity demand, fall in price=rise in quantity demand (law of demand) ● Demand schedule and demand curve are two ways of describing the relationship between price and quantity demanded ● Nearly all demand curves share the fundamental similarity that they slope down from left to right ● Demand curves embody the law of demand ○ Demand refers to the curve and quantity demanded refers to the specific point on the curve ■ Supply of Goods and Services ● Rise in price=rise in quantity supplies, fall in price=decreased quantity supplied (law of supply) ● supply refers to the curve and quantity supplied refers to the specific point on the curve ● Supply schedule is a table ● Supply curve is a graphic illustration ● Nearly all supply curves, however, share a basic similarity; they slope up from left to right and illustrate the law of supply ■ Equilibrium ● Equilibrium price=price that consumers and producers agree ● Equilibrium quantity is when quantity demanded=quantity supplied ● Equilibrium means balance II. 3.2 Shifts in Demand and Supply for Goods and Services ○ Terms ■ ceteris paribus other things being equal ■ Complements goods that are often used together so that consumption of one good tends to enhance consumption of the other ■ factors of production the combination of labor, materials, and machinery that is used to produce goods and services; also called inputs ■ inferior good a good in which the quantity demanded falls as income rises, and in which quantity demanded rises and income falls ■ Inputs the combination of labor, materials, and machinery that is used to produce goods and services; also called factors of production ■ normal good a good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls ■ shift in demand when a change in some economic factor (other than price) causes a different quantity to be demanded at every price ■ shift in supply when a change in some economic factor (other than price) causes a different quantity to be supplied at every price ■ Substitute a good that can replace another to some extent, so that greater consumption of one good can mean less of the other ○ Notes ■ Factors that Affect Demand ● Price ● Desire (tastes and preferences or wants and needs) ● Ability to purchase (income) ● Size or composition of population ○ Ex. more children in a family=more demand for diapers and clothing ■ The Ceteris Paribus Assumption ● The assumption behind a demand curve or a supply curve is that no relevant economic factors, other than the products price, are changing ● A latin phrase meaning “other things being equal” ● The amount consumers buy falls for two reasons; first because of the higher price and second because of the lower income ■ How does income affect demand ● When a demand curve shifts, it does not mean that the quantity demanded by every individual buyer changes by the same amount ● A shift in a demand curve captures an pattern for the market as a whole ● When income increases, the demand curve shifts to the left ■ Other factors that shift demand curves ● Other things that change demand include tastes and preferences, the composition or size of the population, the prices of related goods, and even expectations ● A higher price for a substitute good has the reverse effect ■ How Production Costs Affect Supply ● When costs of production fall, a firm will tend to supply a larger quantity at any given price for its output ● If a firm faces higher costs of production, then it will earn lower profits at any given selling price for its products ● A higher cost of typically causes a firm to supply a smaller quantity at any given price ■ Other factors that affect supply ● Other things such as changes in weather or natural conditions, new technologies for production, and some government policies III. 3.3 Changes in Equilibrium Price and Quantity: The FourStep Process ○ Terms ■ None IV. 3.4 Price Ceilings and Price Floors ○ Terms ■ price ceiling a legal maximum price ■ price control government laws to regulate prices instead of letting market forces determine prices ■ price floor a legal minimum price ■ total surplus see social surplus ○ Notes ■ Price ceilings ● Demanders outnumber suppliers ● The first rule of economics is you do not get something for nothing everything has an opportunity cost ● Price ceilings are enacted in an attempt to keep prices low for those who demand the product ● But when the market price is not allowed to rise to the equilibrium level, quantity demanded exceeds quantity supplied, and thus a shortage occurs ● Those who manage to purchase the product at the lower price given by the price ceiling will benefit, but sellers of the product will suffer, along with those who are not able to purchase the product at all ● Quality is also likely to deteriorate ■ Price floors ● Is the lowest legal price that can be paid in markets for goods and services ● Best example = minimum wage ● Sometimes called “price supports” because they support a price by preventing it from falling below a certain level ● When quantity supplied exceeds quantity demanded, a surplus exists ● The high income areas of the world including the US, europe, and japan ■ Price ceilings or price floors do not cause a change in supply and demand V. 3.5 Demand, Supply, and Efficiency ○ Terms ■ consumer surplus the extra benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid ■ deadweight loss the loss in social surplus that occurs when a market produces an inefficient quantity ■ economic surplus ee social surplus ■ producer surplus the extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept ■ social surplus the sum of consumer surplus and producer surplus ○ Notes ■ Consumer surplus, producer surplus, social surplus ● At the efficient level of output, it is impossible to produce greater consumer surplus without reducing producer surplus, and it is impossible to produce greater surplus without reducing consumer surplus ■ Inefficiency of price floors and price ceilings ● The imposition of a price floor or a price ceiling will prevent a market from adjusting to its equilibrium price and quantity, and thus will create an inefficient outcome ● Price floors and ceilings will also transfer some consumer surplus to producers, or some producer surplus to consumers ● When deadweight loss exists, it is possible for both consumer and producer surplus to be higher ● Both price floors and ceilings block some transactions that buyers and sellers would have been willing to make, and creates deadweight loss ○ Removing such barriers, so that prices and quantities can adjust to their equilibrium level, will increase the economy's social surplus ■ Demand and supply as a social adjustment mechanism ● Famous economist, alfred marshall, wrote that asking whether supply or demand determined a price was like arguing “whether it is the upper or under blade of a pair of scissors that cuts a piece of paper” ● Adjustments of equilibrium price and quantity in a marketoriented economy often occur without much government direction or oversight
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