Macro Notes Week Two: The Market Forces of Supply and Demand
Macro Notes Week Two: The Market Forces of Supply and Demand Econ-UA 1
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This 7 page Class Notes was uploaded by Cindy Notetaker on Thursday September 15, 2016. The Class Notes belongs to Econ-UA 1 at New York University taught by Gerald McIntyre in Fall 2016. Since its upload, it has received 85 views.
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Date Created: 09/15/16
September 13th, 2016 Macro Notes CHAPTER 4 Market Forces of Demand and Supply : basic work tool of economists Markets and Competition --markets: group of buyers and sellers of a good or service -this can be in an actual marketplace, online, etc... --assume that these markets are in perfect competition -goods are exactly the same from market to market -many buyers and sellers: businesses competing for $, and the buyer competing with others to buy that goof --we cannot affect the market individually --sellers are forced to sell at market price **we assume no government intervention** DEMAND Quantity Demanded (QD) --amount of goods buyers are willing/able to purchase at a particular price --it is a particular point on the demand curve Law of Demand: when price (P) of a good rises, quantity demanded (QD) falls, other things equal --while they do have incentive to buy/demand fewer, it is important to note that not everyone will --it is an inverse relationship b/w price and quantity demanded NOTE: (P) is graphed vertically on the y-axis and (QD) is graphed on the x-axis Individual Demand and Market Demand --market demand is the horizontal sum of quantities demanded by all buyers --leads to the market demand curve Shifting Demand Curve --shifts when some other variable changes: "other things" that affect the buyers' will- ingness if demand increases, the graph shifts RIGHT if demand decreases, the graph shifts LEFT Factors That Increase Demand: 1. the number of buyers increases -this is largely caused from population increase -the larger the number of buyers, more demand and curve will shift right 2. income increases -this is true for normal goods -with inferior goods, if income increases then demand falls 3. price of substitute goods -ex) coke vs Pepsi: if coke prices increase, some people will buy more Pepsi 4. price of complements goes down ex) tea and sugar: if the prices of tea goes down, people will buy more sugar ***NOTE: Factors 3 and 4 make the market interrelated*** 5. tastes change of the good -if more people demand the good the curve shifts RIGHT -if buyers start preferring an alternate good, then the demand of a current good will fall and the demand curve will shift LEFT ex) lost desire for apples and decided to opt for mangoes instead; demand for man- goes rises and demand for apples decreased 6. changes in expectations (about the future) ex) I like dark chocolate, but cocoa beans are scarce, so dark chocolate price will increase: I buy more dark chocolate NOW -if buyers expect prices to rise, the current demand will shoot up SUPPLY quantity supplied: the amount that sellers are willing and able to sell when price (P) is high --selling the good is profitable so firms are willing to sell more Law of Supply --positive relationship: when price (P) rises, quantity supplied (QS) of the good raises, given that everything else is held at a constant --when price of good rises, everything else at a constant, the quantity of good supplied will rise --when sellers can get higher prices for goods, producing and selling become more profitable ex) rise in the price of laptops but not desktops will encourage comp. makers to focus more on laptops, not computers --price and quantity supplied are POSITIVELY RELATED --this translates to an upward curve on a graph, in contrast to the demand curve -each point on the curve shows the quantity that sellers would choose to sell at a specific price --shifts along the curve: -a change in price, we go ALONG the curve (a rise, we go right; a fall, we go left) --a shift in the supply curve -when variables that we once held constant change (like to cost of transportation of a good) ex) if transportation of maple syrup drops, the seller is encouraged to supply more bottles and the curve shifts RIGHT Individual Supply vs Market Supply --market quantity supply is the horizontal sum of the individual supply of individual companies/firms shifting supply curve -when "other things" (variables) affect the sellers' willingness Factors that Increase Supply 1. input prices fall -there are many other factors and sources of labor that create a product, and a change in price in any of those sectors shifts the supply curve: in sectors of labor and energy to create that good -a rise in price of input shifts the curve to the left -more profit and willing to supply more 2. technology improves -company can make more or the same amount at a lower cost -technological advances increase the supply of a good -not only is it more advanced, but it's cheaper and more new ex) replacing sap buckets by tubes draining into a central container for boiling 3. the number of sellers increases -this is due to the entry of more firms -if more people decide to get involved in a particular market, the supply of that good would increase and curve shifts RIGHT -if firms decide to leave the market, supply decreases and curve shifts LEFT ex) maple syrup market: more vendors decide to sell maple syrup, and so more bottles will end up being produced; increase in supply, this shifts the graph to the RIGHT 4. changes in expectations -if firms expect that the price (P) of a good will fall, they more today but not as much in the future -expectations of future prices of a good will affect the supply and therefore shift the supply curve -if expectation of a future price rising, the curve shifts LEFT -if expectation of a future price falls, the curve shift RIGHT If QS>QD --surplus --must lower the price (P) to achieve equilibrium b/c consumers are more likely to buy that good If QS<QD --shortage --raise prices; chokes off extra demand -price continues to rise until equilibrium occurs When supply and demand curves are COMBINED, we have three outcomes --equilibrium -the quantity of goods that buyers are willing/able to buy EXACTLY balances the quantity of goods that sellers are willing/able to sell --surplus -suppliers are unable to sell everything they produced at a certain price -"excess supply" -they then respond by lowering prices --shortage -buyers are unable to get all they want of a particular good or service at the go- ing price -"excess demand" Law of Supply and Demand: the price of any good with adjust itself to bring QS and QD for that good into an equilibrium TERMS: change in quantity supplied: when the price of as good changes and we move ALONG the supply curve change in supply: when something OTHER THAN PRICE changes, causes the ENTIRE supply curve to shift alternate goods: other goods that firms in a market could produce instead of the good in ques- tion alternate markets: when the firm sells the same good in a DIFFERENT market (ex.instead of producing in the US, you decide to produce in Canada) technological advances (in production): when a firm can produce a given level of output in a new and cheaper way than before "The US Stock Market has predicted 7 of the last 5 recessions" The Market Forces of Supply and Demand ex) The Market for Electric Cars ` --tastes change and people want more: demand shifts RIGHT --the price rises because there is a shortage, it can wade off some of the Quantity De- manded and increase is Quantity Supplied Ex 2) New Technology Reduces Cost of Producing Cars --cut the price and when it falls consumers will buy more of this product ex 3) Tastes Change AND New Technology Reduces Production Costs --if demand increases, equilibrium point increases --if demand shift is moderate and supply shift is dramatic, the equilibrium quantity would rise, but the price is ambiguous The Mathematics of Supply and Demand Demand Function: Qd=100-2P NOTE: the minus implies an INVERSE relationship Supply Function: Qs=3P NOTE: the positive coefficient indicated an upward slope How do we get quantities? Insert price into either demand or supply function Qs=3(20)=60 Qd=100-2(20) Equilibrium --QD=QS Total Expenditure (TE) --price is multiplied by quantity --in this case: (20)(60)=1200 Different Ways of Reading Supply and Demand Putting it all together:
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