ECON Week 4 Notes
ECON Week 4 Notes ECON 200
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This 1 page Class Notes was uploaded by Charles Smith on Thursday September 22, 2016. The Class Notes belongs to ECON 200 at James Madison University taught by in Fall 2016. Since its upload, it has received 8 views. For similar materials see Introduction to Macroeconomics in Economics at James Madison University.
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Date Created: 09/22/16
Day 7: When Quantity supplied is equal to the quantity demanded at a certain sell price. This is referred to as the equilibrium price. Here there are no risks of shortages or surpluses. Free markets always try and move forward so they can reach the equilibrium price. Equilibrium is a temporary concept however. An increase in supply causes the equilibrium to have a lower price and a higher quantity. An increase in demand causes the equilibrium to have a higher price and a higher quantity. A decrease in supply causes the equilibrium to change to a higher price and a lower quantity. A decrease in demand causes the price and quantity to decrease. Economists say often that prices are a, “rationing mechanism”. If the supply of a good falls, how do prrices “ration” these nowscarce goods in a competitive market? The prices increase to have those who see it as a non necessity, as not worth the extra money. Prices allocate goods to the people with the highest willingness to pay. Sometimes it is better to do other things. Like using prices to allocate goods to the people with the lowest value of their own time (wait in line). Prices allocate goods to the people who deserve them the most. There is nothing actually “free”. Often a “free” product or service is actually getting its costs offsetted from somewhere else. DAY 8: Unexploited Gains from trade exist when quantity is below the Equilibrium Quantity. These are also known as “wasteful trades”. A free market maximises producer pay with incentives to selling more, this also causes more gains from the inevitable trade. It is a producer’s goal to have the lowest possible cost in the production of a good or service while still satisfying the needs of the highest value buyers. Since this is very hard to do, one group, buyers or sellers, will have to have a better deal. Distorted price signals cause resources cause resources to be misallocated. A Price ceiling is a maximum price allowed by law. Policy makers may respond to buyers’ complaints that prices are “too high”, by enacting price controls. Price ceilings can cause shortages, a reduction in the product quality (in order to turn a profit), and wasteful lines/ other costs of search, (bribes in order to solve problem but is constantly unfair. Also typically time is more valuable than money.)
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