MICROECONOMICS CH 4 SUPPLY AND DEMAND TOGETHER
MICROECONOMICS CH 4 SUPPLY AND DEMAND TOGETHER ECON 211
Popular in Micro Economics
verified elite notetaker
Popular in Economcs
This 4 page Class Notes was uploaded by Addie Pearson on Monday February 29, 2016. The Class Notes belongs to ECON 211 at Clemson University taught by prof fiore in Winter 2016. Since its upload, it has received 24 views. For similar materials see Micro Economics in Economcs at Clemson University.
Reviews for MICROECONOMICS CH 4 SUPPLY AND DEMAND TOGETHER
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 02/29/16
CHAPTER 4 MICROECONOMINCS PUTTING DEMAND AND SUPPLY TOGETHER ROADMAP - Developed demand and supply as ways to measure aggregate marginal benefits and marginal costs - We will now put demand and supply together, which will give us: o Means of explaining market prices and how and why change happens o Means of measuring net benefits that result from the operations of a market o Basis for analyzing the effect of policies (taxes, regulations) or events (technological change) on a market prices and social welfare PUTTING DEMAND AND SUPPLY TOGETHER - Demand and supply are represented as a series of price and quantity pairs o Willingness to buy (marginal benefits curve) o Opportunity cost of selling (marginal costs curve) - But at any given time in an ACTUAL MARKET we see only ONE price - In a freely operating marker the one price we see is the price that equates quantity demanded and quantity supplied - Why is the market price where demand and supply intersect? o Suppose the price is GREATER than where quantity demanded and quantity supplies are equal (i.e. greater than the equilibrium price) Excess supply Reflects marginal costs o This will lead the price being bid down as sellers compete to rid themselves of excess units o As the price falls, 2 things happen: Qdemand rises (buyers want to purchase more at lower prices) Qsupply falls (sellers are willing to sell less at lower prices) Price will fall until (Qdemand=Qsupply) o Suppose the price is LESS than where quantity demanded and quantity supplied are equal (i.e., less than the equilibrium price) Excess demand o This will lead to price being bid up as potential buyers compete to obtain the product o As the price rises, 2 things happen: Qdemand falls (buyers want to purchase less at a higher price) Qsupply rises (sellers are willing to sell more at higher prices) Price will rise until (Qdemand=Qsupply) o P*=EQUILIBRUIM PRICE o So neither P>P* nor P<P* can persist in freely operating markets o The price will be stable where Qdemand=Qsupply - At the equilibrium price… o Anyone who wants to buy at the market price can buy (no excess demand) o Anyone who wants to sell a the market price can sell (no excess supply) LAW OF SUPPLY AND DEAND The price of any good adjusts to bring the quantities of that good supplied and demanded into balance - Automatic movement toward the equilibrium (market clearing) price Illustrating changes in demand (slopes down) - An increase in demand shift to the right - A decrease in demand shift to the left Illustrating changes in supply (slopes up) - An increase in supply shift to the right - A decrease in demand shift to the left Impact of demand changes on equilibrium price and quantity - Demand decreases: price goes down, quantity goes down - Supply increases: price down, quantity up - Supply decreases: price up, quantity down But why do demand and supply change? - Demand and supply curves are “ceteris paribus” concepts o They represent willingness to buy and willingness to sell HOLDING EVERYTHING ELSE CONSTANT - Demand is based on marginal benefits - Supply is based on marginal costs - If anything changes marginal benefits, demand changes - If anything changes marginal costs, supply changes Factors that shift demand 1. Tastes a. One’s own personal feelings about the good. i. Ex: LeBron James returns to play for the cavaliers. What happens to the market for the Cleveland Cavaliers tickets? 1. Higher price, higher quantity 2. Income a. When people become wealthier, their demand for a good may rise OR fall i. Normal good demand rises when income rises ii. Inferior good demand falls when income rises iii. Ex: income rises, what happens to ramen noodles? 1. Lower price lower quantity 3. Prices of related goods a. When the prices of related goods change, demand for the good in question changes too i. Substitute a good you use in it’s place 1. Demand rises when a substitutes price rises, vice versa 2. The price of coca cola falls, what happens to the market for pepsi? Drop in price and drop in quantity ii. Complements goods you usually buy with another good 4. The size of the market a. As the number of consumers increases, ceteris paribus, demand rises Factors that shift supply 1) Price inputs (materials, labor energy, etc) a. An input is a good/service used to make a final good b. If an input becomes more expensive, supply decreases, vice versa c. Ex. Supposed Trump builds his big wall- a cheap wall made of cheap wood i. Higher price of lumber; so new houses are more expensive 2) Technology a. If tech improves so as to allow a good to be produced at lower cost, supply increases, and vice versa b. Common ex (beyond general improvements on production) are the internet and weather “shocks” c. Ex. What happens to the market for corn when the weather is perfect for several months? i. Lower price, higher quantity 3) The size of the market a. As the number of suppliers increases ceteris paribus, supply increases. Changes in price and/or quantity - Changes in the market price and or quantity occur ONLY of demand or supply has shifted. o If we see a change, we know one of the other has shifted Evaluating shifts in demand and supply - Three steps for figuring out the effect of an event on the price and quantity 1. Decide whether supply, demand, or both has shifted 2. Decide in which direction the shift occurred 3. Use the supply and demand diagram to see how the shifts affect equilibrium price and quantity ii. If both demand and supply shift the outcome depends upon which is greater- change in supply or change in demand Both demand and supply shift - Price of olives rises and study reveals additional health benefits from using olive oil, what happens to the market for olive oil? - Price goes up quantity goes down, price goes up quantity goes up Remember that these is a difference in quantity demanded and demand, as well as quantity supplied and supply - for example, o an increase in demand occurs when one of the cp conditions change (tastes, income, etc.) o by contrast, the fact that consumers consume more at lower prices is simply the law of demand; a movement along an existing demand curve How have we as a society sought to reduce smoking? - Taxes on producers (increase cost to produce) - Inform on risks - Restrictions on where you can smoke - Subsidies on treatments (patches, sessions) - All four policies reduce smoking (quality of cigarettes demanded) but only latter three reduce demand for smoking (shift demand curve for cigarettes)
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'