Week 3-Chapter 3:Supply and Demand Curve
Week 3-Chapter 3:Supply and Demand Curve AREC 202-001
Popular in Agriculturl/ Resource Economics
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This 6 page Class Notes was uploaded by Alexa Johnson on Saturday September 12, 2015. The Class Notes belongs to AREC 202-001 at Colorado State University taught by Rebecca Lynn Hill in Spring 2015. Since its upload, it has received 83 views. For similar materials see Agriculturl/ Resource Economics in Business at Colorado State University.
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Date Created: 09/12/15
AREC 202 Agriculture and Natural Resource Economics week 3 Chapter 3 Supplv and Demand gtgt The supply and demand model is a model of how a competitive market works 1 A competitive market is a market in which there are many buyers and sellers of the same good or service none of whom can influence the price at which the good or service is sold gtgt There are five key elements in the supply and demand model 1 The demand curve 2 The supply curve 3 The factors that cause the demand curve andor the supply curve to shift 4 The market equilibrium which includes equilibrium price and quantity 5 The way market equilibrium changes when the supply curve andor demand curve shifts gtgt The demand curve is a graphical representation of the demand schedule that shows relationship between quantity demanded andlprice 1 Demand schedule shows how much of a good or service consumers will want to buy at varying prices a The demand schedule contains information about the true quantity demanded 2 The quantity demanded is the actual amount of a good or service that consumers are willing to buy 3 The demand curve will slope downward in an inverse relationship between price and quantity demanded always a The law of demand says that a higher price for a good or service other things equal will lead people to demand a smaller quantity of that good or service b Example When gas is 175gallon demand is higher than it will be if gas is 325gallon consumers will choose other methods of transportation when price of gas gets higher gtgt The supply curve shows the relationship between quantity supplied and price 1 The quantity supplied is the actual amount of a good or service people are willing to sell at some specific price 2 The supply schedule shows how much a good or service would be supplied at varying prices a Represented graphically by an upward sloping curve most often gt The demand curvemay shift due to a variety of factors 1 A shift of the demand curve is a change in the quantity demanded at any given price represented by the shift of the original demand curve to a new position left or right a A shift in the curve is not the same as a movement along the curve which is also possible b Movements along the demand curve are changes in the quantity demanded of a good arising from a change in the good s price 2 A decrease in demand leads to a leftward shift while an increase in demand leads to a rightward shift 3 Five principal factors are believed to shift the demand curve for a good or service a Changes in the price of related goodsservices Substitutions the rise in the price of one of the goods leads to an increase in the demand for the other similar functions like coffee or tea Complements the rise in the price of one good leads to a decrease in demand for the other good items consumed together like cars and gas b Changes in income when people have money they are more likely to buymore of39most goods eMost goods are normal goods an increase in income increases demand for good Some goods are inferior goods an increase in income decreases the demand for a good These are goods considered less desirable such as riding the bus or buying offbrand c Changes in tastes People have certain preferences or tastes which do change and determine what they choose to consume d Changes in expectations Current demand is often affected by expectations about the future price of a good when making a purchase e Changes in the number of consumers Population changes and demographics affect demand for a good or service eAn individual demand curve shows the relationship between quantity demanded and price for an individual consumer The market demand is a horizontal sum of individual demand curves for all consumers within a market A shift in the supply curve is a change in the quantity supplied of a good or service at any given price and is represented by the change of the original curve to a new position 1 Again there is a distinction between a shift in the supply curve and movements along the supply curve a A decrease in supply moves the curve left while an increase in supply moves the curve right 2 Economists have identified five factors that affect the shirt of the supply curve a Changes in input prices Input is any good or service that is used in the production of another good or service A fall in the price of an input makes production of final good less costly and sellers are more willing to supply the goodrightward shift b Changes in the price of related goods or services Goods can be complements in production or a producer may produce multiple goods from the same rawmaterials such as gasoline and heating oil from crude If price is high fOr gasoline the producer will produce more gasoline and less heating oil c Changes in technology When better technology becomes available the cost of production and input decreases shifting the supply curve to the right d Changes in expectations Changes in the expected future market or price of the good can lead a supplier to supply less or more of the good today e Changes in the number of producers The individual supply curve illustrates the relationship between quantity supplied and price fer an individual producer The market supply curve shows how the combined total quantity supplied by all individual producers depends on the market price of the good Igt Acompetitive market is in equilibrium when price has moved to a level at which quantity of good or service demanded equals the quantity of that good or service supplies 1 This price point is also referred to as equilibrium price or marketclearing price a The quantity of the good or service bought and sold at that price is called the equilibrium quantity 2 The easiest way to determine the equilibrium price and quantity in a market is to place supply and demand curves on the same graph a The point where the supply curve and demand curve intersect is the equilibrium 3 In any market where sellers and buyers have been around fOr some time sales and purchases tend to converge at a general unifbrm price called market price 4 There may be surplus or shortage in a market a Surplus of a good or service occurs when the quantity supplied exceeds the quantity demanded or when price is above equilibrium b A shortage of a good or service occurs when the quantity demanded exceeds the quantity supplied or when the price is below equilibrium 5 The market always moves toward equilibrium price where there is neither a surplus nor a shortage Changes in supply and demand or the equilibrium price and quantity in a market result from shifts of the supply curve demand curve or both 1 An increase in demand shown by a rightward shift increases both the equilibrium price and equilibrium quantity a Leads to movement along the supply curve 2 A decrease in demand shown by a leftward shift decreases both the equilibrium price and equilibrium quantity 3 When the supply of a good or service increases the equilibrium price falls and the equilibrium quantity rises a Movement along the demand curve to lower price and higher quantity 4 When the supply of a good or service decreases the equilibrium price rises and equilibrium quantity falls 5 In real life supply curves and demand curves for many goods and services shift quite often because the economic environment changes continually a When both shift in the same direction the change in equilibrium quantity is predictable but equilibrium price is not Both increase quantity rises Both decrease quantity falls In both cases price in ambiguous b When they shift in opposite directions the change in equilibrium price is predictable but equilibrium quantity is not Demand decreasesupply increase leads to price fall Demand increasesupply decrease lead to price rise 6 When there are simultaneous shifts of supply and demand curves curve that shifts the greater distance has the greatest effect on equilibrium pricequantity
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