ECON 201 Week Notes 2 - Chapter 4 and 6
ECON 201 Week Notes 2 - Chapter 4 and 6 ECON 201
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This 9 page Class Notes was uploaded by AnnMarie on Wednesday March 30, 2016. The Class Notes belongs to ECON 201 at Louisiana Tech University taught by Menuka Karki in Spring 2016. Since its upload, it has received 12 views. For similar materials see Economic Principles & in Economcs at Louisiana Tech University.
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Date Created: 03/30/16
Chapter 4: Supply and Demand Demand • Demand is the willingness and ability to purchase a good. Demand comes from buyers and supply comes from sellers. • Amarket is a group of buyers and sellers for a good or service. • We use price and quantity when talking about the demand or supply of a good or service. • The law of demand is the theory that the quantity demanded of a good or service will decrease as the price of that good or service increases – keeping everything else constant. • The following changes can change the demand curve: a) Change in quantity demanded b) Change in Demand • The market demand is the sum of individual demand. Shift in Demand Curve 1. Income Two Types of Goods 1. Normal Good When income increases the demand of the normal good increases, causing the demand curve to shift to the right. 2. Inferior Good When income decreases the demand for inferior goods increases, causing the demand curve to shift to the right. When income increases the demand for inferior goods decreases, causing the demand curve to shift to the left. 2. Price of Related Good Two Types of Goods 1. Substitute When the price of a substitute good goes up the quantity demanded of the other good goes up. 2. Complement – goes together When the price of a complement good goes down, the quantity of the other complement good goes up. 3. Taste 4. Number of buyers -Age - Immigration 5. Future Expectations of Price Supply • The Law of Supply states that if the price of a good increases the quantity supplied of that good will increase keeping everything else constant. • The market supply is the sum of supply from individual firms. • Shifts in supply are just like the shifts in demand. ◦ They can be along the supply curve (moving from one point to another) ◦ They can be shifts to the left or right. Shift in the Supply Curve 1. Input Prices • Land, labor, and capital 2. Technology advancement 3. Future Expectations 4. Number of Sellers (Firms) Demand and Supply Together When we put the demand and supply curves together on the same graph we get the demand and supply of a market. The point that the demand and supply curves intersect is the equilibrium point, where the amount supplied is the amount demanded at the market price. The market price is the price at the equilibrium point. The following graph displays a perfectly competitive market. In the graph above the Pe is the Market Price at equilibrium and Qe is the quantity supplied at equilibrium. Perfectly Competitive Market The market price is the price of a good that both buyers and suppliers accept. When the price is greater than the equilibrium price the quantity demanded will decrease and the quantity supplied will increase, which causes a surplus in quantity supplied. When the price of a good is less than the equilibrium price the quantity demanded will increase and the quantity supplied will decrease, causing a shortage in quantity supplied. The following graph displays the case of minimum wage. The Qd is the quantity demanded by firm and Qs is quantity supplied by households. The area above the equilibrium between Qd and Qs is the surplus or unemployed workers. Change in Market Equilibrium 1. Shift in Demand • For example the season is summer and thus the taste of ice cream increases. When demand increases, the price increases and quantity supplied increases. 2. Shift in Supply • For example the price of milk increased due to a drought which caused the price of cow feed to increase. When the supply decreases, the price increases and both quantity supplied and demand decrease. 3. Shift in Demand and Supply • For example the demand of ice cream increases but the supply of ice cream decreases. We can see that the increase in demand is greater than the decrease in supply. Thus, we can say that the increase in demand is the dominate effect. Chapter 6: Supply, Demand, and Governmant The government can use price control to either control the maximum price of a good\service or to control the minumum price of a good\service. These controls are called price ceiling and price floor. Price ceiling is the maximum price that a firm can charge for a good or service, which benefits the consumer. Price floor is the mimumum price that a firm can charge for a good or service, which benefits the firm. When the government uses these controls it can cause a shortage or a surplus of goods depending on the equilibrium price and quantity. Binding price ceiling occurs when the maximum price that a firm can charge is below the equilibrium price.Anon-binding price ceiling occures when the maximum price that a firm can charge is above the equilibrium price. However, the non-binding price ceiling is hardly discussed when talking about price ceilings. But a non-binding price ceiling can become a binding price ceiling if demand and\or supply shift and the new equilibrium is above the price ceiling.An example of this situation is the price increase on crude oil. Illustration 1: Before Input Price Change Illustration 2: After input price change Because the supply shifted to the left the new equilibrium was created above the price ceiling. Thus changing the price ceiling into a binding price ceiling. Rent Control in the Short-run and Long-run Rent control places a binding price ceiling on the supplier. Short-run is the small amount of time that buyers and suppliers can react to a change in the market. We can say that at least one input stays constant. Long-run is a larger time span that buyers and suppliers can react to a change. We can say that all inputs can be changed. We can also tell what time span a market is in based on its supply and demand graph. Illustration 3: Short-Run Illustration 4: Long-Run As you can see in Illustration 3, the shortage amount is less than it is in the long-run. When the demand curve or supply curve is almost vertical, we can say that this is inelastic. When the government wants to make firms that are not producing goods to resume producing, the government will implement a price floor that is above equilibrium. Taxes Excise tax is a tax on a good, not a sales tax. Both the consumer and supplier are effected by the tax. How much the supplier and consumer are effected depends on the situation. For example: If a farmer is producing potatoes and selling them at $1.00 per pound but has to pay $0.50 per pound in taxes. Because it is more expensive to produce potatoes, the farmer will decrease his supply. This is illustrated bellow. As you can see, Ps is the price that the supplier pays and Pb is the price that the buyer pays. The area between Pb and Ps is the tax amount. How Tax Effects the Market Outcome The following illustration displays a shift in the demand curve due to the cost of a good with the tax applied to it. The area between Pb and Pe is the tax amount that the buyer pays for. The area between Pe and Ps is the tax amount that the supplier pays for. The Effects of Tax 1. Discourages MarketActivity Equilibrium quantity decreases 2. Both Buyer and Seller share the burden of the tax.