Week 3 Lecture Notes
Week 3 Lecture Notes EC 110
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This 9 page Class Notes was uploaded by Matt Owens on Thursday January 29, 2015. The Class Notes belongs to EC 110 at University of Alabama - Tuscaloosa taught by Kent O. Zirlott in Spring2015. Since its upload, it has received 166 views.
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Date Created: 01/29/15
Matt Owens Principles to Microeconomics January 27th amp 29th 2015 Chapter 4 Notes In this chapter look for the answers to these questions 0 What factors affect buyers demand for goods 0 What factors affect sellers supply of goods 0 How do supply and demand determine the price of a good and the quantity sold 0 How do changes in the factors that affect demand or supply affect the market price and quantity of a good 0 How do markets allocate resources Markets and Competition Market A group of buyers and sellers of a particular product Competitive Market one with many buyers and sellers each has a negligible effect on price Demand The Quantity Demanded QD is the amount of the good that buyers are willing and able to purchase at a specific price 0 QD is a point on the demand curve The Demand Curve is a set of various quantities demanded QD at corresponding prices 0 It is the curve itself Law of Demand the claim that the quantity demanded of a good falls when the price of the good rises other things equal 0 When price goes up you buy less 0 When price goes down you buy more The Demand Schedule Demand Schedule A table that shows the relationship between the price of a good and the quantity demanded 0 Example Helen s demand for lattes When drawing a supply demand graph PRICE always goes on the vertical axis QUANTITY always goes on the horizontal axis Price of Lattes Quantity of Lattes Demanded 000 16 100 14 200 12 300 10 400 8 500 6 600 4 0 Notice that Helen s preference obey the Law of Demand Market Demand Versus Individual Demand The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price Suppose Helen and Ken are the only two buyers in the latte market Q01 quantity demanded Price Helen s Qd Ken s Qd Market Qd 000 16 8 24 100 14 7 21 200 12 6 18 300 10 5 15 400 8 4 12 500 6 3 9 600 4 2 6 Demand Curve Shifters The demand curve shows how price affects quantity demanded other things being equal A change in the price of the good changes QD and results in a movement along the D curve These other things are nonprice determinants of demand ie things that determine buyers demand for a good other than the good s price 0 Changes in them shift the D curve 0 Demand Curve Shifters Number of Buyers 0 Increase in number of buyers increases quantity demanded at each price shifts D curve to the right Demand for pizza in Tuscaloosa shifts to the left during the summer because students leave town during the summer I 30 of population leaves Tuscaloosa Most missed question on exam 1 deals with movement along the curve vs shifting the curve KNOW THE DIFFERENCE O The demand curve for beer shifts WAY to the right on game day in Tuscaloosa I Population triples Demand Curve Shifters Income 0 O 0 Demand for a Normal Good is a positively related to income I Increase in income causes increase in quantity demanded at each price shifts D curve to the right I Example Eating at a sitdown restaurant Demand for an Inferior Good is negatively related to income I An increase in income shifts D curves for inferior goods to the left I Ramen noodles would be inferior good for college students I Public Transportation Normal goods vs inferior goods are subjective some normal goods might be inferior goods to others and vice versa Demand Curve Shifters Prices of Related Goods 0 Two goods are Substitutes if an increase in the price of one causes an O 0 Demand Curve Shifters Tastes amp Preferences 0 O 0 Also tablet computers such as the iPad are currently very popular so the demand curve for these computers has shifted to the right as well 0 increase in demand for the other Example Crest and Colgate I An increase in the price of Crest toothpaste increases demand for Colgate toothpaste shifting the Colgate demand curve to the right Other Examples Coke and Pepsi laptops and desktop computers butter and margarine CDs and music downloads Two goods are Complements if an increase in the price of one causes a fall in demand for the other I You consume them together Example Computers and Software I If price of computers rises people buy fewer computers and therefore less software Software demand curve shifts left Other examples College tuition and textbooks bagels and cream cheese peanut butter and jelly hot dogs and hot dog buns Most missed question on exam 1 deals with movement along the curve vs shifting the curve KNOW THE DIFFERENCE Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right Example I The Atkins diet became popular in the 90s caused an increase in demand for eggs shifted the egg demand curve to the right I Cant have carbs on Atkins curve shifted to the left for cereal companies bread companies etc Anything that causes a shift in tastes away from a good will decrease demand for that good and shift its D curve to the left 0 Demand Curve Shifters Expectation o Expectations affect consumers buying decisions 0 Examples I If people expect their incomes to rise their demand for meals at expensive restaurants may increase now I If the economy sours and people worry about their future job security demand for new autos may fall now Summary Variables That In uence Buyers Variable A change in this variable Price Causes a movement along the D curve Number of buyers Shifts the D curve Income Shifts the D curve Price of related goods Shifts the D curve Tastes Shifts the D curve Expectations Shifts the D curve Active Learning Draw a demand curve for digital cameras What happens to it in each of the following scenarios Why 0 A The price of memory cards fall I Digital cameras and memory cards are complements I A fall in price of memory cards shifts the demand curve for digital cameras to the right 0 B The price of digital cameras falls I The D curve does NOT shift I Move down along to a point with lower P higher Q o C The price of smartphones falls I Smartphones and digital cameras are substitutes of one another I A fall in price of smartphones shifts demand for digital cameras to the left Supply Quantity Supplied Q8 The amount that sellers are willing and able to sell of any good at a specific price 0 Q8 is a point on the supply curve Supply Curve A set of various quantities supplied QS at corresponding pr1ces Law of Supply The claim that the quantity supplied of a good rises when the price of the good rises other things equal The Supply Schedule Supply Schedule A table that shows the relationship between the price of a good and the quantity supplied Example Starbucks supply of lattes Price of Lattes Quantity of Lattes Supplied 000 0 100 3 200 6 300 9 400 12 500 15 600 18 Notice that Starbucks supply schedule obeys the Law of Supply Market Supply Versus Individual Supply The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price Suppose Starbucks and Crimson Cafe are the only two sellers in this market QS Quantity Supplied Price Starbucks Crimson Caf Market Q5 000 0 0 0 100 3 2 5 200 6 4 10 300 9 6 15 400 12 8 20 500 15 10 25 600 18 12 30 Supply Curve Shifters MOSt missed question on The supply curve shows how price affects quantity supplied other things exam 1 deals being equal A change in the price of the good changes QS and results in a Wlth movement along the S curve mOVement These other thingsquot are nonprice determinants of supply along the curve vs shifting the CUFVC I ltn lT VI I39I39I39 0 Changes in them shift the S curve Supply Curve Shifters Input Prices 0 O 0 Examples of input prices I Wages prices of raw materials A fall in input prices makes production more profitable at each output price so firms supply a larger quantity at each price and the S curve shifts to the right When input prices go up it makes production less profitable and the curve shifts to the left Supply Curve Shifters Technology 0 O O O 0 Technology determines how much inputs are required to produce a unit of output A costsaving technological improvement has the same effect as a fall in input prices shifts S curve to the right A technological advance makes production more efficient always and forever the S curve shifts to the right Whenever technology is destroyed is the only time the curve will shift to the left I Natural Disasters I War I Etc Supply Curve Shifters Number of Sellers An increase in the number of sellers increases the quantity supplied at each price shifts S curve to the right Supply Curve Shifters Expectations Effects demand and supply Example I Events in the Middle East lead to expectations of higher oil prices I In response owners of Texas oilfields reduce supply now save some inventory to sell later at the higher price I S curve shifts left In general sellers may adjust supply if the good is not perishable when their expectations of future price change Summary Variables that In uence Sellers Variable A change in this variable Price Causes a movement along the S curve Input Prices Shifts the S curve Technology Shifts the S curve Number of Sellers Shifts the S curve Expectations Shifts the S curve Active Learning Supply Curve Draw a supply curve for steel What happens to it in each of the following scenarios 0 A Steel producers cut the price of steel I S curve does not shift I Moves along the curve to a lower P and lower Q o B A technological advance allows steel to be produced at lower cost I S curve shifts to the right I At each price Q increases 0 C Aluminum alloy producers raise the price of the metals they produce I This shifts the demand curve for steel not the supply curve Substitutes only affect demand Supply and Demand Together Equilibrium Price has reached the level where quantity supplied equals quantity demanded 0 Q8 and QD are equal Market Clearing Another term for equilibrium Equilibrium Price The price that equates quantity supplied with quantity demanded Equilibrium Quantity The quantity supplied and quantity demanded at the equilibrium price Surplus aka excess supply When quantity supplied is greater than quantity demanded 0 Example I If P 5 then QD 9 lattes and QS 25 lattes resulting in a surplus of 16 lattes 0 Facing a surplus sellers try to increase sales by cutting price 0 This causes QD to rise and QS to fall which reduces the surplus 0 Prices continue to fall until market reaches equilibrium Shortage aka excess demand When quantity demanded is greater than quantity supplied 0 Example I If P 1 then QD 21 lattes and QS 5 lattes resulting in a shortage of 16 lattes 0 Facing a shortage sellers raise the price causing QD to fall and QS to rise which reduces the shortage 0 Prices continue to rise until market reaches equilibrium Three Steps to Analyzing Changes in the Equilibrium To determine the effects of any event o 1 Decide whether event shifts S curve D curve or both 0 2 Decide in which direction the curves shift 0 3 Use supplydemand diagram to see how the shift changes equilibrium P and Q Example The Market in Hybrid Cars 1 A Shift in Demand Event to be analyzed 0 Increase in price of gas Step 1 o D curve shifts because price of gas affects demand for hybrids Determinant is taste preferences Step 2 o D shifts rightbecause high gas price makes hybrids more attractive relative to other cars Step 3 o The shift causes an increase in price and quantity of hybrid cars Notice 0 When P rises producers supply a larger quantity of hybrids even though the S curve has not shifted Always be careful to distinguish between a shift in a curve and a movement along the curve 2 A Shift in Supply Event 0 New technology reduces cost of producing hybrid cars Step 1 o S curve shifts because event affects cost of production D curve does not shift because production technology is not tone of the factors that affect demand Step 2 o S shifts right because event reduces cost makes production cheaper Step 3 o The shift causes price to fall and quantity to rise 3 A Shift in Both Supply and Demand Events 0 Price of gas rises AND new technology reduces production costs Step 1 0 Both curves shift Step 2 0 Both curves shift to the right Step 3 0 Q rises but effect on P is ambiguous or uncertain because the representation is abstract not able to tell without specific data Active Learning Shifts in Supply and Demand Use the 3 step method to analyze the effects of each event on the equilibrium price and quantity of ice cream 0 Event A Fall in price of frozen yogurt I D curve shifts I D curve shifts I P and Q both fall 0 Event B Fall in milk prices I S shifts I S shifts rigm I P falls Q rises 0 Event C Fall in price of frozen yogurt and fall in milk prices I Both curves shift I D shifts left S shifts right I P unambiguously falls Effect on Q is ambiguous The fall in demand reduces Q the increase in supply increases Q Terms for Shift vs Movement Along Curve Changes in Supply A shift in the S curve occurs when a nonprice determinant of supply changes like technology or costs Change in the Quantity Supplied A movement along a fixed S curve occurs when P changes Change in Demand A shift in the D curve occurs when a nonprice determinant of demand changes like income or number of buyers 0 Change in the Quantity Demanded A movement along a fixed D curve occurs when P changes