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ECONOMICS. CHAPTER 3
SUPPLY AND DEMAND.
SUPPLY AND DEMAND: A MODEL OF A COMPETITIVE MARKET.
We can define MARKET as a group of producers and consumers who exchange a good or a service for payment.
COMPETITIVE MARKET: Market in which there are many buyers and sellers of the same good and service, none of whom can influence the price at which the good or service is sold.
! *There are many producers with the same product.
! -It is known for being an easier model than other markets.
! -When a market is competitive, its behaviour is well described by the supply and demand model.
! ! *Not all markets are competitive markets! THE DEMAND CURVE.
*How many X do consumers want to buy depends on the price of X.
It is a graphical representation of the demand schedule.
THE DEMAND SCHEDULE AND THE DEMAND CURVE.
DEMAND SCHEDULE: Shows how much of good and services consumers will want to buy at different prices.
QUANTITY DEMANDED: Actual amount of a good or service consumers are willing to buy at some specific price. -- If the price of some good rises, it is common that the quantity demanded falls.
DEMAND CURVE: Graphical representation of the demand schedule, another way of showing the relationship between the quantity demanded and the price.
LAW OF DEMAND: A higher price for good or service leads people to demand a smaller quantity of that good of service. For this law, all other things must remain equal! ! SHIFTS OF DEMAND CURVE.
DEMAND SCHEDULE: Shows how much of g/s consumers will want to buy at different prices. ! The shift of the demand schedule shows the change in the quantity demanded at any given price, represented by the change in position of the original demand curve to a new position, denoted by a new demand curve.
-It is crucial to make the distinction between such shifts of the demand curve and movements along the demand curve, changes in the quantity demanded of a good arising from a change in that good’s price.
UNDERSTANDING SHIFTS OF THE DEMAND CURVE.
-Increase in demand means a rightward shift of the demand curve: at any given price, consumers demand a larger quantity of the good or service than before.
-Decrease in demand means a leftward shift of the demand curve: at any given price, consumers demand a smaller quantity of the good or service than before.
ECONOMICS. CHAPTER 3 FIVE PRINCIPAL FACTORS: 1-CHANGES IN THE PRICES OF RELATED GOOD OR SERVICES.
! Two goods are SUBSTITUTES: A rise in the price of one good makes consumers more willing to buy the ! other good.
! *Substitutes are usually goods that in some way serve a similar function: Coke and Pepsi.
! Two goods are COMPLEMENTS: A rise int he price of one good leads to a decrease in the demand for the ! other good.
! *Complements are usually goods that in some sense are consumed together: Cars and oils.
2-CHANGES IN INCOME.
! When a rise in income increases the demand for a good (the normal case) it is a NORMAL GOOD.
! When a rise in income decreases the demand for a good. it is an INFERIOR GOOD. -- Inferior goods are ! considered less desiderable than more expensive alternatives.
! Ex: Bus ride instead of taxi or particular cars // Fast food instead of a high quality restaurant.
! *When they can afford to, people stop buying an inferior good and switch their consumption to the ! preferred.
3.CHANGES IN TASTES.
! ! People have certain preferences, or tastes, that determine what they choose to consume and that these tastes can change.
! Economist usually lump together changes in demand due to fads, beliefs, cultural shifts, and so on under ! the heading of changes in tastes or preferences.
4-CHANGES IN EXPECTATIONS.
! When consumers have some choice about when to make a purchase, current demand for a good is often ! affected by expectations about its future price.
! *EXPECTATIONS ABOUT THE FUTURE.
! Expected changes in future income can also lead to changes in demand.
5-CHANGES IN THE NUMBER OF CONSUMERS.
! Because of population growth the quantity of demand of some products can change during time. When ! there’s a growth of population, there’s a growth in demand.
ECONOMICS. CHAPTER 3 THE SUPPLY CURVE.
QUANTITY SUPPLIED: Actual amount of good or service producers are willing to sell at some specific price.
*The quantity that producers are willing to produce and sell (the quantity supplied) depends on the price they are offered.
THE SUPPLY SCHEDULE AND THE SUPPLY CURVE.
SUPPLY SCHEDULE: Show how much of a good or service producers will supply at different prices.
! *A supply schedule can be represented by a supply curve.
SUPPLY CURVE: Shows the relationship bewteeen quantity supplied and price.
SHIFTS OF SUPPLY CURVE.
SHIFT OF THE SUPPLY CURVE: Is a change in the quantity supplied of a good or service at any given price.
It is represented by the change of the original supply curve to a new position, denoted by a new supply curve.
*A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good’s price.
Economists believe that shifts of the supply curve for a good or service are mainly the result of five factors: 1-CHANGES IN INPUT PRICES.
To produce an output, you need inputs.
! INPUT: Any good or service that is used to produce a good or service.
2-CHANGES IN THE PRICES OF RELATED GOODS OR SERVICES.
A single producer often produces a mix of goods rather than a single product.
When a producer sells serveral products, the quantity of any one good it is willing to supply at any given price depend on the prices of its other co-produced goods.
3-CHANGES IN TECHNOLOGY.
The techonolgy as the methods people can use to turn inputs into useful goods or services.
When suppliers have some choice about when they put their good up for sale, changes in the expected future price of the good can lead a supplier to supply less or more of the good today.
4-CHANGES IN THE NUMBER OF PRODUCERS.
Changes in the number of producers affect the supply curve.
INDIVIDUAL SUPPLY CURVE: Shows the relationship between quantity supplied and price for an individual producer.
The market supply curve shows how the combined total quantity supplied by all indi- vidual producers in the market depends on the market price of that good.
ECONOMICS. CHAPTER 3 SUPPLY, DEMAND AND EQUILIBRIUM.
EQUILIBRIUM PRICE: The price that matches the quantity supplied and the quantity demanded.
EQUILIBRIUM QUANTITY: The quantity bought and sold at that price.
*The equilibrium price is also known as the market-clearing price: it is the price that “clears the market” by ensuring that every buyer willing to pay that price finds a seller willing to sell at that price, and vice versa.
EQUILIBRIUM BETWEEN QUANTITY AND PRICE.
The easiest way to determine the equilibrium price and quantity in a market is by putting the supply curve and the demand curve on the same diagram.
Since the supply curve shows the quantity supplied at any given price and the demand curve shows the quantity demanded at any given price, the price at which the two curves cross is the equilibrium price: the price at which quantity supplied equals quantity demanded.
*There are some markets were the same good can be sold for many different prices, depending on who is selling or who is buying.
! -In any market where buyers and sellers have both been around for some time, sales and ! purchases tend to coverage at a generally uniform price, so that we can talk about the MARKET ! PRICE.
-Surplus: The quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level.
-Shortage: The quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.
We have seen now, then, that a market tends to have a single price: The equilibrium price.
ECONOMICS. CHAPTER 3 CHANGES IN SUPPLY AND DEMAND.
We have seen that when a curve shifts, the equilibrium price and quantity change.
We will now concentrate on how the shift of the curve alters the equilibrium price and quantity.
WHEN THE DEMAND CURVE SHIFTS.
-When demand for a good or service increases, the equilibrium price and the equilibrium quantity both rise.
-When demand for a good or service decreases, the equilibrium price and the equilibrium quantity both fall.
To summarize how a market responds to a change in demand: An increase in demand leads to a rise in both the equilibrium price and the equilibrium quantity. A decrease in de- mand leads to a fall in both the equilibrium price and the equilibrium quantity.
WHEN THE SUPPLY CURVE SHFTS.
-When supply of a good or service increases, the equilibrium price falls and the equilibrium quantity rises.
-When the supply of a good or service decreases, the equilibrium price rises and the equilibrium quantity falls.
To summarize how a market responds to a change in supply: An increase in supply leads to a fall in the equilibrium price and a rise in the equilibrium quantity. A decrease in supply leads to a rise in the equilibrium price and a fall in the equilibrium quantity.
SIMULTANEOUS SHIFTS OF DEMAND AND SUPPLY.
This is not a very unusual thing, in fact, supply and demand curves typically shift quite often because the economic environment continually changes.
■ When demand increases and supply decreases, the equilibrium price rises but the change in the equilibrium quantity is ambiguous.
■ When demand decreases and supply increases, the equilibrium price falls but the change in the equilibrium quantity is ambiguous.
■ When both demand and supply increase, the equilibrium quantity increases but the change in equilibrium price is ambiguous.
■ When both demand and supply decrease, the equilibrium quantity decreases but the change in equilibrium price is ambiguous.