ECON 200 Macro Chapter 4 Notes Gochenour PDF

Preview

Summary

ECON 200 notes from Chapter 4 reading, Professor Gochenour...

Description

Equilibrium: How Supply and Demand Determine Prices ● Equilibrium - when both the demand curve and the supply curve meet at one point ○ The price at the meeting point is called the equilibrium price and the quantity at the meeting point is called the equilibrium quantity ○ The equilibrium values are the only price and quantity that in a free market are stable ● Surplus- a situation in which the quantity supplied is greater than the quantity demanded ○ Solution: hold a sale; sell more if price is lower than competitors ○ Competition will push prices down whenever there is a surplus ○ As competition pushes prices down, the demand will increase and quantity supplied will decrease ● Shortage- a situation in which the quantity demanded is greater than the quantity supplied ○ Excess of demand and not enough storage = raise prices ○ Buyers will have an incentive to bid higher than their fellow buyers because there is not enough supply ○ Competition will push prices up when there is another shortage ○ As prices are pushed up, the quantity supplied increases and the quantity demanded decreases ● Equilibrium price- the price at which the quantity demanded is equal to the quantity supplied; ideal price that is stable ● Buyers and sellers don’t have incentives when there is an equilibrium ● Sellers lower prices to compete with other sellers ● Buyers raise prices to compete with other buyers

● Unexploited gains exist from trade at any quantity less than the equilibrium quantity ○ In a free market, the quantity sold bought will increase until the equilibrium quantity is reached ● If quantity supplied exceeds the equilibrium quantity, it costs the sellers more to produce the product than the product that is worth to buyers ● Equilibrium quantity- quantity at which the quantity demanded is equal to the quantity supplied ● Resources are wasted if quantity exceeds the equilibrium quantity ○ Loss for all sources, not just sellers ● Free market maximizes the gains from trade and producer plus consumer surplus ○ Supply of good is bought by the buyers with the highest willingness to pay ○ Supply of goods is sold by sellers with the lowest cost ○ Between buyers and sellers, there are no unexploited gains from trade and no wasteful trades ● In the real market, buyers and sellers do not know the true curves ● Vernon Smith conducted an experiment with buyers and sellers which created the supply and demand model ● Tech advances can lower the costs of production which which will lower the supply curve and cause a surplus from the old equilibrium price; suppliers can still sell at the old price ○ Excess supply is temporary and sellers will keep lowering prices until they reach a new equilibrium price ● An increase in demand increases price and quantity ● Demand v. Quantity demanded

○ Increase in quantity demanded is a movement along the fixed demand curve ○ Increase in demand is a shift on the entire demand curve (up and to the right) ● Shifts in the supply curve cause movements along the demand curve ● Takeaway ○ Market competition brings about an equilibrium in which the quantity supplied is equal to the quantity demanded ○ Only one price/quantity combo is a market equilibrium...