Econ Chapter 4 Notes - Summary Principles of Economics PDF

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Econ 1 Chapter 4—the Market Forces of Supply and Demand Intro  

Free societies allocate resources through the market forces of supply and demand o Supply and demand are the forces that make market economies work Supply and demand refer to the behavior of people as they interact with one another

Markets and Competition 

What is Competition o Price and quantity are determined by all buyers and sellers as they interact in the marketplace o Competitive market—a market in which there are many buyers and many sellers so that each has a negligible impact on the market price o Markets are perfectly competitive  The goods offered for sale are exactly the same  The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price o Price takers—buyers and sellers accept the price the market determines  At market price, the buyers can buy all they want and sellers can sell all they want o Monopoly—markets with only one seller who singularly sets the price

Demand 

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The Demand Curve: The Relationship between Price and Quantity Demanded o Quantity demanded—the amount of a good that buyers are willing and able to purchase  One main things that influences is price of the good o Law of demand—the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises o Demand schedule—a table that shows the relationship between the price of a good and the quantity demanded  All other influencers are held constant o Demand curve—the graph of the relationship between the price of a good and the quantity demanded Market Demand versus Individual Demand o Market demand is the sum of all the individual demands for a particular good or service  The total quantity demanded at any price (for all the consumers) Shifts in the Demand Curve o If something alters the quantity demanded at any given price, the demand curve shifts  NOT Price o Increase in demand—increases quantity demanded—shifts right

Econ 1 o o

Decrease in demand—decrease in quantity demanded—shifts left Variables that shift the curve  Income  Normal good—a good for which an increase in income leads to increase in demand  Inferior good—a good where an increase in income leads to decrease in demand  Prices of related goods  Substitutes—2 goods where an increase in price of one leads to an increase in the demand of the other  Complements—2 goods where an increase in the price of one leads to a decrease in the demand of the other  Tastes  Personal taste is a determinant of the demand  Expectations  Your expectations about the future determine your demand today o Ex. If expect a raise, then spend more money now  Number of buyers  If more people want a good, then the quantity demanded goes up at every price, and the market demand increases

Supply 

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The Supply Curve: The Relationship between Price and Quantity Supplied o Quantity supplied—the amount of a good that sellers are willing and able to sell o Law of supply—the claim that the quantity supplied of a good rises when the price of the good rises o Supply schedule—a table that shows the relationship between the price of a good and the quantity supplied o Supply curve---a graph of the relationship between the price of a good and the quantity supplied  Slopes upwards because as price rises, the greater the quantity supplied Markets Supply versus Individual Supply o Market supply is the sum of the supplies of all sellers Shifts in the Supply Curve o Variables that shift quantity supplied  Input prices  When price of raw ingredients rises, supply goes down  Technology  New tech decreases labor required, increases supply b/c more profit  Expectations  Supply less today if prices will rise in future

Econ 1 

Number of Sellers  Ex. If Ben and Jerry retired from Ice Cream, supply would decrease

Supply and Demand Together 

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Equilibrium o Equilibrium—a situation where the market price has reached the level where quantity supplied equals quantity demanded  Situation where various forces are in balance o Equilibrium price—the price that balances quantity supplied and demanded  The quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell  Market-clearing price—the price where everyone is satisfied o Equilibrium quantity—the quantity supplied and demanded at the equilibrium price o Surplus—a situation where quantity supplied is greater than quantity demanded  Excess supply—above equilibrium o Shortage—a situation where quantity demanded is greater than quantity supplied  Excess demand—below equilibrium o Law of supply and demand—the price of any good adjusts to bring the quantity supplied and demanded for that good into balance Three Steps to Analyzing Changes in Equilibrium o Equilibrium determines the price and quantity of the good that buyers purchase and sellers produce o 3 Steps to Analyze changes  Decide whether the event shifts the supply or demand curve (or both)  Decide in which direction the curve shifts  Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity o Shift vs. movement along curve  A shift in the supply curve is a change in supply  Shift in the demand curve is a change in demand  Movement along is determined by change in quantity supplied or demanded

Conclusion: How Prices Allocate Resources...