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Lecture

CHAPTER 3,4,5 econ.docx

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Department
Economics
Course
ECON 101
Professor
Lutz- Alexander Busch
Semester
Fall

Description
CHAPTER 3  Each good and service has its own special characteristics that determine the quantity people are willing and able to consume, such as: o Price o Independent variables that are important determinants of demand:  Consumer preference  Process of related goods  Services  Income  Demographic characteristics (population size, buyer expectations) Price and the demand curve:  A change in quantity demand is not a change or shift in the demand curve; it is the movement along the demand curve  A higher price reduced the quantity demand  A lower price increases the quantity demand Movement along the demand curve: all  Demand curves slope downwards other variables unchanged Shift in the demand curve: change in Changes in demand: demand due to changes in variables  Price alone does not determine the quantity of a good or serve that people consume  A change in any one of the variables held constant in constructing demand schedule will change the quantities demand at each price (shift in the entire demand curve rather than a movement along the demand curve)  Less of a demand shifts the curve to the left, increase of demand shifts the curve to the right  Demand shifters: o Consumer preference:  Change in preference that makes one good or service more popular will shift the demand curve to the right  Change that makes it less popular will shift the demand curve to the right o Price of related goods and services  Complements (opposite) – doughnuts & coffee  Substitutes (same) – coffee & tea o Income:  Income rises, increase in consumption of many goods and services  Income fall, their consumption of these goods and services fall  Normal good (same) shifts the demand curve to the right  Inferior good (opposite) shifts the demand curve to the left o Demographic characteristics:  Number of buyers affect the total quantity of a good or service that will be bought (greater the population, greater the demand)  Increase number of buyers shifts the demand curve to the right  Decrease number of buyers shifts the demand curve to the left o Buyer expectations:  Consumption of goods that can be easily stores, or consumption can be postponed, is strongly affected by buyer expectations  Lower prices in the future shifts the demand curve to the left  Increase of prices in the future shifts the demand curve to the right Supply:  Determines the quantity of a good or services sellers are willing to offer for sale: o Price:  Higher price is likely to induce sellers to offer a great quantity of good or service  All other things unchanged (ceteris paribus) o Production cost:  Price of factors used to produce the good or service  Returns from alternative activities  Technology  Expectations of sellers  Natural events (ie. Weather changes) o Number of sellers:  Greater the number of sellers of a particular good or service, the greater will be the quantity offered at any price per time period Price and the supply curve:  Increase in price, increase of quantity supplied (Law of supply)  Exceptions of increase in prices (goods that cannot be produced)  When there is many sellers, increase price increases the quantity supplied  Supply curve: o Price and quantity supplied is generally positive (upward sloping) o Change in price causes a movement along the supply curve (change in quantity of supplied) o Change in quantity supplied doesn’t not shift the supply curve (moves along the supply curve) o Change in any variables will cause a change in supply which will shift the supply curve o Increase in the quantity of a good or service supplied at each price shifts the supply curve to the right (ie. Price of fertilizers falls) o Decrease in the quantity of a good or service supplied at each price shifts the supply curve to the left (ie. Increase in production cost and excessive rain that reduces the yields from coffee plants)  Supply shifters: o Price of factors of production:  Change in the price of labor (or some other factor of production) will change the cost of producing any quantity of the good or service  Increase in factor prices should decrease the quantity suppliers will offer at any price, shifting the supply curve to the right  A reduction in any of these costs increases supply, shifting the supply curve to the right o Returns from alternative activities:  Opportunity cost suggest that the value of the activity forgone is the opportunity cost of the activity chosen  Shift the supply curve to the left to reflect a decrease in supply (producing something that is not majorly wanted over the other) o Technology:  Alters the combinations of inputs or the types of inputs required in the production process  Improvement in technology means that fewer and/or less costly inputs are needed  Cost of production is lower, the profits available at a given price will increase, and producers will produce more  More produced at every price the supply curve will shift to the right o Seller expectations:  All supply curves are based in part on seller expectations about future market conditions  Decisions about production and selling is made before the product is ready for sale  Changes in seller expectations can have important effects on price and quantity  Price of one item will increase in the future, the owners will decide to produce it later when the price is high thus a decrease in supply shifting the supply curve to the left o Natural events:  Something destroys a substantial part of an agricultural crop, the supply curve will shift to the left (ie. Storms, drought, insect infestations)  Unusually good harvest the supply curve will shift to the right o Number of sellers:  Change in the number of sellers in an industry changes the quantity available at each price and thus changes supply  Increase in the number of sellers supplying a good or service shifts the supply curve to the right  Reduction in the number of sellers shifts the supply curve to the left Determination of price and quantity:  Putting the two curves together, there is a price at which the quantity of buyers are willing and able to purchase equals the quantity sellers will offer for sale  At a price above the equilibrium there is a tendency for the price to fall  At a price below the equilibrium there is a tendency for the price to rise  One price equilibrium can achieved Surplus:  No surplus at the equilibrium price  Occurs only if the current price exceeds the equilibrium price  Unsold goods sellers will begin to reduce their prices to clear out unsold goods, while the quantity of goods demand begins to rise  Increase in quantity demand is a movement along the demand curve – the demand curve does not shift in response to a reduction in price  Prices will continue to fall until it hits equilibrium (no reason for the price to fall further)  Surplus is short lived Shortages:  Price below the equilibrium  Sellers are likely to begin to raise their prices, an increase in the quantity supplied and a reduction in the quantity demanded until the equilibrium price is achieved Shifts in demand and supply:  Shift in demand or supply curves changes the equilibrium price and equilibrium quantity of a good or service  Increase in demand (shifts the demand curve to the right, movement along the supply curve) o Demand shifters that can increase demand:  Shift in preferences that leads to greater coffee consumption  Lower price for a complement to coffee (doughnuts)  Higher price of substitutes (tea)  Increase of income  Increase of population  Change in buyer expectations (predictions of bad weather lowering expected yields on coffee plants and increasing future coffee prices)  Decrease in demand (shift the demand curve to the left, movement along the supply curve) o Demand shifters that can decrease demand:  Shift in preference that makes people want to consume less coffee  Increase in the price of a complement (doughnuts)  Reduction in the price of substitutes (tea)  Reduction in income  Reduction in population  Change in buyer expectations that lead people to expect lower prices for coffee in the future  Increase in supply (shifts the supply curve to the right, movement along the demand curve) o Supply shifters:  Reduction in the price of an input (labor)  Decline in the returns available from alternative uses of the inputs that produces the good  Improvement in technology  Good weather  Increase in the number of coffee producing firms  Decrease in supply (shifts the supply curve to the left, movement along the demand curve) o Supply shifters:  Increase in the price of inputs used in the production of coffee  Increase in the returns available from alternative uses of these inputs  Decline in production because of problems in technology (restriction on pesticides)  Reduction in the number of coffee producing firms  Natural event (excessive rain) Simultaneous shifts: An overview of demand and supply: the circular flow model  Circular flow model: o Shows flows of spending and income through the economy o Firms supply goods and services to households o Households buy these goods and services from firms o House holds supply factors of production (labor, capital, and natural resources) that firms require o Payments firms make in exchange for these factors represent the income households earn o Figure 3.13 shows only private domestic economy (omits government and foreign sectors) o Its called the circular flow of model because households use the income they receive from their supply of factors of production to buy goods and services from firms, in turn firms use the payments they receive from households to pay for their factors of production  Demand and supply model: o Helps us understand what is happening in each of these product or facto markets and allows us to see hoe these markets are interrelated CHAPTER 4  A shift in either demand or supply, or in both, leads to a change in equilibrium price and equilibrium quantity The personal computer market:  Rapid increase in the number of firms, together with dramatic technological improvements, led to an increase in supply, shifting the supply curve to the right  Demand shifted to the right as income rose and new uses for computers (emailing, social networking, voice over internet protocol (VoIP) and radio frequency ID (RFID) tags), altered preferences of consumer and business users  A fall in equilibrium price and an increase in equilibrium quantity, we conclude that the rightward shift of supply has outweighed the rightward shift in demand The markets for crude oil and for gasoline:  Dramatic increase in gasoline and oil prices in 2008, due to the increasing worldwide demand outpacing producers’ ability or willingness to increase production  Higher oil prices increased the cost of producing every good or service (production of most goods require transportation), thus an higher price for every good and service  Supply curves shifted to the left, putting downward pressure on output and upward pressure on prices  Second half of 2008 the demand curve for oil shifted to the left  By November 2008 price per barrel dropped and gas prices subsided and so did the threat of higher prices The stock market:  Firms own capital, people (households) own firms, through ownership of firms that households own capital  Firms can be owned by: o One person (sole partnership) o Several people (partnership) o Shareholders who own stock in the firm (corporation)  Produces 90% of the nations total output  Owns most capitals (machines, plants, buildings…)  Prices of shares of corporate stock, shares in the ownership of a corporation are determined by the interaction of demand and supply  Value of a firm’s stock determine the value of a sole proprietorship or partnership  Corporation needs funds to increase capital (or other reasons) they can issue new stocks, borrow funds or use past profits  Once new shares have been sold in initial public offering (IPO), the corporation receive no future funding from those stocks on the secondary market  Secondary market is the market for stocks that have been issued in the past, and the news reports about stock prices almost always refer to activity in the secondary market  Stock market: o To buy or sell a share of stock, one places an order with a stockbroker who replays the order to one of the trade at some exchange o If the price of someone is willing to pay matches the price at which someone else is willing to sell, the trade is made  - If the price were higher, more shares would be offered for sale than would be demanded, and the price would quickly fall - If the price were lower, more shares would be demanded than would be supplied, and the price would quickly rise - Prices of shares of stock to move quickly to their equilibrium levels  Intersection of the demand and supply curve for shares of stock in a particular company determines the equilibrium price for a share of stock  A corporation will retain and reinvest some its profits to increase its future profitability  Future profits play a role in determining the value of its stock  Future profits are unsure, investors can only predict what they might be: o Based on information about future demand for the company’s products o Future cost of production o Information about the soundness of a company’s management  Upward slope of the supply curve tells us that as the price of the stock rises, more people conclude that the firm’s future earnings do not justify holding the stock and therefore sell it  Downward slope of a demand curve suggests that at lower prices for the stock, more people calculate that the firm’s future earnings will justify the stock’s purchase  Equilibrium price: the number of shares supplied by people who think holding the stock no longer makes sense just balances the number of shares demanded by people who think it does  Shifts of the curve: o Supply curve shift to the left, demand curve shift to the right:  Good future expectation o Supply curve shift to the right, dem
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