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Lecture

ECON101 Lecture Notes - Arc Elasticity, Price Support, Price Ceiling


Department
Economics
Course Code
ECON101
Professor
Lutz- Alexander Busch

Page:
of 12
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
Demand curves slope downwards
Changes in demand:
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
Movement along the demand curve: all
other variables unchanged
Shift in the demand curve: change in
demand due to changes in variables
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: