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Lecture 2

Week 2 study guide


Department
Economics for Management Studies
Course Code
MGEA02H3
Professor
Gordon Cleveland
Lecture
2

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Chapter 3 Demand, Supply, and Price Notes
3.1 Demand
What is “Quantity Demanded”?
x quantity demanded : the amount of a good or service that consumers wish to purchase during some time period
x it is important to notice two things: first, QD is a desired quantity and second, QD refers to a flow of purchases
x total amount of some product that consumers in the relevant market wish to buy in a given time period is influenced by the
following important variables: product’s own price, average income, prices of other products, tastes, distribution of income,
population, and expectations about the future
Quantity Demanded and Price
x a basic economic hypothesis is that the price of a product and the quantity demanded are related negatively, other things being
equal; that is, the lower the price, the higher the quantity demanded; the higher the price, the lower the quantity demanded
x the British economist Alfred Marshall (1842 – 1924) called this fundamental relation the “law of demand”
Demand Schedules and Demand Curves
x demand schedule : table showing relationship between quantity demanded and price of commodity, other things being equal
x demand curve : graphical representation of relationship between QD and price of commodity, other things being equal
x demand : entire relationship between the quantity of a commodity that buyers wish to purchase and the price of that
commodity, other things being equal
x demand curve is drawn with the assumption that everything except the product’s own price is held constant; a change in any of
the variables previously held constant will shift the demand curve to a new position
x the variables that affect demand are: average income, prices of other goods, tastes, distribution of income, population, and
expectations about the future
x substitutes : goods that can be used in place of another good to satisfy similar needs or desires
x complements : goods that tend to be consumed together
x change in demand : change in quantity demanded at each price of commodity, represented by shift in whole demand curve
x change in quantity demanded : a change in the specific quantity of the good demanded, represented by a change from one point
on a demand curve to another point, either on the original demand curve or a new one
x a change in quantity demanded can result form a shift in the demand curve with the price constant; from a movement along a
given demand curve due to a change in the price; or from a combination of the two
3.2 Supply
What is “Quantity Supplied”?
x quantity supplied : the amount of a commodity that producers wish to sell during some time period
x quantity supplied of a product is influenced by the following variables: product’s own price, prices of inputs, technology,
government taxes or subsidies, prices of other products, expectations about the future, and number of suppliers
Quantity Supplied and Price
x basic hypothesis of economics is that price of product and quantity supplied are related positively, other things being equal; that
is, the higher the product’s own price, the more its producers will supply; the lower the price, the less its producers will supply
Supply Schedules and Supply Curves
x supply schedule : table showing relationship between quantity supplied and the price of a commodity, other things being equal
x supply curve : graphical representation of relationship b/n quantity supplied and price of commodity, other things being equal
x supply : the entire relationship between the quantity of some commodity that producers wish to sell and the price of that
commodity, other things being equal
x change in any variables (other than product’s own price) that affects quantity supplied will shift supply curve to new position
x change in supply : change in quantity supplied at each possible price of commodity, represented by shift in whole supply curve
x change in quantity supplied : a change in the specific quantity supplied, represented by a change from one point on a supply
curve to another point, either on the original supply curve or on a new one
x a change in quantity supplied can result from: a change in supply, with the price constant; a movement along a given supply
curve due to a change in the price; or a combination of the two
3.3 The Determination of Price
The Concept of a Market
x market : any situation in which buyers and sellers can negotiate the exchange of goods or services
Graphical Analysis of a Market
x excess demand : a situation in which, at the given price, quantity demanded exceeds quantity supplied
x excess supply : a situation in which, at the given price, quantity supplied exceeds quantity demanded
x excess supply causes downward pressure on price and excess demand causes upward pressure on price
x equilibrium price : the price at which quantity demanded equals quantity supplied; also called the market-clearing price
x disequilibrium price : a price at which quantity demanded does not equal quantity supplied
x disequilibrium : a situation in a market in which there is excess demand or excess supply
Changes in Market Prices
x comparative statics : the derivation of a predictions by analyzing effect of change in some exogenous variable on equilibrium
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