ECON 112 Lecture Notes - Lecture 4: Economic Equilibrium, Demand Curve, Perfect Competition

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18 Sep 2015
Department
Course
The$Market$Forces$of$Supply$and$Demand
A"group"of"buyers"and"sellers"of"a"particular"good"or"service
i.
Determine"the"demand"for"the"product
1)
Buyers"as"a"group
ii.
Determine"the"supply"of"the"product
1)
Sellers"as"a"group
Market
a.
Markets"for"many"agricultural"commodities
1)
Highly"organized
i.
Market"for"ice"cream"in"a"particular"town
1)
Less"organized
ii.
Markets"take"many"forms
b.
Does"not"actually"exist"
i.
Goods"offered"for"sale"are"all"exactly"the"same
ii.
No"single"buyer"or"seller"has"any""influence"over"the"market"
price
1)
Price"takers
2)
Buyers"and"sellers" are"so"numerous
Buyers"can"buy"all"they"want
1)
Sellers"can"sell"all"they"want
2)
At"the"market"price
iv.
Perfectly"competitive"market
c.
The"only"seller" in"the"market
i.
Sets"the"price
ii.
Monopoly"
d.
Between"perfect"competition"and"monopoly
i.
Other"markets
e.
Markets"and"Competition
I.
Relationship"between"the"price"of"a"good"and"quantity"demanded."Law$of$
Demand
a.
Takes"everything"else"constantb.
Demand"schedule:"a"table/functioni.
Prince"on"the"vertical"axis1)
Quantity"on"the"horizontal"axis2)
Demand"curve:"a"graphii.
Two"ways"to"see"thisc.
Reflects"individual's"demand"for"a"producti.
Only"based"on"the"price1)
Other"things"stay"constant2)
Individual"quantity"demanded"of"a"good"variesii.
Individual"demandd.
The"sum"of"all"individual"demands"for"a"good"or"servicei.
Sum"the"individual"demand"curves"horizontally1)
As"the"price"variesa)
Everything"else"stays"constantb)
Totally"quantity"demanded"of"a"good"varies2)
Market"demand"curveii.
Market"demande.
Any"change"that"increases"the"quantity"demanded"at"every"
price
1)
Demand"curve"shifts"right2)
Increase"in"demandi.
Any"change"that"decreases"the"quantity"demanded"at"every"
price
1)
Demand"curve"shifts"left2)
Decrease"in"demandii.
Other"things"constanti)
An"increase"in"income"leads"to"an"increase"in"
demand
ii)
Normal"gooda)
Other"things"constanti)
An"increase"in"income"leads"to"a"decrease"in"
demand
ii)
Inferior"goodb)
Income1)
An"increase"in"the"price"of"onei)
Leads"to"an"increase"in"the"demand"for"the"otherii)
Substitutes,"two"goodsa)
And"increase"in"the"price"of"onei)
Leads"to"a"decrease"in"the"demand"for"the"otherii)
Complements,"two"goodsb)
Prices"of"related"goods2)
Changes"in"tastes"lead"to"changes"in"the"demanda)
Tastes3)
Increase"in"current"demandi)
Expect"an"increase"in"incomea)
Increase"in"current"demandi)
Expect"higher"pricesb)
Expectations"about"the"future4)
Increases"="market"demand"increasesa)
Number"of"buyers5)
Variables"that"can"shift"the"demand"curveiii.
Shifts"in"the"demand"curvef.
Demand
II.
Relationship"between"the"price"of"a"good"and"the"quantity"supplied."Law$
of$supply
a.
Takes"everything"else"constantb.
Supple"schedule:"a"tablei.
Price"on"the"vertical"axis1)
Quantity"on"the"horizontal"axis2)
Supple"curve:"a"graphii.
Two"ways"to"see"itc.
Reflects"seller's"individual"supply"for"a"producti.
Individual"quantity"of"supplied"of"a"good"varies"when"the"prices"varyii.
Individual"supplyd.
Sum"of"the"supplies"of"all"sellers"for"a"good"or"servicei.
Sum"of"individual"supply"curves"horizontally1)
As"the"price"variesa)
Total"quantity"supplied"of"a"good"varies2)
Supply"schedule"and"curveii.
Market"supplee.
Any"change"that"increases"the"quantity"supplied"at"every"price1)
Supply"curve"shifts"right2)
Increase"in"supplei.
Any"change"that"decreases"the"quantity"supplied"at"every"
price
1)
Supply"curve"shifts"left2)
Decrease"in"supplyii.
Supply"is"negatively"related"to"pries"of"inputsa)
Decrease"in"supplei)
Higher"input"pricesb)
Input"prices1)
Increase"in"supplyi)
Advance"in"technologya)
Technology2)
Decrease"in"current"supplyi)
Expected"higher"pricesa)
Expectations"about"the"future3)
Market"supply"increasesa)
Number"of"sellers4)
Variables"that"can"shift"the"supply"curveiii.
Variables"that"can"shift"the"supply"curvef.
SupplyIII.
Various"forces"are"in"balancei.
A"situation"in"which"market"prices"has"reached"a"level"where"
quantity(supplied(=(quantity(demanded
ii.
At"this"point,"supply"and"demand"curves"intersectiii.
Balances"quantity"supplied"and"quantity"demanded1)
MarketYclearing"price2)
Equilibrium"priceiv.
Quantity"supplied"and"quantity"demanded"at"the"equilibrium"
price
1)
Equilibrium"quantityv.
Equilibriuma.
Quantity"supplied">"quantity"demandedi.
Excess"supplyii.
Movements"along"the"demand"and"supply"curves1)
Increase"in"quantity"demanded2)
Decrease"in"quantity"supplied3)
Downward"pressure"on"priceiii.
Surplusb.
Quantity"demanded">"quantity"suppliedi.
Excess"demandii.
Movements"along"the"demand"and"supply"curves1)
Decrease"in"quantity"demanded2)
Increase"in"quantity"supplied3)
Upward"pressure"on"priceiii.
Shortagec.
To"bring"the"quantity"supplied"and"the"quantity"demanded"for"
that"good"into"balance
1)
The"price"of"any"good"adjustsi.
Surpluses"and"shortages"are"temporary1)
In"most"marketsii.
Law"of"supply"and"demandd.
Decide"whether"the"event"shifts"the"supply"curve,"the"demand"
curve,"or"both
i.
Decide"whether"the"curves"shift"left"or"rightii.
Compare"the"initial"and"new"equilibrium"and"their"effectsiii.
Three"steps"to"analyzing"changes"in"equilibriume.
Higher"equilibrium"price"="higher"equilibrium"quantity1)
Demand"curve"shifts"righti.
A"change"in"market"equilibrium"due"to"a"shift"in"demandf.
Higher"equilibrium"price"="lower"equilibrium"quantity1)
Supply"curve"shifts"lefti.
A"change"in"market"equilibrium"due"to"a"shift"in"suppleg.
Demand"curve"shifts"to"the"right;"Supply"curve"shifts"to"the"lefti.
If"demand"increases"substantially"while"supply"falls"just"a"
little:"equilibrium"quantity"rises
1)
If"supply"falls"substantially"while"demand"rises"just"a"little:"
equilibrium"quantity"falls
2)
Equilibrium"price"raisesii.
LOOK"AT"TABLE"4"in"PowerPoint"slide"49iii.
Shifts"in"both"supply"and"demandh.
Supply"and"Demand"TogetherIV.
Signals"that"guide"the"allocation"of"resourcesi.
Mechanism"for"rationing"scarce"resourcesii.
Determine"who"produces"each"good"and"how"much"is"producediii.
Pricesa.
How"Prices"Allocate"ResourcesV.
Chapter(4
Wednesday," September" 9,"2015
12:57"PM
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The$Market$Forces$of$Supply$and$Demand
A"group"of"buyers"and"sellers"of"a"particular"good"or"servicei.
Determine"the"demand"for"the"product1)
Buyers"as"a"groupii.
Determine"the"supply"of"the"product1)
Sellers"as"a"groupiii.
Marketa.
Markets"for"many"agricultural"commodities1)
Highly"organizedi.
Market"for"ice"cream"in"a"particular"town1)
Less"organizedii.
Markets"take"many"formsb.
Does"not"actually"exist"i.
Goods"offered"for"sale"are"all"exactly"the"sameii.
No"single"buyer"or"seller"has"any""influence"over"the"market"
price
1)
Price"takers2)
Buyers"and"sellers" are"so"numerousiii.
Buyers"can"buy"all"they"want1)
Sellers"can"sell"all"they"want2)
At"the"market"priceiv.
Perfectly"competitive"marketc.
The"only"seller" in"the"marketi.
Sets"the"priceii.
Monopoly"d.
Between"perfect"competition"and"monopolyi.
Other"marketse.
Markets"and"CompetitionI.
Relationship"between"the"price"of"a"good"and"quantity"demanded."Law$of$
Demand
a.
Takes"everything"else"constant
b.
Demand"schedule:"a"table/function
i.
Prince"on"the"vertical"axis
1)
Quantity"on"the"horizontal"axis
2)
Demand"curve:"a"graph
ii.
Two"ways"to"see"this
c.
Reflects"individual's"demand"for"a"product
i.
Only"based"on"the"price
1)
Other"things"stay"constant
2)
Individual"quantity"demanded"of"a"good"varies
ii.
Individual"demand
d.
The"sum"of"all"individual"demands"for"a"good"or"service
i.
Sum"the"individual"demand"curves"horizontally
1)
As"the"price"varies
a)
Everything"else"stays"constant
b)
Totally"quantity"demanded"of"a"good"varies
2)
Market"demand"curve
ii.
Market"demand
e.
Any"change"that"increases"the"quantity"demanded"at"every"
price
1)
Demand"curve"shifts"right
2)
Increase"in"demand
i.
Any"change"that"decreases"the"quantity"demanded"at"every"
price
1)
Demand"curve"shifts"left
2)
Decrease"in"demand
ii.
Other"things"constant
i)
An"increase"in"income"leads"to"an"increase"in"
demand
ii)
Normal"good
a)
Other"things"constant
i)
An"increase"in"income"leads"to"a"decrease"in"
demand
ii)
Inferior"good
b)
Income
1)
An"increase"in"the"price"of"onei)
Leads"to"an"increase"in"the"demand"for"the"otherii)
Substitutes,"two"goodsa)
And"increase"in"the"price"of"onei)
Leads"to"a"decrease"in"the"demand"for"the"otherii)
Complements,"two"goodsb)
Prices"of"related"goods
2)
Changes"in"tastes"lead"to"changes"in"the"demanda)
Tastes3)
Increase"in"current"demandi)
Expect"an"increase"in"incomea)
Increase"in"current"demandi)
Expect"higher"pricesb)
Expectations"about"the"future4)
Increases"="market"demand"increasesa)
Number"of"buyers5)
Variables"that"can"shift"the"demand"curve
Shifts"in"the"demand"curve
f.
DemandII.
Relationship"between"the"price"of"a"good"and"the"quantity"supplied."Law$
of$supply
a.
Takes"everything"else"constantb.
Supple"schedule:"a"tablei.
Price"on"the"vertical"axis1)
Quantity"on"the"horizontal"axis2)
Supple"curve:"a"graphii.
Two"ways"to"see"itc.
Reflects"seller's"individual"supply"for"a"producti.
Individual"quantity"of"supplied"of"a"good"varies"when"the"prices"varyii.
Individual"supplyd.
Sum"of"the"supplies"of"all"sellers"for"a"good"or"servicei.
Sum"of"individual"supply"curves"horizontally1)
As"the"price"variesa)
Total"quantity"supplied"of"a"good"varies2)
Supply"schedule"and"curveii.
Market"supplee.
Any"change"that"increases"the"quantity"supplied"at"every"price1)
Supply"curve"shifts"right2)
Increase"in"supplei.
Any"change"that"decreases"the"quantity"supplied"at"every"
price
1)
Supply"curve"shifts"left2)
Decrease"in"supplyii.
Supply"is"negatively"related"to"pries"of"inputsa)
Decrease"in"supplei)
Higher"input"pricesb)
Input"prices1)
Increase"in"supplyi)
Advance"in"technologya)
Technology2)
Decrease"in"current"supplyi)
Expected"higher"pricesa)
Expectations"about"the"future3)
Market"supply"increasesa)
Number"of"sellers4)
Variables"that"can"shift"the"supply"curveiii.
Variables"that"can"shift"the"supply"curvef.
SupplyIII.
Various"forces"are"in"balancei.
A"situation"in"which"market"prices"has"reached"a"level"where"
quantity(supplied(=(quantity(demanded
ii.
At"this"point,"supply"and"demand"curves"intersectiii.
Balances"quantity"supplied"and"quantity"demanded1)
MarketYclearing"price2)
Equilibrium"priceiv.
Quantity"supplied"and"quantity"demanded"at"the"equilibrium"
price
1)
Equilibrium"quantityv.
Equilibriuma.
Quantity"supplied">"quantity"demandedi.
Excess"supplyii.
Movements"along"the"demand"and"supply"curves1)
Increase"in"quantity"demanded2)
Decrease"in"quantity"supplied3)
Downward"pressure"on"priceiii.
Surplusb.
Quantity"demanded">"quantity"suppliedi.
Excess"demandii.
Movements"along"the"demand"and"supply"curves1)
Decrease"in"quantity"demanded2)
Increase"in"quantity"supplied3)
Upward"pressure"on"priceiii.
Shortagec.
To"bring"the"quantity"supplied"and"the"quantity"demanded"for"
that"good"into"balance
1)
The"price"of"any"good"adjustsi.
Surpluses"and"shortages"are"temporary1)
In"most"marketsii.
Law"of"supply"and"demandd.
Decide"whether"the"event"shifts"the"supply"curve,"the"demand"
curve,"or"both
i.
Decide"whether"the"curves"shift"left"or"rightii.
Compare"the"initial"and"new"equilibrium"and"their"effectsiii.
Three"steps"to"analyzing"changes"in"equilibriume.
Higher"equilibrium"price"="higher"equilibrium"quantity1)
Demand"curve"shifts"righti.
A"change"in"market"equilibrium"due"to"a"shift"in"demandf.
Higher"equilibrium"price"="lower"equilibrium"quantity1)
Supply"curve"shifts"lefti.
A"change"in"market"equilibrium"due"to"a"shift"in"suppleg.
Demand"curve"shifts"to"the"right;"Supply"curve"shifts"to"the"lefti.
If"demand"increases"substantially"while"supply"falls"just"a"
little:"equilibrium"quantity"rises
1)
If"supply"falls"substantially"while"demand"rises"just"a"little:"
equilibrium"quantity"falls
2)
Equilibrium"price"raisesii.
LOOK"AT"TABLE"4"in"PowerPoint"slide"49iii.
Shifts"in"both"supply"and"demandh.
Supply"and"Demand"TogetherIV.
Signals"that"guide"the"allocation"of"resourcesi.
Mechanism"for"rationing"scarce"resourcesii.
Determine"who"produces"each"good"and"how"much"is"producediii.
Pricesa.
How"Prices"Allocate"ResourcesV.
Chapter(4
Wednesday," September" 9,"2015 12:57"PM
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