ECON 2001.01 Chapter 1: ECON2001.01, Ch 1

1115 views5 pages
Published on 20 Sep 2018
School
Ohio State University
Department
Economics
Course
ECON 2001.01
Professor
Equilibrium price: The price at which the quantity supplied of good, service, or
resource equals the quantity demanded: the price at which the demand and
supply curves intersect. Also known as the market clearing price
Equilibrium quantity: the quantity traded when the quantity supplied of a good,
service, or resource equals its quantity demanded
Fluctuating prices mean that one of the determinants of supply or demand has
changed and the market is adjusting to a new equilibrium
If the price in the market is already at its equilibrium, where quantity supplied
equals quantity demanded, there are no forces acting on it so it will stay there.
If the market is not at equilibrium, adjustments by consumers and producers
will move the market into a new equilibrium.
The equilibrium price comes from sellers wanting to be able to sell their
products at the highest price and buyers buying them at the lowest. This is the
mutual agreement
Shortage: a situation in which the quantity demanded is greater than the
quantity supplied at the current market price. Also called excess demand
Surplus: a situation in which the quantity supplied is greater than the quantity
demanded at the current market price. Also called excess supply
Markets respond to shortages by driving the price higher
Higher prices encourage suppliers to produce more and some consumers to buy
less
Markets respond to surpluses by placing downward pressure on price
As prices fall suppliers reduce production and some consumers buy more of the
good
Change in equilibrium - change in demand
Nonprice determinant (demand): a characteristic of the demand for a good,
service, or resource other than its own market price. A change in a nonprice
determinant of demand changes the relationship between price and quantity
demanded, either increasing or decreasing quantity demanded at every price.
Sometimes referred to as non-own-price determinant
Change in demand: an increase or decrease in the quantity demanded of a
good, service, or resource at every price. Graphically, such changes are
represented by a shift of the demand curve. Changes in demand are caused by
changes in the nonprice determinants of demand
An increase in demand is a shift to the right
Decrease in demand is a shift to the left
Consumers like lower prices and high quantities
The law of demand states that there is a negative relationship between the
price of a good and the quantity demanded, all else held constant
When a good's price changes, the quantity demanded changes, increasing as
price falls and decreasing as price rises
When a nonprice determinant changes, the overall relationship between the
price and quantity demanded changes. This change causes the graph to shift to
the right or left
Changes in equilibrium - change in supply
Nonprice determinant (supply): a characteristic of the supply of a good, service,
or resource other than its own market price. A change in a nonprice
determinant of supply changes the relationship between price and quantity
supplied, either increasing or decreasing quantity supplied at every price.
Sometimes referred to as non-own-price determinant
Change in supply: an increase or decrease in the quantity supplied of a good,
service, or resource at every price. Graphically, such changes are represented by
a shift of the supply curve. Change in supply are caused by changes in a
nonprice determinant of supply
There is a positive relationship between the price of a good and the quantity
supplied, all else held constant
Nonprice determinants are held equal
Change in equilibrium - complex changes
The nonprice determinants of demand and supply are constantly changing
When both demand and supply change at the same time, it's possible to know
either how price will change or how quantity will change, but not both.
Changes to both demand and supply affect the price in the same way, then how
the equilibrium price will change is known, but how the equilibrium quantity
will change is unknown, or indeterminate
If changes in both supply and demand have similar effects on the equilibrium
quantity, the direction of change for quantity is known, but how price will
change is unknown.
If either price of quantity is indeterminate, whether it will increase, decrease, or
stay unchanged depends on the relative magnitudes of the changes in demand
and supply
Price Ceilings
Prevents prices from rising and keeps the market from adjusting
Price ceiling: a maximum legal price at which a good, service, or resource can be
sold
Nonbinding price ceiling: a maximum legal price that is set above the existing
equilibrium price. Because the market equilibrium price is lower than the price
ceiling, the ceiling has no effect on the market and is said to be nonbinding
Price ceiling that is set above the equilibrium price, and has no effect on
the market
Binding price ceiling: a maximum legal price that is set below the existing
equilibrium price. Because the market equilibrium price is greater than the price
ceiling, the ceiling restricts trade and is said to be binding.
It prevents the price from rising to its equilibrium level
Because the price is lower than the equilibrium price, the quantity
demanded rises and the quantity supplied falls, resulting in a shortage of
the good
When a price ceiling is imposed on a market, it is binding only if it is below the
equilibrium price
For the price ceiling to change behavior in a market, it has to go against the
norm
Price ceiling above the equilibrium price does not affect the market, whereas a
price ceiling below the equilibrium price actually changes behavior in the
market
Price floors
Every person participates in both the supply and demand sides of the market
When you go to a store or buy something online, you are contributing to
the demand for the good or service you're buying
Each day you go to work you are contributing to the supply of labor in the
labor market
Price floors are designed to make sure that sellers receive a minimum price that
is greater than what would be available at the market equilibrium
A minimum legal price at which a good, service, or resource can be sold
Nonbinding price floor: a minimum legal price that is set below the existing
equilibrium price. Because the market equilibrium price is greater than the price
floor, the floor has no effect on the market and is said to be nonbinding
Set below the equilibrium price and it has no effect on the market
Binding price floor: a minimum legal price that is set above the existing
equilibrium price. Because the market equilibrium price is lower than the price
floor, the floor restricts trade and is said to be binding
Prevents the price from falling to its equilibrium level
Because the price is greater than the equilibrium price, the quantity
demanded falls and the quantity supplied rises, resulting in a surplus of
the good
Minimum wage: the lowest wage firms can legally pay employees in the labor
market
A tax on suppliers
Governments help markets to function properly and efficiently by defining and
enforcing the "rules of the game" associated with trade
The role of government in market economies includes defining and enforcing
property rights, determining the rules of commerce, enforcing contracts, and
punishing dishonest behavior, to name just a few services
To pay for the services they provide, governments often tax economic activity to
generate the revenue needed
Taxes change the prices that buyers and sellers face in the market, and change
market outcomes
Excise tax: a tax based on the number of units purchased, not on the price paid
for a good or service
Government collect taxes in order to pay for services that are essential for well-
functioning markets and well-ordered communities
Tax revenue collected by the tax equals the quantity traded times the tax
The size of a tax affects the amount of tax revenue collected
When a good or service is taxed, the overall price paid by consumers rises and
the price received by producers falls
Quantity traded in the market also falls, and fewer units are traded
A tax on demanders
When a tax is imposed on a market, it affects both quantity supplied and
quantity demanded.
Consumers and producers are affected regardless of who actually pays
the tax
In the case of a tax on suppliers, a portion of the tax is passed along to
buyers in the form of higher prices and reduced quantities
Taxes are added on at the time of sale, not the price of a good
These taxes are paid by demanders and like the taxes paid by sellers, these
taxes help fund government services and activities
The amount of the tax times the quantity traded equals the tax revenue
Taxes on demanders cause the overall price paid by consumers to rise and the
price received by producers to fall
Higher prices for consumers and lower prices for producers result in a lower
quantity traded in the market
Market Equilibrium
Thursday, September 6, 2018
8:11 PM
Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in
Equilibrium price: The price at which the quantity supplied of good, service, or
resource equals the quantity demanded: the price at which the demand and
supply curves intersect. Also known as the market clearing price
Equilibrium quantity: the quantity traded when the quantity supplied of a good,
service, or resource equals its quantity demanded
Fluctuating prices mean that one of the determinants of supply or demand has
changed and the market is adjusting to a new equilibrium
If the price in the market is already at its equilibrium, where quantity supplied
equals quantity demanded, there are no forces acting on it so it will stay there.
If the market is not at equilibrium, adjustments by consumers and producers
will move the market into a new equilibrium.
The equilibrium price comes from sellers wanting to be able to sell their
products at the highest price and buyers buying them at the lowest. This is the
mutual agreement
Shortage: a situation in which the quantity demanded is greater than the
quantity supplied at the current market price. Also called excess demand
Surplus: a situation in which the quantity supplied is greater than the quantity
demanded at the current market price. Also called excess supply
Markets respond to shortages by driving the price higher
Higher prices encourage suppliers to produce more and some consumers to buy
less
Markets respond to surpluses by placing downward pressure on price
As prices fall suppliers reduce production and some consumers buy more of the
good
Change in equilibrium - change in demand
Nonprice determinant (demand): a characteristic of the demand for a good,
service, or resource other than its own market price. A change in a nonprice
determinant of demand changes the relationship between price and quantity
demanded, either increasing or decreasing quantity demanded at every price.
Sometimes referred to as non-own-price determinant
Change in demand: an increase or decrease in the quantity demanded of a
good, service, or resource at every price. Graphically, such changes are
represented by a shift of the demand curve. Changes in demand are caused by
changes in the nonprice determinants of demand
An increase in demand is a shift to the right
Decrease in demand is a shift to the left
Consumers like lower prices and high quantities
The law of demand states that there is a negative relationship between the
price of a good and the quantity demanded, all else held constant
When a good's price changes, the quantity demanded changes, increasing as
price falls and decreasing as price rises
When a nonprice determinant changes, the overall relationship between the
price and quantity demanded changes. This change causes the graph to shift to
the right or left
Changes in equilibrium - change in supply
Nonprice determinant (supply): a characteristic of the supply of a good, service,
or resource other than its own market price. A change in a nonprice
determinant of supply changes the relationship between price and quantity
supplied, either increasing or decreasing quantity supplied at every price.
Sometimes referred to as non-own-price determinant
Change in supply: an increase or decrease in the quantity supplied of a good,
service, or resource at every price. Graphically, such changes are represented by
a shift of the supply curve. Change in supply are caused by changes in a
nonprice determinant of supply
There is a positive relationship between the price of a good and the quantity
supplied, all else held constant
Nonprice determinants are held equal
Change in equilibrium - complex changes
The nonprice determinants of demand and supply are constantly changing
When both demand and supply change at the same time, it's possible to know
either how price will change or how quantity will change, but not both.
Changes to both demand and supply affect the price in the same way, then how
the equilibrium price will change is known, but how the equilibrium quantity
will change is unknown, or indeterminate
If changes in both supply and demand have similar effects on the equilibrium
quantity, the direction of change for quantity is known, but how price will
change is unknown.
If either price of quantity is indeterminate, whether it will increase, decrease, or
stay unchanged depends on the relative magnitudes of the changes in demand
and supply
Price Ceilings
Prevents prices from rising and keeps the market from adjusting
Price ceiling: a maximum legal price at which a good, service, or resource can be
sold
Nonbinding price ceiling: a maximum legal price that is set above the existing
equilibrium price. Because the market equilibrium price is lower than the price
ceiling, the ceiling has no effect on the market and is said to be nonbinding
Price ceiling that is set above the equilibrium price, and has no effect on
the market
Binding price ceiling: a maximum legal price that is set below the existing
equilibrium price. Because the market equilibrium price is greater than the price
ceiling, the ceiling restricts trade and is said to be binding.
It prevents the price from rising to its equilibrium level
Because the price is lower than the equilibrium price, the quantity
demanded rises and the quantity supplied falls, resulting in a shortage of
the good
When a price ceiling is imposed on a market, it is binding only if it is below the
equilibrium price
For the price ceiling to change behavior in a market, it has to go against the
norm
Price ceiling above the equilibrium price does not affect the market, whereas a
price ceiling below the equilibrium price actually changes behavior in the
market
Price floors
Every person participates in both the supply and demand sides of the market
When you go to a store or buy something online, you are contributing to
the demand for the good or service you're buying
Each day you go to work you are contributing to the supply of labor in the
labor market
Price floors are designed to make sure that sellers receive a minimum price that
is greater than what would be available at the market equilibrium
A minimum legal price at which a good, service, or resource can be sold
Nonbinding price floor: a minimum legal price that is set below the existing
equilibrium price. Because the market equilibrium price is greater than the price
floor, the floor has no effect on the market and is said to be nonbinding
Set below the equilibrium price and it has no effect on the market
Binding price floor: a minimum legal price that is set above the existing
equilibrium price. Because the market equilibrium price is lower than the price
floor, the floor restricts trade and is said to be binding
Prevents the price from falling to its equilibrium level
Because the price is greater than the equilibrium price, the quantity
demanded falls and the quantity supplied rises, resulting in a surplus of
the good
Minimum wage: the lowest wage firms can legally pay employees in the labor
market
A tax on suppliers
Governments help markets to function properly and efficiently by defining and
enforcing the "rules of the game" associated with trade
The role of government in market economies includes defining and enforcing
property rights, determining the rules of commerce, enforcing contracts, and
punishing dishonest behavior, to name just a few services
To pay for the services they provide, governments often tax economic activity to
generate the revenue needed
Taxes change the prices that buyers and sellers face in the market, and change
market outcomes
Excise tax: a tax based on the number of units purchased, not on the price paid
for a good or service
Government collect taxes in order to pay for services that are essential for well-
functioning markets and well-ordered communities
Tax revenue collected by the tax equals the quantity traded times the tax
The size of a tax affects the amount of tax revenue collected
When a good or service is taxed, the overall price paid by consumers rises and
the price received by producers falls
Quantity traded in the market also falls, and fewer units are traded
A tax on demanders
When a tax is imposed on a market, it affects both quantity supplied and
quantity demanded.
Consumers and producers are affected regardless of who actually pays
the tax
In the case of a tax on suppliers, a portion of the tax is passed along to
buyers in the form of higher prices and reduced quantities
Taxes are added on at the time of sale, not the price of a good
These taxes are paid by demanders and like the taxes paid by sellers, these
taxes help fund government services and activities
The amount of the tax times the quantity traded equals the tax revenue
Taxes on demanders cause the overall price paid by consumers to rise and the
price received by producers to fall
Higher prices for consumers and lower prices for producers result in a lower
quantity traded in the market
Market Equilibrium
Thursday, September 6, 2018 8:11 PM
Unlock document

This preview shows pages 1-2 of the document.
Unlock all 5 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Equilibrium price: the price at which the quantity supplied of good, service, or resource equals the quantity demanded: the price at which the demand and supply curves intersect. Equilibrium quantity: the quantity traded when the quantity supplied of a good, service, or resource equals its quantity demanded. Fluctuating prices mean that one of the determinants of supply or demand has changed and the market is adjusting to a new equilibrium. If the price in the market is already at its equilibrium, where quantity supplied equals quantity demanded, there are no forces acting on it so it will stay there. If the market is not at equilibrium, adjustments by consumers and producers will move the market into a new equilibrium. The equilibrium price comes from sellers wanting to be able to sell their products at the highest price and buyers buying them at the lowest.

Get OneClass Grade+

Unlimited access to all notes and study guides.

YearlyMost Popular
75% OFF
$9.98/m
Monthly
$39.98/m
Single doc
$39.98

or

You will be charged $119.76 upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.