Principles of economics openstax chapter3

Free Market SystemSupply and Demand: the name of the most important model in all economics Market: a network of buyers and sellers negotiating prices Price: the amount of money that must

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Principles of Economics

Chapter 3 Demand and Supply

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Demand & supply

Organic vegetables and fruits locally grown and sold should cost less than regular produce because

of low transportation cost That is not, however, usually the case

Free Market System

Supply and Demand: the name of the most important model in all economics

Market: a network of buyers and sellers negotiating prices

Price: the amount of money that must be paid for a unit of a good or service

Quantity: the amount of a good or service bought or sold

Demand and Supply

Consumers: market participants buying goods and services

Producers: market participants selling goods and services

Equilibrium Price: the money payment at which consumers and producers agree to transact

Equilibrium Quantity: the amount of output exchanged at the equilibrium price

Demand and Supply

Quantity Demanded: the amount of a good or service consumers are willing and able to buy at a particular price

Quantity Supplied: the amount of a good or service producers are willing and able to sell at a particular price

Demand and Supply

Demand shows the relationship between price and

quantity demanded, all being equal.

Supply shows the relationship between price and quantity supplied, all being equal.

The Law of Supply: quantity supplied and price are positively related The supply is upward sloping

Reason: Profitability

Demand and Supply

Market Equilibrium: A condition at which independent plans of consumers and producers coincide in the market

Demand = Supply to determine the equilibrium price and quantity

No shortage or surplus

Demand and Supply

Shortage: At a price lower then the equilibrium price, quantity demanded exceeds quantity supplied

Surplus: At a price higher then the equilibrium price, quantity supplied exceeds quantity demanded

In a “free market,” price adjustments eliminate shortage or surplus

Market equilibrium

SHIFT in demand

Increased demand is a shift to the right from D0 to D1

Decreased demand is a shift to the left from D0 to D2

Determinants of Demand

• Consumer Taste or Preference

• Consumer Income

• Price of Substitute and Complementary Goods

• Population: Number of Buyers

• Expectations of Price Change

• Sales Taxes

• Government Subsidies

With an increase in income, consumers will purchase larger quantities, causing the demand curve to increase (shifting to the right).

Determinants of Demand

SHIFT in supply

Increased supply is a shift to the right from S0 to S2

Decreased supply is a shift to the left from S0 to S1

MARKET FOR SALMON

Good weather to fish leads to and increase in supply of salmon, causing its price to decline and quantity to increase.

MARKET FOR NEWSPAPER

A change in tastes from print news sources to digital sources results in a leftward shift in demand for the former The result is a decrease in both equilibrium price and quantity.

MARKET FOR POSTAL SERVICES

(a) Higher wages causes the supply to decline, decreasing the quantity, but increasing the price (b) Communicating by E-mail & Text-message causes the demand to decline, decreasing both quantity and price

Shift in demand & Supply

Supply and demand shifts cause changes in equilibrium price and quantity.

Price ceiling

When the government set the market price below the equilibrium price, causing a shortage

At P = 500, shortage = 19 – 15 = 4

Price floor

When the government set the market price above the equilibrium price, causing a surplus.

At Pf > Pe, surplus = 19 – 15 = 4

Gains from trade

Consumer Surplus: Total benefit to the consumer as a result of buying a good at the

Price ceiling and price floor cuts into consumer surplus and producer surplus causing market disequilibrium and inefficiency.

Triangles (U + W) and (J + K) are called Dead Weight Loss due to deviation of market price from equilibrium price.

Government & gains from trade