micro economics chapter 03

Law of Demand• Other things equal, as price falls, quantity demanded rises, and as price rises, quantity demanded falls... Quantity Demanded• Change in demand • Refers to shift of entir

Demand, Supply, and Market

Equilibrium 3

• Any institution where buyers and

sellers interact

• Price is determined in the interactions

of buyers and sellers

LO1

• Schedule or curve

• Amount consumers are willing and able to purchase at a given price

• Other things equal

• Market demand

Law of Demand

• Other things equal, as price falls,

quantity demanded rises, and as

price rises, quantity demanded falls

• Reasons:

• Common sense

• Law of diminishing marginal utility

• Income effect and substitution effects

LO1

Determinants of Demand

• Factors other than price

• Usually assumed to be constant

• When a determinant changes,

demand shifts

Determinants of Demand

• Change in buyer’s tastes

• Change in number of buyers

• Change in income

• Normal Goods

• Inferior Goods

LO1

Determinants of Demand

• Change in prices of related goods

• Complements

• Substitutes

• Chris Rock

• Change in consumers’ expectations

• Future prices

• Future income

• Future product availability

Demand vs Quantity Demanded

• Change in demand

• Refers to shift of entire demand curve to left or right

• Cause: Change in determinants of

demand

LO2

Demand vs Quantity Demanded

• Change in quantity demanded

• Refers to movement from one point

to another on fixed demand curve

• Cause: Change in price of good

under consideration

• Schedule or curve

• Amount producers are willing and able to sell at a given price

• Other things equal

• Market supply

LO2

Law of Supply

• Other things equal, as price rises

quantity supplied rises and as price falls quantity supplied falls

• Reason:

• Higher prices act as an incentive to producers

• At some point costs will rise

Determinants of Supply

• Factors other than price

• Usually assumed to be constant

• When a determinant changes, supply

shifts

LO1

Determinants of Supply

• A change in resource prices

• A change in technology

• A change in the number of sellers

• A change in taxes and subsidies

• A change in prices of other goods

• A change in producer expectations

Supply vs Quantity Supplied

• Change in supply

• Refers to shift of entire supply curve

to left or right

• Cause: Change in determinants of

supply

LO2

Supply vs Quantity Supplied

• Change in quantity supplied

• Refers to movement from one point

to another on fixed supply curve

• Cause: Change in price of good

under consideration

Market Shortage

• Occurs when current price is too low

• Quantity demanded exceeds quantity supplied at the current price

• Current price will rise

LO3

Market Surplus

• Occurs when current price is too high

• Quantity supplied exceeds quantity demanded at the current price

• Current price will fall

Market Equilibrium

• Price which equates quantity

demanded and quantity supplied

• No reason for price to change

• Crisis

LO3

Government Set Prices

• Price Ceilings

• Good is necessity, equilibrium price

is too high

• Set below equilibrium price

• Rationing problem

• Black markets

• Example: Rent control

Government Set Prices

• Price Floors

• Good is necessity, equilibrium price

is too low

• Prices are set above the market price

• Chronic surpluses

• Example: Minimum wage laws

LO5