Download Chapter 3 - Jacob Schulman

Jacob Schulman
AP Economics
June 25, 2017
Mr. Coggin
Chapter 3: Individual Markets
I. Markets:
A. Market: an institution or mechanism that brings together buyers (“demanders”) and sellers
(“suppliers”) of particular goods, services, or resources
B. All situations that link potential buyers with potential sellers are markets
- Can be local or international, can be personal or impersonal
C. We’re focusing on huge markets; not the markets where a handful of producers “set” prices
II. Demand:
A. Demand: Schedule or a curve that shows the various amounts of a product that consumers
are willing and able to purchase at each of a series of possible prices during a period of time
B. Demand Schedule: reveals the relationship between the various prices of corn and the
quantity of corn a particular consumer would be willing and able to purchase at each of these
prices
- Need to have a time period or else it’s really useless; doesn’t tell about the demand
Law of Demand:
A. Law of Demand: All else equal, as price falls, the quantity demanded rises, and as price
rises, the quantity demanded falls (inverse relationship)
B. This is consistent with common sensepeople usually buy more of cheap things than
expensive ones; price is an obstacle, and the higher the obstacle the less they’ll buy
C. Consumption is subject to diminishing marginal utility (buyers receive less satisfaction from
each successive unit)
D. Income Effect: indicates that a lower price increases the purchasing power of a buyer’s
money income, enabling the buyer to purchase more of the product than before
E. Substitution Effect: suggests that at a lower price buyers have the incentive to substitute
what is now a less expensive product for similar ones that are more expensive (it’s a better
deal)
The Demand Curve:
A. Demand Curve: downward slow reflects the law of demand—people buy ore of a product,
service, or resource as its price falls (inverse relationship)
Market Demand:
A. When adding quantities demanded by all consumers at each of the various possible prices,
we can get from individual demand to market demand
B. Plot the price and the total quantity demanded as on point on the market demand curve
C. Must infer that all buyers in a market are willing and able to buy the same amounts at each
of the possible prices
D. Assume that the price is the most important influence on the amount of any product
purchased, but there are other factors
E. Determinants of Demand: Factors that affect purchases (AKA demand shifters)
- Assumed to be constant when a demand curve is drawn
- Basic ones are preferences, number of consumers in market, incomes, prices of related
goods, and consumer expectations about future prices and incomes
Change in Demand:
A. A change in the demand schedule or shift on the demand curve is called change in demand
- When they want to buy more of something at each possible price, it’s an increase in demand
- When they want to buy less at each price than indicated—decrease in demand
B. Tastes: A favorable change in consumer tastes means that more is demanded, demand
curve shifts to the right (unfavorable change decreases demand, shifts curve to the left)
- New products can affect tastes (CDs impacted tapes)
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C. Number of Buyers: Increased buyers means increased demand (and the converse)
- Ex. Baby Boom after WWII increased demand for baby-related things
- Increased life expectancy also leads to many more demands
D. Income: More difficult to generalize about
- Products whose demand varies directly with money income are superior / normal goods
- Most products are normal goods; but things like used clothing aren’t
- Inferior Goods: goods whose demand varies inversely with money income
E. Prices of Related Goods: Change in price of a related good can do anything to demand
1. Substitute Good: one that can be used in place of another one (Ex. Beef and chicken)
- Substitutes- when two are, the price of one and the demand for the other move in the
same direction; there is substitution in consumption
2. Complementary Good: one that is used together with another one
- Complements are used together and demanded together (Ex. Gas and motor oil)
- When two products are complements, the price of one and the demand for the other
move in opposite directions
3. Unrelated goods: Independent goods- a change in the price of one doesn’t affect the other
F. Expectations: Changes in expectations can shift demands (predictions for the near future
can help force people to wait or to buy now)
- Can prompt consumers to change their current spending when future income is expected to
increase or decrease
G. An increase in demand can be caused by: favorable change in tastes, more buyers, rising
incomes if normal good, falling incomes if inferior goods, increased price of substitute good,
new expectations that prices or income will be higher in the future
Changes in Quantity Demanded:
A. Change in Demand: a shift of the entire demand curve to the right (increase in demand) or to
the left (decrease in demand)
- Occurs because of a change in the state of mind of a consumer
B. Change in Quantity Demanded is a movement from one point to another point (one pricequantity combination to another)
III. Supply:
A. Supply: a schedule or curve showing the amounts of a product that producers are willing and
able to make available for sale at each of a series of possible prices during a specific period
- Supply Schedule: shows quantities that will be supplied at various prices
Law of Supply:
A. Law of Supply: As price rises, the quantity supplied rises; as price falls, the quantity supplied
falls; price is the obstacle here for the consumer
B. To a supplier, price represents revenue (the incentive for producing at all)
C. Manufacturers usually have increased cost per added unit of output
The Supply Curve:
A. It’s convenient to represent supply graphically
B. Supply Curve: obtained by horizontally adding the supply curves of the individual producers
Determinants of Supply:
A. We assume that price is the most significant influence on the quantity supplied of any
product, but other factors do matter
B. Basic determinants of supply are: resource prices, technology, taxes and subsidies, prices of
other goods, price expectations, and number of sellers in the market
C. Shift to the right signifies an increase in supply, to the left means a decrease in supply
Changes in Supply:
A. Costs are a major factor in supply curves; anything that affects it shifts the curve
B. Resource Prices: Higher resource prices raise production costs incurred by firms, squeeze
profits usually
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- Lower resource prices increase profitscan have greater output at each price
C. Technology: Technology lets us make more with fewer resourcesgood for everyone
D. Taxes and Subsidies: An increase in sales or property taxes will increase production costs
and reduce supplies
- Subsidies are reverse taxes- lowers producers cost and increases supply
E. Prices of Other Goods: Higher the prices of “other goods” may entice producers to make that
particular good to try and increase profits
- Substitution in production results in a decline in the supply of the first good
F. Price Expectations: When it’s anticipated that demand for a good will decline, producers just
won’t produce as much of it as they would’ve before
- In other manufacturing industries, new expectations that price will increase may shift firms to
add more workers or expand their production facilities
G. Number of Sellers: The more suppliers, the greater the market supply
- When there are more firms, the supply curve shifts to the right
Changes in Quantity Supplied:
A. Change in supply means a change in the entire schedule and a shift of the entire curve
- Increase in supply moves it to the right, decrease moves it to the left
B. Change in Quantity Supplied: movement from one point to another on a fixed supply curve
C. Supply is the full schedule of prices and quantities shown, doesn’t change when price does
IV. Supply and Demand: Market Equilibrium
Surpluses:
A. Surplus: excess supply; the price can’t persist over a period of time
Shortages:
A. Shortage: excess demand for somethingCompetition can drive up price
Equilibrium Price and Quantity:
A. Market-Clearing / Equilibrium Price: when there’s an equilibrium quantity of materials
- The stable price of the good
B. There is equilibrium when at a higher price, suppliers want to sell more than consumers will
buy, and any lower there’ll be a shortage
C. The intersection of the supply curve and the demand curve for a product indicates the
market equilibrium (any higher and there’s a surplus, lower and there’s a shortage)
Rationing Function of Prices:
A. Rationing Function of Prices: ability of competitive forces of supply and demand to establish
a price at which selling and buying decisions are consistent
B. Basically, people that can pay the set price buy it, people that can’t are unable to
Changes in Supply, Demand, and Equilibrium:
A. Changes in Demand: If supply is constant and demand increases, the new intersection of
the curves is at higher values on both price and quantity axes
B. Changes in Supply: Demand is constant but supply increases, new intersection is located at
a lower equilibrium price but higher equilibrium quantity
- If supply decreases, equilibrium price rises while equilibrium quantity declines
C. Complex Cases: When supply and demand change
1. Supply Increase; Demand Decrease: Net result is a price drop greater than that resulting
from either change alone
- If increase supply greater than decrease in demand, EQ quantity increases
2. Supply Decrease; Demand Increase: Increase in equilibrium price greater than that caused
by either change separately
3. Supply Increase; Demand Increase: If increase in supply is greater than increase in
demand, EQ price falls
- Increases in supply and demand each raise equilibrium quantity
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4. Supply Decrease; Demand Decrease: If decrease in supply is greater than decrease in
demand, equilibrium price rises
A Reminder: “Other Things Equal”
A. Specific curves imply that other things are equal
B. If you forget this inferral, then situations can seem to be in conflict with basic principles
- The law of demand’s other things equal assumption has been violated over the example
C. It’s very important to have a distinction between a change in quantity demanded and a
change in demand
Application: Pink Salmon
A. Supply and demand shifted in the market for pink salmonthere was an increased catch
and a decreased cost of obtaining it
- There were also high prices so more fisherman entered the industry
Curve shifted to the right
B. Demand for pink salmon decreaseddemand shifted away from canned fish and toward
other alternatives
C. Increased supply of, and decreased demand for pink salmon reduced the price
- Equilibrium quantity of pink salmon increased though because the increase in supply
exceeded the decrease in demand
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