Ecop Unit 3 Demand, Supply & Prices.docx

[Economic Principles 101 Ch 4 - Demand, Supply & Prices 1](#_Economic_Principles_101__Ch_4___Demand_) [1. The Basics 4](#the-basics) [1.1. Households have the 4 FoPs and sell them to Firms 4](#households-have-the-4-fops-and-sell-them-to-firms) [1.1.1. What are these? What is the payment for each?...

[Economic Principles 101 Ch 4 - Demand, Supply & Prices 1](#_Economic_Principles_101__Ch_4___Demand_) [1. The Basics 4](#the-basics) [1.1. Households have the 4 FoPs and sell them to Firms 4](#households-have-the-4-fops-and-sell-them-to-firms) [1.1.1. What are these? What is the payment for each? 4](#what-are-these-what-is-the-payment-for-each) [1.2. Firms use the FoPs and produce G&S 4](#firms-use-the-fops-and-produce-gs) [1.3. Households use their income and buy these G&S 4](#households-use-their-income-and-buy-these-gs) [1.3.1. So Households DEMAND G&S and Firms SUPPLY these 4](#so-households-demand-gs-and-firms-supply-these) [1.4. Based on this demand and supply, the market economy determines prices 4](#based-on-this-demand-and-supply-the-market-economy-determines-prices) [1.4.1. It is referred to as equilibrium in price and in quantity 5](#it-is-referred-to-as-equilibrium-in-price-and-in-quantity) [2. Demand 5](#demand) [2.1. The basic demand graph 5](#the-basic-demand-graph) [2.1.1. but the information can also be shown as words, schedules/numbers or equations/symbols (see later) 5](#but-the-information-can-also-be-shown-as-words-schedulesnumbers-or-equationssymbols-see-later) [2.2. Definition of demand: p61 5](#definition-of-demand-p61) [2.2.1. Based on my intention and that I have the means to buy: \* we refer to quantities of a G or S \* potential buyers \* willing \* and able to buy 5](#based-on-my-intention-and-that-i-have-the-means-to-buy-we-refer-to-quantities-of-a-g-or-s-potential-buyers-willing-and-able-to-buy) [2.2.1.1. Note: Demand is not any want (Why?) Also not needs for claims such as demand for higher wages 5](#note-demand-is-not-any-want-why-also-not-needs-for-claims-such-as-demand-for-higher-wages) [2.2.1.1.1. \"\"EFFECTIVE\"\" demand is when able and willing to pay exists 5](#effective-demand-is-when-able-and-willing-to-pay-exists) [2.2.1.1.2. So it is a future concept based on PLANS of hholds, firms 5](#so-it-is-a-future-concept-based-on-plans-of-hholds-firms) [2.2.2. It is a FLOW concept, measured over a period (although we don\'t always indicate the period). 5](#it-is-a-flow-concept-measured-over-a-period-although-we-dont-always-indicate-the-period.) [2.3. Individual demand 6](#individual-demand) [2.3.1. Individual demand is influenced by: - tomato example? chocolate? burgers? 6](#individual-demand-is-influenced-by---tomato-example-chocolate-burgers) [2.3.1.1. Determinants 6](#determinants) [2.3.1.1.1. Availability (supply) does NOT influence the demand decision although it may influence OUTCOME 6](#availability-supply-does-not-influence-the-demand-decision-although-it-may-influence-outcome) [2.3.2. An example of putting it in words - p 62 6](#an-example-of-putting-it-in-words---p-62) [2.3.3....and symbols 6](#and-symbols) [2.3.3.1.1. The Dependent variable is... 7](#the-dependent-variable-is.-.-.) [2.3.3.1.2. Name the Independent variables 7](#name-the-independent-variables) [2.3.3.1.3. Now we see a \"\"Law of Demand\"\" (p62) 7](#now-we-see-a-law-of-demand-p62) [2.3.3.1.4. Why are there lines on some symbols? 7](#why-are-there-lines-on-some-symbols) [2.3.4. other ways 7](#other-ways) [2.3.5. So: how many ways can we express demand? Can we do it for any other economic principle? 8](#so-how-many-ways-can-we-express-demand-can-we-do-it-for-any-other-economic-principle) [2.4. Market Demand 8](#market-demand) [2.4.1. Market demand is simply total of individuals\' preferences (aggregate): \* same factors determines the market demand curve \* use the same ceteris paribus rule \* also is inverse, obviously. 8](#market-demand-is-simply-total-of-individuals-preferences-aggregate-same-factors-determines-the-market-demand-curve-use-the-same-ceteris-paribus-rule-also-is-inverse-obviously.) [2.5. Movements and Shifts on the DEMAND Curve 8](#movements-and-shifts-on-the-demand-curve) [2.5.1. Movement 8](#movement) [2.5.1.1. REMEMBER this: 8](#remember-this) [2.5.1.2. Market Demand Curve 9](#market-demand-curve) [2.5.1.2.1. What does it show? Quantities demanded at different prices 9](#what-does-it-show-quantities-demanded-at-different-prices) [2.5.1.3. We also say a movement is A CHANGE IN QUANTITY DEMANDED 11](#we-also-say-a-movement-is-a-change-in-quantity-demanded) [2.5.1.4. Q: What is the TRIGGER for a movement? 11](#q-what-is-the-trigger-for-a-movement) [2.5.2. Shift 11](#shift) [2.5.2.1. A SHIFT is the whole curve in action: 11](#a-shift-is-the-whole-curve-in-action) [2.5.2.2. So what is a shift? 13](#so-what-is-a-shift) [3. Supply 17](#supply) [3.1. Define: The G or S producers PLAN to sell 17](#define-the-g-or-s-producers-plan-to-sell) [3.1.1. willing and able to sell; also a flow concept measured over a period no guarantee 17](#willing-and-able-to-sell-also-a-flow-concept-measured-over-a-period-no-guarantee) [3.2. Individual supply 18](#individual-supply) [3.2.1. Determinants of supply 18](#determinants-of-supply) [3.2.1.1.1. A little bit of screwy theory: 1. Producers consider price because they want to make a profit. 2. Although price is determined by demand, they don\'t consider HOW price is determined - p 65 19](#a-little-bit-of-screwy-theory-1.-producers-consider-price-because-they-want-to-make-a-profit.-2.-although-price-is-determined-by-demand-they-dont-consider-how-price-is-determined---p-65) [3.2.1.1.2. See word def p72 19](#see-word-def-p72) [3.2.2. In Symbols: 19](#in-symbols) [3.2.2.1.1. Note that N relates to Market Supply 19](#note-that-n-relates-to-market-supply) [3.2.3. other ways: 19](#other-ways-1) [3.2.3.1.1. A positive slope: Quantity supplied ↑ as price ↑ 20](#a-positive-slope-quantity-supplied-as-price) [3.3. Market Supply 20](#market-supply) [3.3.1. Aggregate of individual supply curves; \* shows relationship of prices and quantities supplied \* for the period 20](#aggregate-of-individual-supply-curves-shows-relationship-of-prices-and-quantities-supplied-for-the-period) [3.3.2. Determinants are the same as for individual supply, plus a few more: \* government policy \* natural disasters eg. droughts \* joint- and byproducts \* productivity 20](#determinants-are-the-same-as-for-individual-supply-plus-a-few-more-government-policy-natural-disasters-eg.-droughts-joint--and-byproducts-productivity) [3.3.3. Movements & Shifts 20](#movements-shifts) [3.3.3.1. If price changes, move along the curve in either direction. Movement represents change in quantity supplied 20](#if-price-changes-move-along-the-curve-in-either-direction.-movement-represents-change-in-quantity-supplied) [3.3.3.1.1. Take note: \"\"A change in any determinant of the quantity supplied except the price of the product will be illustrated by a shift of the supply curve\"\" 21](#take-note-a-change-in-any-determinant-of-the-quantity-supplied-except-the-price-of-the-product-will-be-illustrated-by-a-shift-of-the-supply-curve) [3.3.4. Keep the terminology straight 21](#keep-the-terminology-straight) [3.3.4.1. A movement along the supply curve \* results from a Δ in price \* is called a Δ in quantity supplied. A shift of the supply curve - results from a Δ of any factor other than price - is called a Δ in supply 21](#a-movement-along-the-supply-curve-results-from-a-%CE%B4-in-price-is-called-a-%CE%B4-in-quantity-supplied.-a-shift-of-the-supply-curve---results-from-a-%CE%B4-of-any-factor-other-than-price---is-called-a-%CE%B4-in-supply) [3.3.5. Review purposes - Table 4-5 (p75) 23](#review-purposes---table-4-5-p75) [4. Market Equilibrium, Excess Demand, Excess Supply 23](#market-equilibrium-excess-demand-excess-supply) [4.1. We now combine demand and supply : 23](#we-now-combine-demand-and-supply) [4.1.1. Market equilibrium is when quantity demanded = quantity supplied. The price is \'equilibrium price\' 23](#market-equilibrium-is-when-quantity-demanded-quantity-supplied.-the-price-is-equilibrium-price) [4.1.2. Refer Table 4-6 p 77 for info 25](#refer-table-4-6-p-77-for-info) [4.1.2.1.1. Equilibrium \"\"is a state of rest\"\" there is no incentive to change 25](#equilibrium-is-a-state-of-rest-there-is-no-incentive-to-change) [4.1.2.1.2. Describe what is happening at \* excess supply \* excess demand (p76) 25](#describe-what-is-happening-at-excess-supply-excess-demand-p76) [5. Consumer Surplus Producer Surplus 26](#consumer-surplus-producer-surplus) [5.1. Consumer surplus 26](#consumer-surplus) [5.1.1. The C surplus reflects more value (some) consumer are getting it\'s the difference market equilibrium price and what they are willing to pay 26](#the-c-surplus-reflects-more-value-some-consumer-are-getting-its-the-difference-market-equilibrium-price-and-what-they-are-willing-to-pay) [5.1.1.1.1. Seen with a supply graph Between C and Q consumers pay less than willing to pay 26](#seen-with-a-supply-graph-between-c-and-q-consumers-pay-less-than-willing-to-pay) [5.2. Producer surplus 27](#producer-surplus) [5.2.1. Similarly the P is willing to supply at less than the market equilibrium price 27](#similarly-the-p-is-willing-to-supply-at-less-than-the-market-equilibrium-price) [5.3. Combined graph 28](#combined-graph) [5.4. Further reading: http://www.investopedia.com/terms/c/consumer\_surplus.asp http://www.investopedia.com/terms/p/producer\_surplus.asp 29](#further-reading-httpwww.investopedia.comtermscconsumer_surplus.asp-httpwww.investopedia.comtermspproducer_surplus.asp) 1. The Basics ========== 1. Households have the 4 FoPs and sell them to Firms ------------------------------------------------- 1. ### What are these? What is the payment for each? 2. Firms use the FoPs and produce G&S ---------------------------------- 3. Households use their income and buy these G&S --------------------------------------------- 2. ### So Households DEMAND G&S and Firms SUPPLY these 4. Based on this demand and supply, the market economy determines prices --------------------------------------------------------------------- 3. ### It is referred to as equilibrium in price and in quantity 2. Demand ====== 5. The basic demand graph ----------------------  ### but the information can also be shown as words, schedules/numbers or equations/symbols (see later) 6. Definition of demand: p61 ------------------------- 5. ### Based on my intention and that I have the means to buy: \* we refer to quantities of a G or S \* potential buyers \* willing \* and able to buy 1. #### Note: Demand is not any want (Why?) Also not needs for claims such as demand for higher wages 1. ##### \"\"EFFECTIVE\"\" demand is when able and willing to pay exists 2. ##### So it is a future concept based on PLANS of hholds, firms 6. ### It is a FLOW concept, measured over a period (although we don\'t always indicate the period). 7. Individual demand ----------------- 7. ### Individual demand is influenced by: - tomato example? chocolate? burgers? 2. #### Determinants ##### Availability (supply) does NOT influence the demand decision although it may influence OUTCOME 8. ### An example of putting it in words - p 62 9. ###...and symbols 3. ####  4. ##### The Dependent variable is... 5. ##### Name the Independent variables 6. ##### Now we see a \"\"Law of Demand\"\" (p62) 1. ###### remember the \"\"ceteris paribus\"\" bit 7. ##### Why are there lines on some symbols? 10. ### other ways 4. #### ### So: how many ways can we express demand? Can we do it for any other economic principle? 8. Market Demand ------------- 12. ### Market demand is simply total of individuals\' preferences (aggregate): \* same factors determines the market demand curve \* use the same ceteris paribus rule \* also is inverse, obviously. 5. ####  9. Movements and Shifts on the DEMAND Curve ---------------------------------------- 13. ### Movement 6. #### REMEMBER this: 8. ##### #### Market Demand Curve  ##### What does it show? Quantities demanded at different prices 2. ######...when the price falls from \$2 to \$1.50... (ceteris paribus) 1. We see a change in quantity demanded shown by a movement along the demand curve 1.  1. something not in the textbook... 2. 3. and things may not always be straight lines... 4.  8. #### We also say a movement is A CHANGE IN QUANTITY DEMANDED 9. #### Q: What is the TRIGGER for a movement? 14. ### Shift 10. #### A SHIFT is the whole curve in action: 10. ##### {#section-7} 3. ###### (remember it can shift both ways) 2.  5. A shift to the right is... in demand and a shift to the left is... in demand 6. 11. #### So what is a shift? 11. ##### {#section-11}  4. ###### A Δ in any determinant of demand except price 5. ###### Some causes: 3. Δ in price of a RELATED good 3. Substitutes, e.g. butter/margarine:\ \* substitute is used in place of the good itself\ \* increase in price of substitute (margarine) will...\ \* and if the price of butter increases... 7. refer graphs p 67 8. Tea/coffee substitute,\ same for butter/margarine So:\ If price of butter increases, demand curve for margarine shifts right = increase in demand?\ \> NO. If I am looking at the demand curve of BUTTER, a Δ in butter\'s price is a MOVEMENT and not a curve. 4. Complements\ (items used jointly) 10. The price of the complement Δs resulting from Δ in supply: 11. The effect of the G or S is in the same direction 12.  Something to note:\ the Δ in price is due to another Δ first; eg. in supply 4. Δ in Income of consumers 5. A shift to the right when income increases, but 14. \- normal good\ - inferior good 5. Δ in preferences (tastes) 6. 6. Δ in population 7. Other influences 7. Expectations. 8. GROUP Work:\ Box 4-1 p69\ Box 4-2 p71 6. ###### Further reading: http://www.yourarticlelibrary.com/economics/effect-of-demand-curve-on-substitute-goods-and-complementary-goods-micro-economics/8914/ 7. ###### Summary Graph: Fig 4-7 8.  ###### Review Table 4-3 (p70) for understanding 3. Supply ====== 10. Define: The G or S producers PLAN to sell ----------------------------------------- 15. ### willing and able to sell; also a flow concept measured over a period no guarantee 12. #### {#section-15} 11. Individual supply ----------------- 16. ### Determinants of supply 13. #### {#section-16}  12. ##### A little bit of screwy theory: 1. Producers consider price because they want to make a profit. 2. Although price is determined by demand, they don\'t consider HOW price is determined - p 65 13. ##### See word def p72 17. ### In Symbols: 14. #### {#section-17} ##### Note that N relates to Market Supply 18. ### other ways: 15. #### {#section-18}  ##### A positive slope: Quantity supplied ↑ as price ↑ 12. Market Supply ------------- 19. ### Aggregate of individual supply curves; \* shows relationship of prices and quantities supplied \* for the period 20. ### Determinants are the same as for individual supply, plus a few more: \* government policy \* natural disasters eg. droughts \* joint- and byproducts \* productivity 21. ### Movements & Shifts 16. #### If price changes, move along the curve in either direction. Movement represents change in quantity supplied 16. ##### Take note: \"\"A change in any determinant of the quantity supplied except the price of the product will be illustrated by a shift of the supply curve\"\" 9. ###### {#section-19}  22. ### Keep the terminology straight 17. #### A movement along the supply curve \* results from a Δ in price \* is called a Δ in quantity supplied. A shift of the supply curve - results from a Δ of any factor other than price - is called a Δ in supply 17. ##### {#section-20} ###### The curves are not always straight lines  ###### See Fig 4-10 p76 ### Review purposes - Table 4-5 (p75) 4. Market Equilibrium, Excess Demand, Excess Supply ================================================ 13. We now combine demand and supply : ---------------------------------- 24. ### Market equilibrium is when quantity demanded = quantity supplied. The price is \'equilibrium price\' 18. #### {#section-21}  ##### {#section-22} ###### {#section-23}  25. ### Refer Table 4-6 p 77 for info 19. #### {#section-24} 19. ##### Equilibrium \"\"is a state of rest\"\" there is no incentive to change 20. ##### Describe what is happening at \* excess supply \* excess demand (p76) 5. Consumer Surplus Producer Surplus ================================= 14. Consumer surplus ---------------- 26. ### The C surplus reflects more value (some) consumer are getting it\'s the difference market equilibrium price and what they are willing to pay 20. #### {#section-25}  21. ##### Seen with a supply graph Between C and Q consumers pay less than willing to pay 13. ###### {#section-26} 15. Producer surplus ---------------- 27. ### Similarly the P is willing to supply at less than the market equilibrium price 21. #### {#section-27}  ##### {#section-28} 16. Combined graph -------------- 28. ### {#section-29}  Further reading: http://www.investopedia.com/terms/c/consumer\_surplus.asp http://www.investopedia.com/terms/p/producer\_surplus.asp ------------------------------------------------------------------------------------------------------------------------------------