Micro Economics Supply and Demand.pdf

Microeconomics How Does Supply and Demand Work? I. Markets and Competition 1. Market (a) A group of buyers and sellers of a particular good or service (b) The buyers determine the demand f...

Microeconomics How Does Supply and Demand Work? I. Markets and Competition 1. Market (a) A group of buyers and sellers of a particular good or service (b) The buyers determine the demand for the product (c) The sellers determine the supply of a product 2. Competitive Market (a) Many buyers and sellers, each has a negligible impact on the market 3. Perfectly Competitive Market (a) The goods are exactly the same (b) Price Takers: so many buyers and sellers that no one can affect the market (c) At the Market Price buyers and sellers can buy and sell all they want (d) A type of competitive Market  II. Demand 1. Quantity Demanded (a) Amount of a good that buyers are willing and able to purchase 2. Law of Demand (a) Other things being equal (b) The Quantity demanded of a good falls when the price of a good rises (c) The Quantity demanded of a good rises when the price of a good falls 3. Demand Schedule (a) A table that shows relationship between the price of a good and the quantity demanded 4. Demand Curve (a) A graph of the relationship between the price of a good and the quantity related (b) Price on y axis, Quantity on x axis 4. Increase in demand vs increase in quantity demanded (a) Increase in demand (shift in curve) (b) Increase in quantity demanded (movement along the demand curve)  III. Market Demand 1. Market Demand (a) Sum of all individual demands for a good or service 2. Market Demand Curve (a) Sum the individual demand for a good or service (b) Sum the individual demand curves horizontally (c) To find the total quantity demanded at any price we add the individual quantities demanded on the x axis IV. Shifts in Demand Curve 1. The Demand Curve (a) Shows how Price affects quantity demanded, other things being equal  (b) Other things are non price determinants of demand (c) Things that determine a buyers demand for another good that is not a goods price 2. Shift in the Demand Curve are Caused by changes in (a) Number of Buyers (b) Income (c) Prices related to goods - If the price of computers go up more people will demand tablets (d) Tastes (e) Expectations (f) Change in number of buyers (increase and decrease accordingly) Direction of shift (a) DEMAND CURVE SHIFTS TO THE RIGHT WHEN INCREASING DEMAND CURVE SHIFTS TO THE LEFT WHEN DECREASING V. Changes in Income 1. Normal Good, other things being equal (a) An increase in income leads to an increase in demand (b) Most goods are normal goods  (c) Shifts the demand curve to the right 2. Inferior good, other things being equal (a) INcrease in income leads to a decrease in demand (b) Inferior good: as income rises you buy less of it (c) Shifts the demand curve to the left VI. Changes in Prices of Related Goods 1. Two goods are substituted, if (a) An increase in the price of one leads to an increase in demand for the other (b) The two goods are able to substitute (competing) each other 2. Two goods are compliments if (a) A increase in the price of one good leads to a decrease in demand for the other (b) Two goods work together VII. Changes in Tastes 1. Tastes (a) Anything that causes a shift in tastes towards a good will increase the demand for that good  (b) Shifts the demand curve to the right VIII. Expectation About the Future 1. People expect an increase in income (a) Current demand increases (b) Shifts to the right 2. People expect higher prices (a) Current demand shifts to the right IX. Supply 1. Quantity Supplied (a) Amount of a good sellers are willing and able to sell 2. Law of Supply (a) Other things being equal (b) The quantity of a supplied of a good rises when the price of the good rises (c) This is because people are demanding less (d) The Quantity supplied of a good falls as price of a good falls (e) This is because people are demanding more 3. Supply Schedule  (a) A table that shows the relationship between the price of a good and the quantity supplied 4. Supply Curve (a) A graph of the relationship between the price of a good and the quantity supplied X. Market Supply Vs. Individual Supply 1. Market Supply (a) Sum of the supplies of all sellers of a good or service (b) Market Supply Curve: sum of the individual supply curves horizontally (c) To find the total quantity supplied at any price, we add the individual quantities ( on the x axis) XI. Shifts in the Supply Curve 1. The supply curve  (a) Shows how price affects quantity supplied, other things being equal (b) Those other things are non price determinants of supply. (c) In other words Things that determine producers supply for good, other than goods and services 2. Shifts in the Supply curve are caused by (a) Input Prices (b) Technology (c) Number of sellers (d) Expectations about the Future (e) Increasing shift in supply is to the right (f) Decrease shift is to the left 3. A fall in input prices (a) Makes production more profitable at each output price (b) Firms supply a larger quantity at each price (c) Supply is negatively related to prices of inputs 4. Change in Technology (a) Determines how much inputs are required to produce a unit of output 5. A cost changing technological improvement (a) Has the same effect as a fall in input prices/ decrease in production cost (b) Shifts supply curve to the right  6. Changes in the number of sellers (a) An increase in the number of sellers increases the quantity supplied at each price (b) Shifts the supply curve to the right (c) A decrease in the number of sellers decreases the quantity supplied at each price (d) Shifts the supply curve to the left 7. Expectations about the future (a) If sellers expect prices to rise they will save some inventory to sell at higher price of good is not perishable XII. Equilibrium 1. Equilibrium (a) Price has reached the level where quantity supplied equals quantity demanded XIII. Markets not in equilibrium 1. Surplus (a) The quantity supplied is greater than the quantity demanded 2. Shortage  (a) The quantity demanded is greater than the quantity supplied 3. The Law of supply and Demand (a) The price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance 4. Once the Market reaches equilibrium (a) No upward or downward pressure on the price 5. When New Equilibrium is found (a) When both supply and demand shift its unclear the (b) When one supply or demand shifts it is clear