Macro Book Notes Chapter 3 all SUPPLY AND DEMAND I market a group of buyers and sellers with the potential to trade with each other a trade doesn t actually have to take place for it to be a market A circular ow of the economy a simple model that shows how goods resources and dollar payments ow between households and rms see picture on pg 54 B product markets markets in which rms sell goods and services to households C resource markets markets in which labor land and capital are bought and sold D imperfectly competitive markets markets in which individual buyers or sellers can control in uence price E perfectly competitive markets competitive markets markets in which buyers and sellers take the market price as a given b c products are standardized buyers sellers are small relative to total market 1 supply and demand model shows how prices are determined in these markets II quantity demanded the quantity of a good that all buyers in a market would choose to buy during a period of time given their constraints A implies a choice not how much a household wants or needs it s how much they choose to buy given the opportunity cost of those decisions B hypothetical C depends on price D change in price law of demand ceteris paribus as the price of a good increases the quantity demanded decreases E change in quantity demanded a movement along the demand curve in response to a F change in demand a shift of the demand curve in response to a change in some variable other than price i e 1 income the amount that a person or rm earns over a period of time increase in income increases demand for normal goods a b decrease in income increases demand for inferior goods 2 wealth the total value of everything a person or rm owns at a point in time minus debts a increase wealth increase demand for normal goods b decrease wealth increase demand for inferior goods 3 prices of related goods a substitute a good that can be used in place of some other good and ful lls more or less the same purpose 1 increase price of a good increase demand for the substitute b complement a good that is used together with another good i e milk and cereal 1 increase price of a good decrease demand of the complement a as population increases demand increases 4 population 5 expected price right a expectation that the price will rise in the future shifts the current demand curve 6 b expectation that the price will fall shifts the current demand left tastes a sometimes attitudes towards a good change for better or worse and therefore III quantity supplied the amount of a good that sellers in a market would choose to sell over demand shifts implies a choice some time period given their constraints A B hypothetical C depends on price D law of supply ceteris paribus as the price of a good increases the quantity supplied increases E change in quantity supplied a movement along the supply curve in response to a F change in supply a shift of the supply curve in response to a change in some variable change in price other than price i e 1 2 price of alternatives input prices the cost of resources needed to produce a good a decrease input prices results in an increase in supply a alternate goods other goods that rms in a market could produce instead of the good in question 1 producers shift to alternate goods when their price is higher than the goods they were originally producing this decreases the supply of the original goods b alternate market a market other than the one being analyzed in which the same good could be sold 1 if the prices in the alternate market are higher producers will move supply there and decrease supply in the current market 3 technology a cost saving technological advances increase the supply of a good 4 number of rms 5 expected price a ceteris paribus increase in the number of sellers increases supply a expectation of future rise in price decreases current supply b expectation of future drop in price increases current supply 6 changes in weather other natural events a favorable weather increases supply of crops and vice versa b natural disasters can destroy or disrupt the productive capacity of all rms in a region quantity supplied IV equilibrium price and equilibrium quantity the values for price and quantity in the market that once achieved will remain constant until the supply and demand curves shift A excess demand at a given price the amount by which quantity demanded exceeds V the three step process used by economists to answer questions about the economy A step 1 characterize the market 1 decide which market or markets best suit the problem being analyzed and identify how trading occurs in that market B step 2 nd the equilibrium determining that equilibrium C step 3 what happens when things change 1 describe the conditions necessary for equilibrium in the market and a method for 1 explore how events or government policies change the market equilibrium