Chapter 3 Supply Demand and the Market Process DEMAND o o the law of demand there is an inverse relationship between the price of a good and the quantity of its buyers that are willing and able to purchase when price rises quantity demand falls and vice versa ceteris paribus quantity demanded the number of that people are willing and able to buy at each price o consumer surplus the difference between the maximum price the consumers are willing to pay and the price that they actually pay lower price more consumer surplus higher price less consumer surplus o marginal value height of demand curve at each quantity o elastic demand many substitutes are available quantity demanded is responsive to price change the demand curve is relatively flat still downward sloping inelastic demand few substitutes available quantity demanded is not very responsive to price change demand curve is relatively steep still downward sloping change in quantity demanded caused by a change in the price of a good change in demand caused by changes in consumer income number of consumers price of related goods expectations demographics and tastes preferences o o o demand shifter 1 change in consumer income an increase in income leads to an increase in demand a decrease in income leads to a decrease in demand demand shifter 2 number of consumers when the number increases demand increases when the number decreases demand decreases demand shift 3 changes in price of related goods o o substitutes goods that perform similar functions of fulfill similar needs an increase price of in one leads to an increase in demand for the other a decrease in price of one leads to a decrease in demand for the other complements products consumed jointly an increase in price of one leads to a decrease in demand for the complement a decrease in the price of one product leads to an increase in demand for the complement demand shifter 4 consumer expectations expectations about the future can shift demand curves I ll wait until it goes on sale demand shifter 5 demographic changes changes in sex race or age of a population change demand for certain goods demand shifter 6 change in consumers tastes preferences tastes and preferences change due to changes in trends information and people SUPPLY o o o o opportunity cost of production total economic cost of producing a good or service profit when revenue is greater than the opportunity cost of production the producer has increased the value of the resources loss when revenue is less than the opportunity cost of production the producer has reduced the value of the resources the law of supply there is a direct relationship between the price of a good and the quantity of it that producers are willing to supply when the price rises quantity supplied rises when the price falls quantity supplied falls o quantity supplied the number that people are willing o o o o o to sell at each price producer surplus the difference between what price suppliers actually receive and the minimum price they would be willing to accept represents the net benefit to all involved in production of producing the good elastic supply quantity supplied ia responsive to change in price supply curve is relatively flat still upward sloping when it is cheap easy to expand inelastic supply quantity supplied is not very responsive to a change in price the supply curve is relatively steep still upward sloping when expanding output is difficult change in quantity supplied caused by a change in the price of a good move along curve change in supply caused by a change in resource prices technology elements of nature and political disruptions and taxes move curve supply shift 1 change in resource prices when resource prices fall supply increases when resource prices increase supply decreases decreases supply shift 2 changes in technology when technology improves supply increases when technology worsens supply supply shifter 3 elements of nature and political disruptions good nature and no political disruptions increase supply bad weather and political unrest decrease supply supply shifter 4 changes in taxes when taxes increase supply falls when taxes decrease supply increases market a concept encompassing the forces of supply and demand equilibrium when quantity demanded equals quantity supplied excess demand puts an upward pressure on the price excess supply puts a downward pressure on the price economic efficiency a situation in which all the gains from trade have been realized with well defined rights and competition market equilibrium is efficient IN SUMMARY increase demand higher price higher quantity increase in quantity supplied decrease in demand lower price lower quantity decrease in quantity supplied increase in supply lower price higher quantity increase in quantity demanded decrease in supply higher price lower quantity decrease in quantity demanded o o o o o
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