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Economics 11
Unit 2 - Demand, Supply and market equilibrium, DEMAND,…
Economics 11
Unit 2 - Demand, Supply and market equilibrium
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Markets: local (farmers), national (real estate), international (NY stock exchange); prices discovered during interaction; brings together buyers and sellers
Def of DEMAND = schedule (table of numbers) 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 specified period of time, other things equal.
LAW of DEMAND
- decreased price = increased Qnt demanded and vise versa
=Demand Curve (inverse relationship between price and Qnt demanded)
- price is an obstacle that deters consumers
- diminishing marginal utility: each successive purchase yields less satisfaction
- income effect: lower price increases the purchasing power of a buyer's money income
- substitution effect: buyer will substitute product whose price has fallen for a product whose price stayed the same (better deal)
- market demand as opposed to individual demand: at each price add the individual demand per buyer to get the total market demand at that price.
Changes in Demand
- different to chngs in Qnt demand
- changes in qnt demand moves along the curve (affected by price)
- changed in demand, moves the entire curve (different customers have different demands) >Determinants of demand (demand shifters) moves the entire curve to right or left (i.e. consumers' tastes/ preferences, change in income, change in no. of buyers, prices of related goods, consumer expectations)
- a change in any one or more of the determinants of demand will cause a change in demand
- change in demand = shift in demand curve
- -network effect = value of product increases as more people use it
- -congestion effect = value of product decreases as more people use it
- -superior/normal goods = products whose demand varies directly with money income
- -inferior goods = goods whose demand varies inversely with money income
- -- substitute goods: in place of
- -- complementary goods: together with
- -- independent goods: unrelated
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Def of SUPPLY = schedule (table of numbers) or a curve showing the various 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 specified period of time, other things equal.
Price and quantity supplied are directly related; producers will offer more of a product for sale when the price rises and less of the product for sale as the price falls
LAW of SUPPLY
As price rises, the quantity supplied rises; as price falls, the quantity supplied falls.
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Changes in Supply
- in changes in one or more of the supply determinants (supply shifters)
- -resource prices
- -technology
- -taxes and subsidies
- -prices of other goods
- -producer expectations
- -number of sellers in the market
Change in supply and Change in Quantity SuppliedChange in quantity supplied - movement along the curve
Change in determinants (supply shifters) - moves the entire curve to the left or the right
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Equilibrium price = market clearing price = price where intentions of buyers and sellers match = price where quantity demanded equals quantity supplied
--Intersection of demand and supply curve
Equilibrium quantity = the quantity at which the intentions of the buyers and the sellers match so that quantity demanded equals quantity supplied
- At above equilibrium price: surplus; quantity supplied exceeds quantity demanded
- Surplus drives price down
- At below equilibrium price: shortage; quantity demanded exceeds quantity supplied
- Shortages drives price up
Rationing function of prices
The ability of the forces of supply and demand to establish a price at which selling and buying decisions are consistent
In a competitive market
Productive efficiency: the production of any particular good in the least costly way
Allocative efficiency: the particular mix of goods and services most highly valued by society
Changes in supply, demand and equilibrium
- Supply Increase, Demand Decrease, Eq Price Decrease, Eq Q Indeterminate
- Supply Decrease, Demand Increase, Eq Price Increase, Eq Q Indeterminate
- Supply Increase, Demand Increase, Eq Price Indeterminate, Eq Q Increase
- Supply Decrease, Demand Decrease, Eq Price Indeterminate, Eq Q Decrease
Government-Set Prices
- Price Ceiling = sets the maximum legal price a seller may charge for a product or service (price at or below ceiling is legal); helps consumers obtain goods or services that they can not afford at equilibrium price; ceiling price is below equilibrium price; causes shortages; rationing problem and black markets
- Price Floor = minimum price fixed by the government (price at or above price floor is legal); price is above equilibrium price; price support; causes surplus;
Government Controlled Prices = shortages/surpluses; distort resource allocation; product negative side effects