# Notes on Lecture Principles of Economics

Quantity Demanded: is the amount of a good, that buyers are willing and able to purchase (now) Law of Demand: States that, other things equal, the quantity demanded of a good falls when price of the good rises (slopes downward) Demand Schedule: The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. Demand Curve: Q(p) = p ( function of p (y (x) = 2x): if price changes, the Qd changes MARKET DEMAND vs. INDIVIDUAL DEMAND ( everybody has a single demand: the sum of it = market demand (for a special good demanded) ( demands are added horizontally [pic] Changes in Quantity Demanded: ( result in an movement ON the curve, caused by a change in the price of the product [pic] Examples for incentives that induce a changed Qd: 1. PRICE (given as a variable on the demand curve) 2.

Consumer income:normal good: I increase ( Qd decrease; I decrease ( Qd decrease inferior good: I increase ( Qd decrease; I decrease ( Qd increase Normal Good: a good for which, other things equal, an increase in income leads to an increase in demand Inferior Good: a good for which, other things equal, an increase in income leads to a decrease in demand 3. Price of related goods: Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other (e. g. orange juice & apple juice): P increase ( Qd increase; P decrease ( Qd decrease Complements: two good for which an increase in the price of one leads to a decrease in the demand of the other (e. g.
DVDs & DVD-Players): P increase ( Qd decrease; P decrease ( Qd increase 4. Tastes (fashion, food): economists only examine what happens when tastes change 5. Expectations: may affect demand of a good or service today 6. Number of Buyers: determines the Qd in a market: NoB increase ( Qd increase; NoB decrease ( Qd decrease [pic] ( result in a shifts in the demand curve: when Qd changes because of certain circumstances. But price doesn`t change!!! ( not only price can change demand: a shift in the demand either to left (decrease) or the right (increase) ( caused by any change that alters the demand: everything except the price!! [pic] SUPPLY
Quantity supplied (Qs): is the amount of a good that sellers are willing or able to sell (now) Law of supply: states that, other things equal, the quantity supplied of a good rises when the price of the other good rises (slopes upward: positively related) Supply schedule: is a table that shows the relationship between the price of the good and the quantity supplied [pic] – usually the small “q” refers to the individual supply (a firm) and the “Q” refers to the market supply (all firms in the market – market supply: refers to the sum of all individual supplies for all sellers of a particular good or service: ( individual supply curves are summed horizontally to obtain the market supply curve – ( S(p) = S1(p) + S2 (p) +… Sm(p) [pic] the sum of 2 individual supplies (\$2 ( 3 cones; \$ 2 ( 4 cones = \$ 2 ( 7 cones in the market supply – if the suppliers (sellers) drop out of the market, the supply would increase with the price – (the supply curve represents the set of profit maximizing quantities for firms) – e. g supply function: q(s) = -4 + 8p; 0 = -4 + 8; 8p = 4; p = ? ( is the minimum price required to get any firm to produce at all (within this given supply curve) ( if the price would be below ? the quantity supplied would be 0, so there would be no firm to produce at all; – slope: change in price divided by change in quantity: e. g. 0 – ? : 4 – 0 = 1/8 (slope), which doesn`t change when the function is linear!! Change in the quantity supplied: – A rise in the price of ice cream results in a movement along the curve (law of supply), so when price changes nothing shifts!! – Shifts of the upply curve: Determinants of change in supply: – Any change that raises the quantity that sellers wish to produce at a given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at a given price shifts the supply curve to the left [pic] 1. Input prices: (labor, material, land, rent: anything that goes into the manufacturing process of the item in question): Input Pr. increase ( S decrease; Input Pr. decrease ( S increase 2. Technology: Technology increase ( S increase; Technology decrease ( S decrease: Techn. In economic terms is the process by which inputs are converted to outputs; 3.
Expectations: supply today depends on future expectations: e. g. when higher price of ice-cream expected in future ( store some ice cream ( supply less today! 4. Number of sellers (only relevant in market supply) [pic] Supply and Demand together: Equilibrium: a situation in which supply and demand have been brought into balance (quantity supplied equals quantity demanded Equilibrium Price: the price that balances quantity supplied and quantity demanded. On a graph it it’s the price, where demand and supply curves intersect Equilibrium Quantity: the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand [pic]
Ceterius Paribus: other things being equal (latin): all variables other than the one being studied are assumed to be constant Markets Not in Equilibrium A)B) [pic] [pic] Surplus: A situation in which the quantity supplied is greater than the quantity demanded Shortage: A situation in which the quantity demanded is greater than the quantity supplied Law of supply and demand: the claim that the price of any good adjusts to bring the supply and demand for that good into balance – A): when price for ice cream is over the equilibrium price ( quantity demanded is still 4, but the quantity supplied rises to 10 ( there are too many cones produced which can`t be all sold (surplus) bec. f the low demand; ( sellers have to reduce the price again; (prices continues to fall until market reaches equlibrium) – B): when price for ice cream is below the equilibrium price ( quantity supplied 4 exceeds quantity demanded, which is now at 10 (shortage of the good); ( sellers can raise the prices without losing sales; as prices are rising the market moves again toward the equilibrium – market activity of many buyers & sellers automatically pushes prices toward equil. (law of s & d) – Once equil. is reached all buyers & sellers are satisfied & no upward or downward pressure on price Three Steps to Analyzing Changes in The Equilibrium analyzing the change in the market equilibrium through comparative statistics – comparing two statistics: new and old equilibrium – Three steps to decide: – 1. Does event shift the supply curve, the demand curve, or both? – 2. Does the curve shifts to the left or the right side? – 3. Using the supply-and-demand diagram to examine how the shift affects equilibrium price and quantity A) HOW AN INCREASE IN DEMAND AFFECTS THE EQUILIBRIUM. An event that raises quantity demanded at any given price shifts the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here, an abnormally hot summer causes buyers to demand more ice cream.
The demand curve shifts from D1 to D2, which causes the equilibrium price to rise from \$2. 00 to \$2. 50 and the equilibrium quantity to rise from 7 to 10 cones. A)B) [pic][pic] B) HOW A DECREASE IN SUPPLY AFFECTS THE EQUILIBRIUM. An event that reduces quantity supplied at any given price shifts the supply curve to the left. The equilibrium price rises, and the equilibrium quantity falls. Here, an earthquake causes sellers to supply less ice cream. The supply curve shifts from S1 to S2, which causes the equilibrium price to rise from \$2. 00 to \$2. 50 and the equilibrium quantity to fall from 7 to 4 cones. Shifts in the Curve vs. Movements along the Curve:
Notice that when hot weather drives up the price of ice cream, the quantity of ice cream that firms supply rises, even though the supply curve remains the same. In this case, economists say there has been an increase in “quantity supplied” but no change in “supply. ” “Supply” refers to the position of the supply curve, whereas the “quantity sup- plied” refers to the amount suppliers wish to sell. To summarize, a shift in the supply curve is called a “change in supply,” and a shift in the demand curve is called a “change in demand. ” A movement along a fixed supply curve is called a “change in the quantity supplied,” and a movement along a fixed demand curve is called a “change in the quantity demanded. ” [pic][pic] A SHIFT IN BOTH SUPPLY AND DEMAND.
Here we observe a simultaneous increase in demand and decrease in supply. Two outcomes are possible. In panel (a), the equilibrium price rises from P1 to P2, and the equilibrium quantity rises from Q1 to Q2. (bec. large increase in demand and small decrease in supply) In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium quantity falls from Q1 to Q2. (because small increase in demand and large decrease in supply) [pic] [pic] NOTES: Elasticity – measures the responsivness for to the quantity demanded and the quantity supplied to a change in the market price by 1 % – measures percentage change in the quantity to a percentage change in price (or other determinants)
Price Elasticity of Demand: a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. Determinants of Price Elasticity of Demand: (How do we react to price changes? ) 1. Necessities vs. Luxury goods (depends on personal perception but in general terms: inelastic vs. elastic); e. g. Food, shelter, clothes vs. diamonds, sailboats etc… 2. Availability of close substitute (few vs. less = inelastic vs. elastic) 3. Market Definition (broad vs. narrowed; e. g. Cars vs. Ford Focus; Food vs. Bread…) 4. Time Horizon (short vs. long; e. g. the adjustment over a short period of time to gasoline price changes vs. long period of time)

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