| UNIT ONE |
CHAPTER 3
Supply, Demand, and the Market
A. Law of Demand
1.
Law of Demand: There is an inverse relationship between the price of a
good and the quantity consumers are willing to purchase.
a.
As price of a good rises, consumers buy less.
b.
The availability of substitutes--goods
that do similar functions-- explains this negative relationship.
B.
Market Demand Schedule
1.
The height of the demand curve at any quantity shows the maximum price
that consumers are willing to pay for that additional unit.
C.
Consumer Surplus
1.
Consumer Surplus - the area below the demand curve but above the actual
price paid.
a.
Consumer surplus is the difference between the amount consumers are
willing to pay and the amount they have to pay for a good.
2.
Lower market prices will increase consumer surplus.
D.
Elastic and Inelastic Demand Curves
1.
Elastic demand - quantity demanded is sensitive to small price changes.
a.
Easy to substitute away from good.
2.
Inelastic demand - quantity demanded is not sensitive to price changes.
b.
Difficult to substitute away from good.
II.
Changes in Demand Versus Changes in Quantity Demanded
A.
Changes in Demand and Quantity Demanded
1.
Change in Demand - shift in entire demand curve.
2.
Change in Quantity Demanded - movement along the same demand curve in
response to a price change.
B.
Demand Curve Shifters
a.
Changes in Consumer Income
b.
Change in the Number of Consumers
c.
Change in Price of Related Good
d.
Changes in Expectations
e.
Demographic Changes
f.
Changes in Consumer Tastes and Preferences
III. Producer Choice and
Law of Supply
A.
Producers
1.
Opportunity Cost of Production - the sum of the producer’s cost of
employing each resource required to produce the good.
2.
Firms will not stay in business for long unless they are able to cover
the cost of all resources employed, including the opportunity cost of those
owned by the firm.
B. Role of Profits
and Losses
1.
Profit occurs when revenues are greater than cost.
2.
Firms supplying goods for which consumers are willing to pay more than
the opportunity cost of resources
used will make a profit.
3.
Firms making a profit will expand and those with a loss will contract.
C. Law of Supply
1.
Law of Supply - there is a positive relationship between the price of a
product and the amount of it that will be supplied.
a.
As the price of a product rises, producers will be willing to supply
more.
D.
Market Supply Schedule
1.
The height of the supply curve shows two points about the cost of
production.
a.
The minimum price necessary
to induce producers to supply that additional unit.
b.
The opportunity cost of producing the additional unit of the good.
E.
Producer Surplus
1.
Producer Surplus - The area above the supply curve but below the actual
sales price.
a.
Producer surplus is the difference between the minimum amount required to
induce producers to produce a good and the amount they actually receive.
F.
Elastic and Inelastic Supply Curves
1.
Elastic supply- quantity supplied is sensitive to small price changes.
2.
Inelastic supply - quantity supplied is not sensitive to price changes.
G.
Short Run and Long Run
1.
Short Run - Firms don’t have enough time to change plant size.
a.
Supply tends to be inelastic in the short run.
2.
Long Run - Firms have enough time to change plant size.
a.
Supply tends to be much more elastic in the long run.
IV. Changes in Supply
Versus Changes in Quantity Supplied
A.
Changes in Supply and Quantity Supplied
1.
Change in Supply - shift in entire supply curve.
2.
Change in Quantity Supplied - movement along the same supply curve in
response to a price change.
B.
Supply Curve Shifters
1.
Changes in Resource Prices
2.
Change in Technology
3.
Elements of Nature and Political Disruptions
4.
Changes in Taxes
V.
How Market Prices Are Determined
VI. How Markets Respond to
Changes in Supply and Demand
A.
Effects of a Change in Demand
1.
If Demand decreases, the equilibrium price and quantity will fall.
2.
If Demand increases, the equilibrium price and quantity will rise.
B.
Effects of a Change in Supply
1.
If Supply decreases, the equilibrium price will rise and the equilibrium
quantity will fall.
2.
If Supply increases, the equilibrium price will fall and the equilibrium
quantity will rise.
VII. Time and the
Adjustment Process
A. Time and the Adjustment Process
1.
With the passage of time, the market adjustments of both producers and
consumers will be more complete.
a.
Both demand and supply are more elastic in the long run than in the short
run.
VIII. Invisible Hand
Principle
A.
Invisible Hand
1.
Invisible Hand- the tendency of market prices to direct individuals
pursuing their own interest into productive activities that also promote the
economic well-being of society.
B.
Communicating Information
1.
Product prices communicate up-to-date information about the consumers’
valuation of additional units of each commodity.
2.
Without the information provided by market price it would be impossible
for decision-makers to determine how intensely a good was desired relative to
its opportunity cost.
C.
Coordinating Actions of Market Participants
1. Price changes bring the decisions
of buyers and sellers into harmony.
2. Price changes create profits and
losses which change production levels.
D.
Prices and Market Order
1.
Market order is the result of market prices, not central planning.
E.
Qualifications
1.
The efficiency of market organization is dependent upon:
a.
The presence of competitive markets.
