Chapter Outline CHAPTER 2. Definitions (continued) Definitions. Markets. Supply and Demand

Size: px
Start display at page:

Download "Chapter Outline CHAPTER 2. Definitions (continued) Definitions. Markets. Supply and Demand"

Transcription

1 Chapter Outline CHATER 2 and Definitions The and Model All About All About Determinants of Determinants of The Effect of Changes in rice Expectations on the and Model Kick it Up a Notch: Why the Equilibrium Definitions and : the name of the most important model in all economics rice: the amount of money that must be paid for a unit of output Market: any mechanism by which buyers and sellers negotiate price Output: the good or service and/or the amount of it sold Definitions (continued) Consumers: those people in a market who are wanting to exchange money for goods or services roducers: those people in a market who are wanting to exchange goods or services for money Equilibrium rice: the price at which no consumers wish they could have purchased more goods at that price; no producers wish that they could have sold more Equilibrium Quantity: the amount of output exchanged at the equilibrium price Quantity ed and Quantity Supplied Quantity demanded: how much consumers are willing and able to buy at a particular price during a particular period of time Quantity supplied: how much firms are willing and able to sell at a particular price during a particular period of time Markets Capitalism free markets in financial capital as well as goods and services freedom to borrow or lend profits go to the owners of capital Communism capital and the profit that it generates is controlled by a government authority. a government authority decides how the money is used. Socialism a significant part of the profit generated by financial capital goes to government in the form of taxes. a government uses the tax money to counter the wealth impacts of the distribution of profit. 1

2 Heritage Foundation Index of Economic Freedom The Scientific Method and Ceteris aribus Free Hong Kong Singapore Ireland Zealand United Kingdom Denmark Iceland Australia Chile Switzerland United States Sweden Finland Canada Netherlands Oppressed Tajikistan Haiti Venezuela Uzbekistan Iran Cuba Laos Turkmenistan Zimbabwe Libya Burma North Korea Scientists conduct experiments in laboratories. use replication and verification to ensure the accuracy of their conclusions. Social Scientists cannot experiment on their subjects. must use models and look at the effects of individual variables within those models. Economists hold variables constant within models to examine the effect of other variables. use the Latin phrase ceteris paribus which means holding other things equal to identify this is the case. and is the relationship between price and quantity demanded, ceteris paribus. is the relationship between price and quantity supplied, ceteris paribus. The and Model The Schedule The Schedule presents, in tabular form, the price and quantity demanded for a good. rice Individual Q D Q D for 1, $. 5 5, $.5 $1. $1.5 $2. $ , 3, 2, 1, Figure 1 The Curve $2.5 $2. $1.5 $1. $

3 The Schedule Figure 2 The Curve The Schedule presents, in tabular form, the price and quantity supplied for a good. $2.5 rice Individual Q D Q S for 1 firms $2. $. $.5 $1. 1, 1, $1.5 $1. $1.5 2, 2, $.5 $2. $2.5 3, 4, 3, 4, Equilibrium, Shortages, and Surpluses A Combined and Schedule Equilibrium is the point where the amount that consumers want to buy and the amount that firms want to sell are the same. This occurs where the supply curve and the demand curve cross. Shortage (Excess ): the condition where firms do not want to sell as many as consumers want to buy. Surplus (Excess ): the condition where firms want to sell more than consumers want to buy rice $. $.5 $1. $1.5 $2. $2.5 Q D 5, 4, 3, 2, 1, Q S 1, 2, 3, 4, Shortage 5, 4, 2, Surplus 2, 4, Figure 3 The and Model All About $2.5 $2. $1.5 Equilibrium The Law of The relationship between price and quantity demanded is a negative or inverse one. $1. $

4 Why Does the Law of Make Sense? The Law of The Substitution Effect moves people toward the good that is now cheaper or away from the good that is now more expensive The Real Balances Effect When a price increases it decreases your buying power causing you to buy less. The Law of Diminishing Marginal Utility The amount of additional happiness that you get from an additional unit of consumption falls with each additional unit. The Law of is the statement that there is a positive relationship between price and quantity supplied. Why Does the Law of Make Sense? Determinants of Because of Increasing Marginal Costs firms require higher prices to produce more output. Taste Income Normal Goods Inferior Goods rice of Other Goods Complement Substitute opulation of otential Buyers Expected rice Movements in the Curve Figure 4 The Effect of an Increase in Determinant Taste Income-Normal Good Income-Inferior Good rice of Other Goods-Complement rice of Other Goods-Substitute opulation of otential Buyers Expected Future rice Result of an Result of a increase in the decrease in the determinant determinant D shifts left D shifts right D shifts left D shifts right $2.5 $2. $1.5 $1. $ Equilibrium 4

5 Figure 5 The Effect of a Decrease in The Determinants of $2.5 $2. $1.5 $1. Equilibrium rice of Inputs Technology rice of Other otential Output Number of Sellers Expected Future rice $ Movements in the Curve Figure 6 An Increase in Determinant rice of Inputs Technology rice of Other otential Outputs Result of an increase in the determinant Result of a decrease in the determinant $2.5 $2. $1.5 $1. Equilibrium Number of Sellers Expected Future rice $ $2.5 $2. $1.5 Figure 7 A Decrease in Equilibrium Kick it Up a Notch: Why the Equilibrium? If there is a change in supply or demand then without a change in the price of the good, there will be a shortage or a surplus. $1. $

6 Figure 8 A Shortage Resulting From an Increase in (If the price does not increase) Figure 9 A Surplus Resulting From a Decrease in (If the price does not fall) $2.5 $2.5 $2. $1.5 $2. $1.5 Surplus $1. $1. $.5 Shortage $ Figure 1 A Surplus Resulting From an Increase in (If the price does not fall) Figure 11 A Shortage Resulting From a Decrease in (If the price does not rise) $2.5 $2. Surplus $2.5 $2. $1.5 $1.5 Shortage $1. $1. $ $