List the last three course objectives from text page 61:
4. Explain how prices and quantities bought and sold are determined by
demand and supply.
5. Explain why some prices fall, some rise, and some fluctuate.
6. Use demand and supply to make predictions about price changes.
3. Outline
III. Supply
A. The quantity supplied of a good is the amount
that producers plan to sell in a given period of time.
B. The law of supply is that "other things
remaining the same, the higher the price of a good, the greater is the quantity
supplied."
1. A higher price increases the quantity supplied because
producing larger quantities increases the marginal cost of production. Hence greater
quantities are supplied only if the price rises to cover the higher marginal cost.
C. Supply is the entire relationship between all
possible prices and the quantity supplied at every price.
D. The supply curve graphs the relationship between the
quantity supplied and the price of a product.
1. The supply curve shows firms’ minimum supply price;
that is, for any quantity, it shows the minimum price that firms must receive in order to
supply the last unit of the given quantity.
F. A change in supply (a shift in the supply curve)
occurs whenever some factor that affects the supply of the good, other than its price,
changes. Such variables include:
1. Prices of productive resources. A rise (fall) in the
prices of resources shifts the supply curve leftward (rightward).
2. An increase in technologyshifts the supply
curve rightward.
3. An increase (decrease) in the number of suppliers
shifts the supply curve rightward (leftward).
4. Prices of other goods produced, which have two
possible relationships:
a) When the price of a substitute in production rises
(falls), the supply curve for the good shifts leftward (rightward).
b) A rise (fall) in the price of a complement in production
shifts the supply curve rightward (leftward).
5. If the expected future price of the product rises
(falls), the supply curve in the present period shifts leftward (rightward).
G. Similar to demand, the distinction between a "change in
supply" and a "change in the quantity supplied"is crucial.
The former refers to a shift in the entire demand curve, whereas the latter refers
to a movement along the supply curve.
IV. Market Equilibrium
A. Equilibrium is defined as a situation in which
opposing forces balance. Unless something changes, the equilibrium will persist
indefinitely.
B. The equilibrium price is the relative price at which
the quantity demanded equals the quantity supplied; the equilibrium quantity is the
amount bought and sold at the equilibrium price.
1. A price below the equilibrium price causes a shortage.
People’s willingness to pay more than the going price allows producers to raise the
price, toward the equilibrium.
2. A price above the equilibrium price causes a surplus. Firms
lower prices attempting to sell more output, and the lower price moves the market to
equilibrium.
3. At the equilibrium, the price does not change.
V. Predicting Changes in Price and Quantity
A. A change in demand changes the price and quantity.
1. An increase in demand (a shift rightward of the demand
curve) results in a rise in the price and an increase in the quantity.
2. Analogously, a decrease in demand (a shift leftward in the
demand curve) causes a drop in the price and a decrease in the quantity.
B. A change in supply also affects the price and quantity of
the product.
1. An increase in supply (a shift rightward of the supply
curve) causes the price to fall and the quantity to increase.
2. A decrease in supply (a shift leftward in the supply curve)
causes the price to rise and the quantity to decrease.
C. If both demand and supply change, without further
information it is not possible to tell what happens to both the price and quantity.
1. If demand and supply change in the same direction, we know
what happens to the quantity, but without information about the relative magnitudes of the
shifts, the effect on the price is uncertain.
a) If the price of a complement falls (e.g., when considering
audiotapes, a drop in the price of a Walkman) and also the level of firms’ technology
advances, the demand and supply curve of tapes both shift rightward. In this case, the
quantity definitely increases, but the price may rise (if the demand shift is larger);
fall (if the supply shift is larger); or stay the same (if the shifts are of equal size).
1. If supply and demand change in opposite directions, we can
always determine the effect on the price but the impact on the quantity is ambiguous.
a) If the price of a substitute falls (thinking of audiotapes,
a drop in the price of a CD player) the demand curve for tapes shifts leftward while
simultaneously technological advances in the production of audiotapes cause the supply
curve of tapes to shift rightward. As a result, the price of a tape falls, but the
quantity may increase (if the supply shift is larger); decrease (if the demand shift is
larger); or not change (if the shifts are of equal size).
D. Technological progress in the production of a CD player has
caused the supply curve to shift substantially rightward, but the increase in demand has
been relatively modest. As a result, the equilibrium price of a CD player has plunged and
the quantity produced skyrocketed.
E. In the market for health care, the supply curve has shifted
a bit rightward, but the demand curve has shifted substantially rightward because of an
aging population, increasing incomes, and a wider range of ailments that can be treated.
As a result, there has been a substantial rise in the price of health care combined with
an increase in the quantity of health care.
F. Changes in growing conditions cause large fluctuations in
the supply curve of bananas, but demand remains relatively constant. As a result, the
price of a banana fluctuates.
2. Complete even-numbered
Questions in your study guide and check your answers.
3. If you watched the video, write one or more
sentence about each of its three episodes which will bring the episodes and lessons
learned from them to mind.
4. If not done in class, complete the Two-Minute-Feedback.
8.
Summary
1. You need to know the items that
change the location of the demand curve. Memorize them.
2. You need to know the items that
change the location of the supply curve. Memorize.
3. To use the demand and supply model
follow these steps:
When one of these items changes,
Step 1- Draw and initial supply and demand
diagram. Label the axes, the demand curve, and the supply curve. Also indicate
the initial equilibrium price and quantity.
Step 2 - Decide whether the item changes the
demand curve or the supply curve.
Step 3 - Decide whether the change shifts
the affected curve rightward or leftward.
Step 4 - On the demand and supply diagram
you have drawn, shift the appropriate curve the appropriate direction.
Step 5 - Discover the new equilibrium price
and equilibrium quantity and write down the answer.
9.
Preview
A First Look at Macroeconomics is a brief introduction to the major issues and
policies for handling them in the nation's macroeconomy. After seeing how
macroeconomics was born during the Great Depression, you'll take a glimpse at these
issues:
Economic growth; how we measure it, its costs and benefits, and how the U.S.
compares to the rest of the world.
Jobs and unemployment; how we measure unemployment and compare to other parts of the
globe.
Inflation; how we measure it and compare with other nations.
Surpluses and deficits; what they are and how they matter.
Fiscal and monetary policy; the two kinds of policy for influencing our macro issues
and outcomes.
10.
Two Minute Feedback
Take a minute and jot down the problem, idea, or concept that was
most interesting to you from this chapter.
Take another minute and jot down the problem, idea, or concept
with which you struggled the most.
