Chapter 3 Notes on Econ 1A - the prices and quantities of goods and services are determined by interactions in the market

-demand curve graphs the quantity of a good that buyers wish to buy at each price -why demand curve is downward sloping? -buyer’s reaction to a price change -substitution effect -the change in quantity demanded because buyers switch to or from substitutable goods when the prices changes -income effect -the change in quantity demanded (Qd) because change in price changes the buyer’s purchasing power) -difference in buyer’s reservation prices -consumers are different in terms of how much they are willing to pay for the goods -buyer’s reservation prices – the largest dollar amount the buyer is willing to pay for the goods -seller’s reservation price – the smallest dollar amount the seller would be willing to charge for an additional unit of the good -interpretations of demand curves -horizontal interpretation -start from the vertical axis (P) to the horizontal axis (Q) -how much of the good is demanded at a given price? -vertical interpretation -start from the horizontal axis to the vertical axis -how much the buyer wants to pay at a given quantity? -the reservation price of the marginal buyer at a given quantity -interpretation of supply curves -horizontal interpretation -at a certain level of price, how many products sellers wish to sell -vertical interpretation -the seller’s reservation price at a given level of Qs -when the market is in equilibrium, no incentive to move away from the equilibrium -Changes in demand -when there is an increase in demand, the demand curve shifts to the right -when there is a decrease in demand, the demand curve shifts to the left

-6 factors that shift demand curve -change in price of a complementary good -2 goods are “complements” if a price of one good decreases, demand for the other good increases (or price of one good increases, demand for the other good decreases) -change in price of a substitutable good -two goods are “substitutes” if increase in price of one good, demand for the good decreases (demand decrease, price decreases, and quantity decreases) -change in buyer’s income -normal good – increase in buyer’s income causes demand for normal good to increase -(Equilibrium Price increases and Equilibrium Quantity increases) -inferior good – increase in buyer’s income causes demand for inferior good to decrease -change in buyer’s preference or taste -demand increases which causes price and quantity to increase -change in population of potential buyers -demand increases the price and quantity increases -an expectation of price change in future -decrease in demand causes decrease in prices and quantity -changes in supply - when there is an increase in supply, the supply curve shifts to the right - when there is a decrease in supply, the supply curve shifts to the left

-5 factors that shift the supply curve -change in the cost of inputs used for production (capital or labor) -wage of workers increase causes costs to increase which causes decrease in supply -causes price of goods to increase and quantity of goods to decrease -improvement in technology (less costly to produce) -causes supply to increase which causes price to decrease, and quantity to increase -change in weather (agriculture) -if there is sunny weather for oranges then the supply increases which causes the price to decrease and the quantity to increase -change in the number of suppliers -if the number of suppliers increases it causes the supply curve to shift to the right -causes the equilibrium price to decrease and the equilibrium quantity to increase -an expectation of price change in future -due to a bad weather, bad crops of wheat are expected -suppliers may withhold sale of wheat because they expect an increase in price due to shortage of wheat -supply decreases which causes equilibrium price to increase and equilibrium quantity to decrease -what if both supply and demand curves shift simultaneously? -if increase in supply is relatively bigger than decrease in demand -equilibrium price decreases, and equilibrium quantity increases -if decrease in demand is relatively bigger than increase in supply -equilibrium price decreases and equilibrium quantity decreases

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