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Chapter 3 -- 

1. consumer incomes
2. consumer tastes and preferences
3. number of potential buyers
4. consumer price expectations
5. prices of related goods

 

• substitute goods – a change in the price of a close substitute will cause the demand for the good in question to change in the same direction. (An increase in the price of hamburgers will cause the demand for hot dogs to increase)
• complementary goods (goods that are consumed together) – a change in the price of the complementary good will cause the demand for the good in question to change in the opposite direction. (An increase in the price of 35mm cameras will cause a decrease in the demand for 35mm film)

 

 

 

 

 

 

 

 

 

The law of supply simply states the observed direct or positive relationship that exists between the price of a good and the quantity that sellers are willing to bring to the market during a specific market period, all other things remaining constant. A change in the price of the good will cause a change in the quantity supplied, not a change in supply. The supply of a good will increase (shift supply curve to the right) or decrease (shift supply curve to the left) only when one of the non-price determinants change.

The non-price determinants of supply are:

 

1. prices of factors
2. improved technology
3. government taxes and subsidies
4. number of producers or sellers
5. producer/seller expectations

 

Equilibrium is a state or condition in which there are no internal forces acting to cause a change.  A system in equilibrium is "satisfied."  It is at rest.  Applying this idea to the market for some good or resource, a market is in equilibrium when the market price is that price that makes the quantity demanded equal to the quantity supplied.  This is the equilibrium price or "market clearing" price.

But what if a market is not in equilibrium?  What are the internal forces that will act to move it back toward equilibrium?  Here's the rule:

If the market price is greater than the equilibrium price, there will be a market surplus; and, in order to eliminate that surplus, businesses will be forced to lower the price, causing it to move back toward the equilibrium price.  If the market price is less than the equilibrium price it will cause a market shortage.  Responding to the shortage, consumers will bid the price back up toward the equilibrium price.

The rationing function of price

Efficiency:  How well we "use" our limited resources.

           Productive efficiency is the production of any particular mix of goods and services in the least costly way.  It means using the fewest amount of resources to produce that output.  But that begs the question of whether that particular mix of goods and services is the one which will best satisfy the wants and needs of that society.

          Allocative efficiency requires that an economy produce the right mix of goods and services. In other words, are we allocating are scarce resources efficiently.  It is important to recognize that the science of economics does not say what the right mix is, but it does argue that there is such a mix.  The goal of any economic system is to use its resources to achieve that mix.

Our discussion thus far has assumed that price is free to change. However, on occasion government, at our behest, places legal restrictions on price.  These instances involve what are know as price ceilings and price floors.

A price ceiling is a maximum legal price below the equilibrium price, and results in a legislated shortage.  A good example is rent control laws.

A price floor is a minimum legal price above the equilibrium price, and results in a legislated surplus.  Examples are farm price supports and the minimum wage.