CLEP Macro Economics

An increase in demand leads to an increase in both

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An increase in demand leads to an increase in both Equilibrium price and Equilibrium quantity A decrease in demand leads to a decrease in both Equilibrium price and Equilibrium quantity A increase in supply will lead to a decrease Equilibrium price and a increase in Equilibrium quantity Equilibrium GDP – is the output level in an economy in which aggregate supply (AS) equals aggregate demand (AD) All goods produced are purchased and consumed Demand – the amount of good or service that consumers plan to buy in a given period of time and in given conditions. The factors that determine demand for a good or service: 1. Price of good 2. Price of related goods 3. Expected future prices 4. Income 5. Population 6. preferences Supply Excess = (Supply – Demand) Supply quantity exceeds the demand Excess Demand = (Demand-Supply) also called, Economic Shortage Demand of good exceeds the quantity goods Price Ceiling – maximum price allowed by law Goal of price ceiling is to keep the price of a good low and affordable Products with price ceilings are; Natural Gas, Gasoline, Prescription Drugs and Food Substitute Effect – suggests that a lower price provides incentive to substitute a cheaper good for similar good that is now more expensive goods or services that satisfies a consumers same preference or goal An increase in product price will cause an increase in demand for a substitute product. o Example: Coke increases prices, consumers demand Pepsi. o Example: when beef prices increase people choose chicken o Example: bananas are cheaper than strawberries so I’ll buy bananas how changes in price affect the consumption of those goods, when prices increase, buyers tend to purchase other interchangeable goods. Income Effect – indicates that at a lower price you can afford more of the good without giving up other goods I can buy more banana’s now at the lower price than strawberries Slide 28 Complement goods – goods that complete another item and may lead to more consumption of that item o Example: bread and mayo is a complement of ham (to make a sandwich) An increase in buyers will cause an increase in demand, and price.
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A decrease in cost of materials used in production will cause an increase in supply Example: lumber price decreases, production of wood furniture will increase, more furniture will be built An increase in the number of suppliers and the expectation for lower prices will lead to an increase in supply, Buyer’s Surplus – the difference in the price the buyer wanted to pay and paid. Example: If I’m willing to pay $20 for shoes and I buy them for $15, my surplus is $5 Sellers Surplus – the difference in price received by the seller and the price the seller wanted to pay Example: If the seller is willing to sell shoes for $10, and the shoes were sold for $15, seller surplus is $5 Seller Reservation Price – lowest price the seller is willing to sell an item Generally equal to marginal cost (cost per unit produced) so no loss in profit occurs Total Surplus – difference between the buyers reservation price and the sellers reservation price (reservation
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An increase in demand leads to an increase in both...

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