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Surplus: when the quantity supplied is greater than the quantity demanded.•Shortage: when the quantity demanded is greater than the quantity supplied.•How Markets Eliminate Surpluses and Shortages:The interaction of demand and supply determines the equilibrium price•Demand and Supply Both Count:Lesson 3 Page 12
Neither consumers nor firms dictate what the equilibrium price will be.○No firm can sell anything at any prices unless it can find a willing buyer.○No consumer can buy anything at any price without finding a willing seller.○The interaction of demand and supply determines the equilibrium price•3.4 The Effect of Demand and Supply Shifts on Equilibrium:When the supply curve shifts to the right there will be a surplus at the original equilibrium price.•The surplus is eliminated as the equilibrium falls to P2and the equilibrium quantity rises from Q1to Q2.•Supply Shifts & Equilibrium:When the demand curve shifts to the right there will be a shortage at the original price.•The shortage is eliminated as the equilibrium rises to P2and the equilibrium quantity rises from Q1to Q2.•Demand Shifts & Equilibrium:Demand and Supply Equations:Qd=QsConsumer surplus and producer surplus:Sum of consumer surplus and producer surplus = net benefit all renters and landlords receive from participating in the market for apartmentsLesson 3 Page 13
Used to explain how prices are determined○Every model will relate to supply and demand○Must make some assumption○The supply and demand model is the most powerful tool in economics.•Assume analyzing a perfectly competitive market•Perfectly competitive market: a market with many buyers and sellers, all firms are selling identical products, and no barriers to new firms entering the market.•Lesson 3:P increases, Qd= decreases○Law of Demand: states that holding all else constant, when the price of a product falls, the quantity demanded of that will increase and vice versa.•Demand:Ex) Pepsi prices increase -> coke-a-cola bought more.○Substitution effect:when consumers buy less of a product when the prices go up because it is a relatively more expensive than other products.•Income effect: when consumers buy less of a product when the price goes up because it now takes a larger share of their income.•Why is Demand Downward Sloping:Change in demand: when the entire demand curve shifts. This is because of an exogenous factor changes your desire to purchase a product.Quantity demanded: desire to purchase a product changes because the price changes. This is an endogenous change which equals a movement along the curve.•Change in Demand vs Change in Quantity Demanded:Notes from ClassLesson 3 Page 14
Income1.Price of a related goods2.Taste and preference3.Population of demographics4.Expected future prices5.