Supply and Demand Flashcards
What are the three economic questions?
- What goods and services will be produced?
- People vote with incomes for things they demand, money they pay ends up going to wages to labor, rent for capital - How things are produced?
- Competitive firms compete on price, must minimize costs of production by choosing combinations of labor, capital + tech - Who gets the produced goods
Factor markets (labor, land, capital demanded by businesses)
Households: who supply these resources get the income.
The more valuable their particular version of the resource, the more they can buy
What does the demand schedule for a commodity reflect?
Reflects the amount people are willing to pay under varying prices, holding all else equal.
Holding all else: price and desirability of other commodities is assumed to be fixed even as the price of the commodity being examined changes
Why is the demand curve downward sloping?
- Substitution effect: as the price of something increases, people “substitute” away from that good and towards other goods
e.g. if coffee becomes more expensive, might shift to tea
- Income effect: as price increases, I become poorer, can afford less of the thing.
if coffee becomes more expensive, can afford less coffee on my budget
When does the demand curve shift?
When something OTHER THAN PRICE changes
e.g. if a substitute product becomes cheaper, then the demand curve would shift inward, reflecting less demand at all prices
If people all of a sudden want more of the product, then the demand curve would shift out
What are 5 reasons a demand curve might shift?
- Change in preference
- Change in income
- Change in price of related goods
- Change in population
- Special circumstances
What is the supply schedule?
Reflects amount of a commodity that businesses/individuals supply to the market under a given price, HOLDING ALL ELSE CONSTANT
In general, upward sloping- as price increases, more of the commodity will be tended to be to supplied to the market
What is the law of demand?
As quantity goes up, the price needs to go down to have enough buyers
As price falls, the quantity demanded increases
(negative correlation)
look at price: e.g. if price was 2 dollars, would drink more coffee than if price was 3 dollars
so more quantity
What is the law of supply?
As price increases, more of the commodity will be tended to be supplied to the market
(positive correlation)
Because producers are incentivized to supply more bc they can make more profit per unit
When does the supply curve shift?
If something other than the price of the commodity being examined changes
e.g. if the input prices of a good falls (in market for sandwiches, bread gets cheaper), supply curve shifts out
suppliers will be willing to produce more sandwiches at any price
Or
If gov puts a tariff on a good, companies make less for any prices they charge customers
There is less of the product available at all price levels,
(supply decrease leads to price increase)
So it shifts back
5 things that might shift supply curve?
- Technology (new way of roasting coffee beans eases production)
- Input prices (coffee growers have a good year, reducing bean prices)
- Price of related goods (if tea becomes less popular, may shift to coffee)
- Gov policy (e.g. if tariffs on coffee are removed)
- Special forces e.g. COVID
Where is the equilibrium amount supplied and demanded?
At the intersection of the two curves, it determines the market price and quantity
At market price, market quantity is willing to be purchased by buyers and supplied by sellers- nothing is left over.
What is excess supply?
If price is above market price
Some sellers are wiling to sell but their commodity is not bought
What is excess demand?
if the price is below the market price- shortage of products
People want products they cannot get
When would the market price change?
When things change in the market that shifts one of the curves.
e.g. if we were talking about the market for sandwiches, and a new health diet came out saying sandwiches are healthy, market price would increase
more would be demanded:
curve would shift to the right
not neccesarily for supply curve
What is the formula to calculate elasticity?
percentage change of quantity/percetnage change of price
((New Q - old Q)/ old Q)/ (New P-Old P)/Old P
What does an inelastic supply curve indicate
There is not much of a change in supply, even if price increases substantially
What is elasticity?
A measure of responsiveness of the market to changes
Reflected somewhat in its slope
Steeper: more inelastic
Flatter: more elastic
What does an elastic supply curve indicate
When supply is inelastic, it means that producers are unable to increase the quantity supplied significantly in response to a price increase, usually because of constraints like production capacity, time, or availability of resources.
Why is the housing supply curve kinked?
because if housing prices go down, houses won’t be demolished
yellow lines: represent supply curve
below the kink:
inelastic supply
Limited available land: In urban areas, land for development is often limited, which makes it hard to quickly increase the number of available homes when demand rises.
Zoning and regulatory restrictions: can restrict the ability to build new housing, creating a bottleneck in the supply.
Long construction times:
High costs of development:
above the “kink”, in a place where expansion is relatively easy, the supply curve might be quite elastic- this is illustrated by the dotted or dashed lines
(NOT SHIFTING OF THE CURVE)
What is the residential housing supply curve?
It is kinked
The shape affects how demand changes impact prices
Since housing is durable, hard to get rid of, decreased in demand tend to reduce prices drastically.
What is the labor supply curve?
It is upward sloping. In general, if you want to pay someone more, they will want to work more.
This ignores cases where people get paid so much they can work less.
The curve:
y axis: wage
x-axis: labor supplied
positive correlation
Why is the elasticity of the labor supply important?
Wages in industries where supply is elastic will tend to stay the same even when demand increases.
Industries with few barriers to entry will be easy to enter, thus the number of workers responsive to any potential wage increases
What does marginal benefit mean?
The maximum amount a consumer is willing to pay for an additional unit of a good or service.
= p* MMPL
When does demand for labor increase?
When demand for the underlying good is high, so prices in output markets rise
When the productivity of the workers increases, e.g. bc improvements in tech improve worker productivity
The intersection of supply and demand determines the wages workers receive and firms pay in the market
What is human capital?
Capital that is internal to individual workers (e.g. education etc)
What are the types of sources that human capital comes from?
- Formal education
- Formal on the job training
- Informal training through work experience
Functions of human capital?
- Increase productivity at any job, increasing employers
willingness to pay you money. - If you specialize enough it can get you into labor markets with low supply, and therefore with higher wages. Sometimes the barrier to entry can be so high that we assume in the
short-run labor supply is completely fixed.
What has happened to the relative wages of college graduates high school graduates?
They have increased
Equilibrium Housing Analysis: Effect of Change in Demand on Price and Quantity Considering Supply Elasticity
In housing market: equilibrium = where quantity of housing supplied equals the quantity of housing demanded,
determines market price and quantity of housing.
Change in Demand:
Increase in Demand (e.g. population growth, lower mortgage rates, higher income levels):
Price: Increased demand also = increase equilibrium price bc more people competing for same amt of housing
Quantity: Quantity of housing supplied will increase, but depends on elasticity of housing supply
If inelastic supply, rise in quantity is small, there is sudden increase in demand, price will rise
If supply is elastic e.g. room for new construction, more new housing will be built to meet demand, and the price will increase, but less dramatically.
(so is this case the case only with housing?)
How to use theory to explain other than common sense?
Supply Elasticity:
Inelastic Supply: The supply of housing cannot easily adjust to the increase in demand. For example, in urban areas with strict zoning laws, limited land, or a long construction timeline, housing supply is inelastic. In this case, a large increase in demand results in a significant price increase but a relatively small increase in quantity.
Elastic Supply: If the housing market can expand easily (e.g., due to available land or favorable building regulations), then the supply will increase to meet the new demand, leading to a more modest price increase and a substantial increase in the quantity of housing available.
Equilibrium Housing Analysis: Effect of Change in Supply on Price and Quantity
Increase in Supply (e.g., new housing developments or relaxing zoning laws): Decrease in price because there is now more housing available relative to demand. (quantity increases)
(supply curve shifts to the right)
Inelastic Supply: If the supply is inelastic (e.g., there are physical limitations to increasing housing supply or it takes a long time to build), the price will decrease only slightly, and the increase in quantity will be minimal. The housing market may not be able to respond quickly or significantly to increased supply.
Elastic Supply: If the supply is elastic (e.g., construction can expand rapidly or more land is available for building), then the market can adjust quickly. An increase in supply will lead to a larger increase in quantity and a more substantial decrease in price.
Equilibrium Labor Market Analysis: Effect of Shift in Labor Demand Considering Supply Elasticity
Equilibrium determines wage rate and number of people employed.
Change in labor demand shifts the equilibrium in various ways, impact of these shifts depends on the elasticity of labor supply.
Change in Labor Demand
Increase in Labor Demand (e.g., due to technological advancements, higher product demand, or a booming industry):
Wage: equilibrium wage will rise because firms need more workers, and they compete for labor by offering higher wages.
Quantity: The number of workers employed (quantity of labor) will increase, but how much it increases depends on the elasticity of labor supply.
Labor Supply Elasticity:
Inelastic Labor Supply: If labor supply is inelastic (e.g., there is a limited number of skilled workers for a specific job), employers will have to raise wages significantly to attract more workers. However, even with higher wages, the increase in employment may be relatively small because there aren’t enough workers available or willing to fill the positions.
Elastic Labor Supply: If the supply of labor is elastic (e.g., if workers can easily be trained or there is a large pool of available workers), the wage increase will not need to be as large to attract more workers. The employment quantity will increase more substantially, and the wage increase may be smaller compared to an inelastic labor supply.
What happens when there is inelastic demand?
When demand is inelastic, it means that the quantity demanded changes very little even when the price changes.
