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Chapter 3 (Lecture Notes and Textbook Notes)

Tuesday, January 24, 2023
Birdget O’Shaughnessy
ECON 1BB3 C02

Lecture Notes (Tuesday, January 24, 2023)

 Test 1 Saturday January 28 (10:00-11:00am)
→ Chapters 1-3
→ 30 multiple choice questions
 Review the practice test on A2L and video questions

Textbook Notes (pg 56 –91)

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3.1 The Demand Side of the Market

 Determined by wants/needs of consumer
 Price main factor in consumer decisions

Demand schedules and demand curves

 Demand schedule = table showing relationship b/t price and quantity demanded
 Quantity demanded = amount of good/service consumer willing/able to purchase at given price
 Demand curve = curve showing relationship b/t price and quantity demanded
 Market demand = demand by all consumers of given good/service

Law of demand
 When price of product falls, quantity demanded of product ↑, and price of product rises,
quantity demanded of product ↓
 Substitution effect
→ Price of good rises in comparison to other goods, consumers start buying other goods
instead
 Income effect
→ Change in quantity demanded of good that results from effect of change in good's price
on consumers' purchasing power
→ When price of good falls, consumers can afford to buy more (purchasing power)

Magic Latin Phrase Ceteris Paribus

 When analyzing relationship b/t 2 variables, other variables held constant
 Shift of demand curve = increase/decrease in demand
 Movement along demand curve = increase/decrease in quantity demanded

Variables that shift market demand

1. Income
→ Normal good = demand increases when income increase (brand clothes)
→ Inferior good = demand decreases when income increase (second hand clothing)
2. Price of related goods = substitutes
3. Tastes
4. Population and demographics
5. Expectations = think price will ↑/↓
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3.2 The Supply Side of the Market

 Quantity supplied = amount of good/service firm willing/able to supply at given price

Supply schedules and supply curves

 Table showing relationship b/t price of product and quantity of product supplied
 Supply curve = curve showing relationship b/t price of product and quantity of product supplied

Law of supply
 Rule that increase in price cause increases in quantity supplied, and decreases in price cause
decreases in quantity supplied
 If movement along supply curve this ↑/↓ quantity supplied

Variables that shift market supply

1. Price of inputs = anything used in making good/service
2. Technological change = +/- change in quantity of output firm can produce using given quantity
of inputs
3. Prices of substitutes in production = alternative products firm could produce w same inputs
4. # of firms in market
→ Entrance = shift right
→ Leave = shift left
5. Expected future prices
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Change in supply vs change in quantity supplied

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3.3 Market Equilibrium: Putting Buyers and Sellers Together

 Situation where quantity demanded = quantity supplied
 Competitive market equilibrium = many buyers and sellers
 Surplus = quantity supplied > quantity demanded
→ Produce more than needed
→ Lead to sale
 Shortage = quantity demanded > quantity supplied
 Raise price without losing sales

3.4 The Effect of Demand and Supply Shifts on Equilibrium

 Shifts in supply

 Shifts in demand
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 Shifts in supply and demand over time

 When sift in demand/supply curve cause change in equilibrium price, change in price doesn’t
cause further shift in demand/supply
 Demand to increase/supply to decrease, whole curve must shift