II. Trade-offs, Comparative Advantage and Market System
c. Explanations for the Law of Demand
- The Law of Demand is governed by two concepts known as the substitution effect and the income effect. The substitution effect is the idea that as prices rise will replace more expensive items with less costly alternatives. Conversely, as the wealth of individual’s increases, the opposite tends to be true as inferior commodities are disregarded for more expensive, higher-quality goods and services, this is known as the
2. The Supply Side of the Market.
a. Supply Schedules and Supply Curves
-Supply is defined the amount of product producers are willing and able to sell at a given price. A supply schedule illustrates the relationship between the price of a product and the quabtity of the product supplied This data translated on a graph represents the supply curve.
b. The Law of Supply
- The law that states that as the price of a good or service increases, the quantity of that good or service increases and vice versa.
c. Variables that Shift the Market Supply
- The Law of Supply only applies when particular variables are constant, this concept is referred to as the Ceteris paribus condition. The variables are listed as income, taste, population/demographics, expected future prices, and prices of related goods. Changes in each given variable will shift the demand curve either right or left. A Shift to the right indicates an increase in demand. A shift toward the left indicates a decrease in demand
d. A Change in Supply Vs A Change in Quantity Supplied
-A change in supply is described by the suppliers of a given good or service altering their production or output. A change in supply can be brought on by new technologies, making production more efficient and less expensive, or by a change in the number of competitors in the market. A change in quantity supplied is represnted by a movement along the supply curve and is initiated by a change in a products price.
3. Market Equilibrium
- Market equilibrium is defined as the intersection between the quantity demanded and the quantity supplied as a result, prices become stable.
a. How Markets Eliminates Surpluses and Shortages
-Markets in disequilibrium tends to find its equilibrium in time. Generally, when there is too much supply for goods or services, the price goes down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium.
4. The Effects of Demand and Supply Shifts on Equilibrium.
- A Demand curves shift effects on equilibrium is that the new equilibrium price will be higher or lower than the original price depending on if the curve is shifted to the right or left. A supply shifts effect on equilibrium creates either surplus or shortages. Prices are then either raised or lowered to accommodate the new found equilibrium.
IV. Economic Efficiency and Government Price Setting.
1. Consumer Surplus and Producer Surplus
a. Consumer Surplus
-Consumer Surplus is a concept that accounts for the difference between the highest prices a customer is willing to pay compared against its actual market price therefore consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.
b. Producer Surplus
- The difference between the lowest prices a firm would be willing to accept for a good and the price it actually is being sold for. Marginal cost is the additional cost to a firm of producing one more unit of a good or service
c. What Consumer and Producer Surplus Measure.
- If the price of a product is zero, then the consumer surplus in a market would be all of the area under the demand curve. When the price is above zero, then the consumer surplus is the area below the demand curve and above the market price. Moreover, if producers could supply a good at zero cost, then the producer surplus in a market would be all of the area below the market price. When cost is above zero, the producer surplus is the area below the market price and above the supply curve.
2. The Efficiency of Competitive Markets
a. Marginal Benefit Equals Marginal Cost in Competitive Equilibrium
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b. Economic Surplus
- Defined by the sum of consumer surplus and producer surplus. In a competitive market, economic surplus is at a maximum when the market is in equilibrium. Dead weight loss is defined as the reduction in economic surplus resulting from a market not being in competitive equilibrium.
c. Economic Surplus and Economic Efficiency
-When both the consumer and producer benefit from market interaction through producer and consumer surplus, economic efficiency becomes its result. Economic Efficiency is the market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and the sum of consumer and producer surplus is at its maximum.
3. Government Intervention in the Market
a. Price Floors- Governmental Policy
- Price Floors are minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance. Price floors are only an issue when they are set above the equilibrium price, since they have no effect if they are set below market clearing price.
b. Price Ceilings
- Price Ceilings are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them. Price ceilings only become a problem when they are set below the market equilibrium price
c. Black Markets
- A market in which buying and selling take place at prices that violate government price regulations
d. The Results of Governments Price Control
- Three results occur from governmental price control: A lost of economic efficiency, benefits a segment of the population and hinders another segment of the population. A lost of economic efficiency happens because market equilibrium is unachievable through the interference of price control. -
V. Gains from International Trade
a. The US in the International Economy
- International trade has in recent years has become less restricted and increasingly more efficient, a reason for this is due to the tariff rates being substantially reduced. Tariffs are the taxes imposed by government on imports. Trade has become considerable factor in the overall economy and has become a considerable portion of the overall economy’s GDP due to the US being the largest exporter in the world. Comparative advantage is the ability of a producer to produce a relative good at a lower opportunity cost than a competitor. International trading is governed by comparative advantages between international trading partners; each respective country specializes in the product they possess a comparative advantage in. This allows increased productive efficiency. The alternative product forgone at the price of specialization is then imported through trade from another country and vice versa. This tactic proves beneficial for both parties