Summary: Microeconomics 3E

Read the summary and the most important questions on microeconomics 3e

• 2 supply and demand

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• There are four key assumptions underlying the supply and demand model. Name these assumptions.

  • Single market: We restrict our focus to supply and demand in a single market
  • Homogeneous: All goods bought and sold in that market are identical
  • Single price and same information: same price and everyone has the same information
  • Large number of buyers and sellers: There are many producers and consumers in the market

• Complements and substitutes of a given good affect the demand for that good. Define complements and substitutes

  Substitutes: is a good that can be used as a replacement of an other. (cola VS pepsi) the demand of pepsi cola will decrease, if cola is at discount
  
  complements: this is a good that a used in combination with an other good (e.g. Bread and butter) the demand for butter may go up, if bread is at discount

• What simplifying assumption do we make to build a demand curve? Why is the demand curve downward-sloping?

  the curve describes the relationship between quantity of a good that consumers demand and the good’s price, holding all other factors constant
  
  
  law of demand: consumers buy more of a good (high demand) if the price is low, and buy less (low demand) if price of good is high
  
  eg. (QD=1000-200P)
  QD= quantity of demand and p= price of good
  
  

• What is the difference between a change in quantity demanded and a change in demand?

  Change
  quantity-demand:  movement along the demand curve will occur as a result of the change
  
  demand: shift of the entire demand curve caused by a change in a determinant of demand other than the goods own prices 
  
  determinants. (•Number of consumers, Consumer wealth/Income, Consumer tastes, Price of other goods (Complements or substitutes) or A- Z (weather, fashion, neighborhood effect etc….)

• Why is the supply curve upward sloping?

  Supply: the amount of a good sellers a willing to sell at a given price (effected by price and government actions) 
  
  supply-curve: there is a positive relation (high price = more units the seller is willing to sell) effected by price, production cost and number of seller
  
  eg. (QS=200P-200)

• What is the difference between a change in quantity supplied and a change in supply?

  Quantity-supplied: movement along the supply curve in response to a price change, with everything else held constand
  
  supply: shift of the entire supply curve caused by a change in non price factors

• Define market equilibrium. What is true of the quantity supplied and demanded at the market equilibrium?

  This is a situation were no one wants to change their behavior. 
  supplied- and demand curve   intersect (QD=QS)

• What happens when price is below the equilibrium price? Why?

  Equilibrium-price: is the price were consumers can buy as much as they want and sellers can sell as much as they want.
   
   if P < Pe, quantity demanded will exceed quantity supplied, resulting in Excess Demand: QD  > QS (point Y and Z) Excess demand is also referred to as a shortage. The shortage will induce buyers to bid up the price. As prices rise, quantity demanded will fall and quantity supplied will rise until the market reaches equilibrium at a higher price

• What happens when price is above the equilibrium price? Why?

  If P > Pe, quantity supplied will exceed quantity demanded, resulting in Excess Supply:
  QS  > QD (point W and X) Excess supply is also referred to as a surplus. To sell their products, producers must lower prices. As prices fall, quantity demanded increases and quantity supplied   decreases until the market reaches an equilibrium at a lower price.

• In what direction will price and quantity move as a result of a demand shift?

  Factors that effect shift in the demand curve: -number of consumers, - income. -consumer tastes, - prices of related goods. 
  if the demand for a good decrease the equilibrium quantity and price will decrease. Likewise if the demand of a good increase the equilibrium price and quantity will increase.