Reading notes--Principles of Economics (chapter4)

2021-07-12

Word count: 920 | Reading time≈ 5 min

Summary

Chapter 4 is The Market Forces of Supply And Demand. This chapter explains how market force(supply/demand) determines the allocation of resources（the quantity and price of goods in the market.

Supply/Demand Curve

Quantity demand

The demand curve slopes downward.
Other things being equal, the quantity demanded of a good falls when the price of the good rises. (The law of demand)

When the demand increases, we can say there is an extension along the demand curve. When the demand decreases, we can say there is a contraction along the demand curve.

You can use a demand schedule to show the relationship between the price of a good and the quantity demanded.

Quantity supply

The supply curve slopes upward.
Other things being equal, the quantity supplied of a good rises when the price of the good rises. (The law of supply)

When the supply increases, we can say there is an extension along the supply curve. When the demand decreases, we can say there is a contraction along the supply curve.

You can use a supply schedule to show the relationship between the price of a good and the quantity supplied.

Shifts in the demand curve

The demand curve shifts as the demand changes due to any reasons except the change of the price. In other words, the demand changes at any given price.
The demand increases when the demand curve shifts to the right, the demand decreases when the demand curve shifts to the left.
Many reasons lead to the shift in the demand curve. e.g Income, Price of related goods, Tastes, Expectations of future price, Number of byers.

Shifts in the supply curve

The supply curve shifts as the supply changes due to any reasons except the change of the price. In other words, the supply changes at any given price.
The supply increases when the supply curve shifts to the right, the supply decreases when the supply curve shifts to the left.
Many reasons lead to the shift in the supply curve. e.g Technology of production, Expectations of future price, Number of sellers.

Supply and Demand Together

Excess supply/demand

When the price above the equilibrium price（the price when supply curve and demand curve intersect), the quantity supplied is greater than the quantity demanded. In other words, there is a excess supply(surplus).
When the price below the equilibrium price（the price when supply curve and demand curve intersect), the quantity supplied is smaller than the quantity demanded. In other words, there is a excess demand(shortage).
As a result, the market price moves towards the equilibrium price.

How to influence equilibrium price and equilibrium quantity

When the supply curve shifts to the right, the equilibrium price decreases and the equilibrium quantity increases.

You can also use the diagrams to analyze the change of equilibrium price and equilibrium quantity when the demand curve shifts or the supply curve shifts to the left.

Definitions

Market– a group of buyers and sellers of a particular good or service
Competitive market– a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
Quantity demanded– the amount of a good that buyers are willing and able to purchase
Law of demand– the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises
Demand schedule– a table that shows the relationship between the price of a good and the quantity demanded
Demand curve– a graph of the relationship between the price of a good and the quantity demanded
Normal good– a good for which, other things being equal, an increase in income leads to an increase in demand
Inferior good– a good for which, other things being equal, an increase in income leads to a decrease in demand
Substitutes– two goods for which an increase in the price of one leads to an increase in the demand for the other
Complements– two goods for which an increase in the price of one leads to a decrease in the demand for the other
Quantity supplied– the amount of a good that sellers are willing and able to sell
Law of supply– the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises
Supply schedule– a table that shows the relationship between the price of a good and the quantity supplied
Supply curve– a graph of the relationship between the price of a good and the quantity supplied
Equilibrium– a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
Equilibrium price– the price that balances quantity supplied and quantity demanded
Equilibrium quantity– the quantity supplied and the quantity demanded at the equilibrium price
Surplus– a situation in which quantity supplied is greater than quantity demanded
Shortage– a situation in which quantity demanded is greater than quantity supplied
Law of supply and demand– the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods? (Correct answer: A)

a. prices and quantities both rise

b. prices and quantities both fall

c. prices rise and quantities fall

d. prices fall and quantities rise

My wrong answer: B