What term do economists use to describe how much of a good is offered for sale at a specific price?

What term do economists use to describe how much of a good is offered for sale at a specific price?
INTRODUCTION

Let’s go back to Fred and Jill, and the willingness to buy and sell chickens. We know that Fred’s willingness to buy chicken depends upon the price he’s asked to pay; we also know that Jill’s willingness to sell chicken depends on the price she’s offered.

It’s time for another assumption. Let’s assume that there are lots of chicken buyers whose actions, when added together, result in the demand curve on the right.   Also, there are lots of chicken sellers whose actions, when added together, result in the supply curve on the right. Obviously, the quantities are in large numbers (e.g. thousands of pounds per week).

EXCESS DEMAND

What term do economists use to describe how much of a good is offered for sale at a specific price?
What would happen if the price were a $1.00 per lb? Buyers really like that idea – they are willing to buy 5 lbs of chicken per week. But, they’re going to have a lot of trouble finding chicken to buy at that price because sellers are willing to sell only 1 lb of chicken per week. That leaves a lot of unhappy chicken-eaters out there (everyone in the shaded area - see left).

Economists call this an “excess demand” – the quantity demanded is greater than the quantity supplied at the given price.   This is also called a shortage.

EXCESS SUPPLY

What term do economists use to describe how much of a good is offered for sale at a specific price?
Now, sellers don’t like the idea of $1.00 per week at all. They’d go out of business at that price! So, they decided to get together and demand that buyer pay $4.00 per lb of chicken. At that price, they’d be willing (even delighted) to offer 4 (thousand) lbs per week.

However, many of the buyers have disappeared (the shaded area - see right)!   They’ve substituted other food for chicken – at $4.00 per lb, their only willing to buy 2 lbs each week.   After all, at $4.00 per lb, they might as well buy steak.

Economists call this situation an “excess supply” – that is the quantity demanded is less than the quantity supplied at the given price.   This is also called a surplus.

So, if the price is too high, sellers will have leftover chickens. And, if the price is too low, buyers won’t be able to find as much chicken as they want.   In either case, the market participants will be disappointed.

What term do economists use to describe how much of a good is offered for sale at a specific price?
However, what happens if the price is $3.00 per lb?   Buyers are willing to buy 3 lbs of chicken per week and sellers are willing to sell 3 lbs of chicken per week.   Wow! No leftover chickens and no unhappy consumers.

Your text explains the process of reaching equilibrium – you should read it carefully.   This tutorial will help you learn to use graphical analysis to solve problems; it is not a substitute for your text.

SUMMARY

Summary so far...

  • Equilibrium: the quantity people are willing to buy equals the quantity people are willing to sell at each price.
  • Excess Demand: the quantity demanded is greater than the quantity supplied at the given price.   This is also called a shortage.
  • Excess Supply: the quantity demanded is less than the quantity supplied at the given price.   This is also called a surplus.

SUMMARY EXERCISE

What term do economists use to describe how much of a good is offered for sale at a specific price?
Suppose consumers convince their legislators that the price of chicken is too high, and since such a nutritious food should be available for everybody, the price must be set by law. Which side of the market changes?

The legislature decreased the price of chicken, and it is sold at the new price represented by Qs (see right). Only Qs is available at the new, low price, and there certainly won't be enough to go around since people want to buy Qd pounds per week. At this price, quantity demanded is much greater than quantity supplied. This is a strange way to make more nutritious food available to more people!

EQUILIBRIUM SHIFT IN DEMAND

What term do economists use to describe how much of a good is offered for sale at a specific price?
We investigated some of the reasons why the demand curve would change in the demand section. Let’s see what happens to the price and quantity of chicken now when the price of corn goes down.

First, the demand for chicken increases as many people buy more chicken to go with their corn. Drag the demand curve to show and increase in demand.

Look at the graph carefully.   At $3.00 per lb, buyers now want to buy 5 lbs of chicken per week. Too bad – the chicken just isn’t there. The demand increased but the supply did not – sellers are willing to sell the same amount of chicken at $3.00 per lb as they were before the corn price changed.

As the buyers try to buy more chicken they offer the sellers more money. After all, they like chicken more than they did last week.

As the buyers offer more money, the sellers realize that they can afford to raise more chickens.

This process stops when the willingness to buy chicken equals the willingness to sell chicken at the current price.   On this graph, that seems to be about 4 lbs at about $4.00 per lb. Verify this with the table. At $4.00, Qd’ is 4 (Demand Table) and quantity is 4 on the supply table.

What term do economists use to describe how much of a good is offered for sale at a specific price?
EQUILIBRIUM SHIFT IN DEMAND - EXERCISE

Suppose a famous TV cooking instructor produces a series called “101 Ways to Cook Chicken.” It’s a big hit, and people increase their consumption of chicken.   What changes in the chicken market?  

Demand increases. The new equilibrium is indicated on the graph (see left).

EQUILIBRIUM SHIFT IN SUPPLY

What term do economists use to describe how much of a good is offered for sale at a specific price?
We investigated some of the reasons why the supply curve would change in the supply section. Now, let’s see what happens to the price and quantity of chicken now when the price of feed goes up.

First, the supply of chicken decreases as sellers find it more expensive to raise chickens. Look at the graph carefully.   Notice that the price of chicken hasn’t risen so that sellers now want to sell only 1 lb of chicken per week. But buyers are willing to buy 3 lbs of chicken at $3.00 per pound.   There are a lot of unhappy chicken-eaters out there!   They want more chicken, and they’re willing to pay for it.

As the buyers offer more money, the sellers realize they can afford to sell more chicken. This process stops when the willingness to buy chicken equals the willingness to sell chicken at the current price. On the graph, that seems to be about 2 lbs at about $4.00 per lb.

What term do economists use to describe how much of a good is offered for sale at a specific price?
EQUILIBRIUM SHIFT IN SUPPLY - EXERCISE

Let’s see what happens when refrigerated railroad cars become available for shipping chicken to market.   If you remember, from the supply section, this decreased the costs of production and increased supply. The graph on the left illustrates the change in supply and the new equilibrium.

What term do economists use to describe how much of a good is offered for sale at a specific price?
EXERCISE 1

Remember the babysitters? Let’s look at them again. There’s a new, hit play in town for only two nights. Everyone wants to see it but it’s not really suitable for children. What changes in the babysitter market?  

The demand increases. The graph on the right illustrates the change in demand and the new equilibrium.

What term do economists use to describe how much of a good is offered for sale at a specific price?
EXERCISE 2

Gizmo Corporation just signed a new contract with its labor union. Wages have gone up! Which segment of the Gizmo market is affected?

The supply increases. Gizmo corporation is willing to sell fewer Gizmos at each price now that wages have risen. The graph on the left illustrates the new equilibrium, where the willingness buyers to buy Gizmos equals the willingness of sellers to sell Gizmos.

What term do economists use to describe how much of a good is offered for sale at a specific price?
EXERCISE 3

The price of donuts just went up and the guys aren’t stopping at the donut shop for coffee and donuts anymore. Which segment of the coffee market changes?

The demand for coffee decreased because coffee and donuts are compliments. The graph on the right illustrates the new equilibrium.

What term do economists use to describe how much of a good is offered for sale at a specific price?
EXERCISE 4

There was a freeze in the Sunbelt and many crops were damaged. What do you think happened to the price and quantity of oranges? First, which segment of the market was affected?

Sellers are willing to sell more oranges at each price. This is an increase in supply. The graph on the left illustrates the new equilibrium, where the willingness buyers to buy oranges equals the willingness of sellers to sell oranges.

What term do economists use to describe how much of a good is offered for sale at a specific price?
EXERCISE 5

Winter is on the way, and forecasters are predicting snow. What do you think will happen to the price and quantity of snow blowers? Which segment of the market for snow blowers was affected?

This is an increase in demand. People are more willing to buy more snow blowers at each price because expectations have changed. The graph on the right illustrates the new equilibrium, where the willingness buyers to buy snow blowers equals the willingness of sellers to sell snow blowers.

EXERCISE 6

What term do economists use to describe how much of a good is offered for sale at a specific price?
Suppose, now, that people get angry and accuse the snow blower sellers of price gouging. The politicians, never ones to let pass an opportunity to serve the voters, enact a law rolling back the price of snow blowers (to the old equilibrium price). What happens next?

The graph on the left shows the new equilibrium. Again the political solution leads to fewer snowblowers available for purchase. The lower price has the opposite result to what was intended. The shaded area is the shortage of snowblowers. After all, at the higher price, Qe' (the new equilibrium quantity) would have been offered for sale; now only Qs' is available.

EXERCISE 7

What term do economists use to describe how much of a good is offered for sale at a specific price?
”Milk is nature’s most nearly perfect food,” so why not have the government establish a low enough price so that everyone can afford it? What part of the market for milk would be affected by such a plan?

The price. The willingness of buyers to buy and sellers to sell has not changed. Qs', as illustrated by the chart on the right, shows how much will be sold. While the purpose of the legislation was to increase the availability of milk, the new quantity offered for sale is less than the equilibrium quantity. Milk producers would rather pour the milk onto the roads than take it to market at that price. This is an excess demand or shortage of milk.

What term do economists use to describe how much of a good is offered for sale at a specific price?
EXERCISE 8

Well, if a low milk price produces a shortage of milk, maybe what we need are price supports – that is a legislated price that is above equilibrium. Which segment of the market will be affected?

The price. The willingness of buyers to buy and sellers to sell has not changed. Qd, as illustrated by the chart on the left, shows how much will be sold. Now there's plenty of milk, but it's too expensive for consumers. Of course, the government could buy all the surplus milk at the new, high price and give it to poor people, but other consumers would have to pay both more for milk and more taxes! It might be more efficient to use another method of increasing the food budget of the poor (e.g. food stamps).

EXERCISE 9

What term do economists use to describe how much of a good is offered for sale at a specific price?
It’s incredible – the football team actually had a winning season! What will happen to the market for football tickets?

Demand for tickets increases as more people want to go to the games (change in tastes). The graph on the right illustrates the new equilibrium, where the willingness buyers to buy tickets equals the willingness of sellers to sell tickets.

What term do economists use to describe how much of a good is offered for sale at a specific price?
EXERCISE 10

The federal government supports the price of wheat to support the income of farmers. How does this affect the consumer? The taxpayer? First, which segment of the wheat market is affected?

The price. The willingness of buyers to buy and sellers to sell has not changed. Qd', as illustrated by the chart on the left, shows how much will be sold. The price is higher than at equilibrium and the quantity is lower (this increases the price of bread, etc., to consumers). Notice that the farmers are encouraged to grow extra wheat - wheat which the taxpayers will buy for 'surplus' (the shaded area).

EXERCISE 11

What term do economists use to describe how much of a good is offered for sale at a specific price?
The steel industry has finally invested in the latest technology making domestic steel much less expensive to produce.   What effect will this have on the price and quantity of cars?   Which segment of the market is affected?

Sellers are willing to sell more cars at each price. This is a change in supply. The graph on the right illustrates the new equilibrium, where the willingness of buyers to buy cars equals the willingness of sellers to sell cars.

What term do economists use to describe how much of a good is offered for sale at a specific price?
EXERCISE 12

Many politicians are in favor of minimum wage laws – others are opposed.   Do minimum wage laws help or hurt the poor?   Let’s see what supply and demand can tell us. Which segment of the market is affected?

Price! The willingness of employees to work and of employees to hire them is unchanged at each wage level. Qd', as illustrated by the chart on the left, shows how many will be hired. At the higher wage, those who manage to get a job are better off; however many more people will be looking for work than will be hired. Again, there are fewer people being hired (decrease in quantity demanded) and more people in the job market (increase in quantity supplied). The shaded area is the amount of unemployment.

EXERCISE 13

What term do economists use to describe how much of a good is offered for sale at a specific price?
New York State had a “usury law” until the late 1970’s, which did not allow interest rates to rise above a controlled limit.   What do you think happened to the mortgage market when interest rates in the economy rose above the legal limit?   The demand and supply curves here refer to the demand for mortgages (borrowing) and the supply of mortgages (lending).

The willingness of buyers (borrowers) to buy (borrow) and sellers (lenders) to sell (lend) at each price has not changed - only the price has changed. Qs', as illustrated by the chart on the right, shows how many loans will be granted. Only a fraction of the loans people want will be available. Notice that people who would not otherwise have gone househunting now want loans in addition to those who would want loans at the higher rate. Notice also that the new, lower rate excludes some people who would have borrowed even at the higher rates. This prevented a lot of home sales (shaded area).

What term do economists use to describe how much of a good is offered for sale at a specific price?
EXERCISE 14

Homelessness is an increasing problem in many of our cities.   Would rent controls help the homeless?   Or, would rent controls make the problem worse? Perhaps we can learn something through supply and demand analysis. Which segment of the market for housing is affected by rent control?

The willingness of buyers to buy and sellers to sell at each price has not changed - only the price has changed. Qs', as illustrated by the chart on the left, shows how many apartments will be for rent. At the controlled, low price of housing, people want additional housing (kids move away from home, people move in and from other places, etc.). At the same time, owners are less willing to rent - they may allow their relatives to live there, they may stop maintenance, they certainly won't build additional housing. The shaded area is the excess demand for housing - the homeless.

What is the amount of a good that is available for sale called?

The cost of goods available for sale equals the beginning value of inventory plus the cost of goods purchased. The cost of goods sold equals the cost of goods available for sale less the ending value of inventory.

What economic term refers to the quantity of good that the seller is willing to offer for sale?

Supply of goods and services When economists talk about supply, they mean the amount of some good or service a producer is willing to supply at each price. Price is what the producer receives for selling one unit of a good or service.

What is equilibrium price?

An equilibrium price is a balance of demand and supply factors. There is a tendency for prices to return to this equilibrium unless some characteristics of demand or supply change. Changes in the equilibrium price occur when either demand or supply, or both, shift or move.

What is absolute price and relative price?

Absolute vs. Relative Price: Absolute price is the number of dollars that can be exchanged for a specified quantity of a given good. Relative price is the quantity of some other good that can be exchanged for a specified quantity of a given good. Suppose we have two goods A and B.