Class Summary #34- 11/21/11

Today, we learned about a plethora of topics including supply and demand curves and what exactly the word "equilibrium" entails.

The supply/demand curves Prof. Rizzo gave us had to do with acoustic guitars. On the graph, supply stands for producers marginal opportunity cost to make- if there is lots of profit available and prices are high, supply will also be high so as to maximize profit.

For demanders, however, as prices go up, there is less of a demand. Demand captures the willingness and ability of a person to pay for a good.

On the graphs, we learned a number of key terms/notes. Here they are:

1. What is surplus?
1. At a particular price then the quantity supplied exceeds the quantity demanded, we say there is a surplus
2. What might sellers do to get out of a surplus?
1. They will cut their prices through special deals, such as 2 for 1s and get a free coffee with the guitar, etc.
1. In this case, what happens when prices are cut?
1. As prices fall, Qs goes down and sellers could potentially drop out of sellers market until the product goes to equilibrium.
2. The two questions one needs to ask anytime there is economic change are:
1. How does each half of the market respond- Buyers and sellers?
2. Whose plans are satisfied? Buyers or sellers?
3. What is a shortage? The opposite of surplus- when at a particular price, the quantity demanded exceeds the quantity supplied.
1. KNOW FOR FINAL EXAM: Difference between a shortage and scarcity.
4. At equilibrium, plans of buyers and sellers are coordinated with one another.
1. A high price signifies the item is relatively scarce.
2. When prices are increasing, it tells us that a shortage is being alleviated and a low price shows that a good is relatively un-scarce.
5. Definition of equilibrium according to Rizzo: when the graph is at a price where buyers nor sellers have an incentive to alter their behavior/price preference. The point at which the graph intersects.
6. In the market, there is two types of equilibrium:
1. "Market Clearing"- Qd=Qs
1. This is GOOD
2. The tendency for markets to clear just happens, it has nothing to do with anybody doing anything to make it happen
2. "Non-market clearing"
1. NOT GOOD

Prof. Rizzo concluded class by giving some examples of what happens when market conditions change:

1. Ex 1. Price of spruce falls. This affects sellers and supply curve shifts out. This happens because it costs less money to produce guitars, lowers price in every aspect of market and thus, with this shift, comes a new equilibrium.
2. Ex 2. Price of electric guitars increases. This affects buyers because demand for acoustic guitars goes up if they are substitutes. So, the demand curve would shift out and once again, there would be a new equilibrium.