Page 137 - Krugmans Economics for AP Text Book_Neat

Section 2 Summary

curves slope downward, meaning that as price de- change in quantity is not. When they shift in the same
creases, the quantity demanded increases. direction, the change in quantity is predictable but the
3. A movement along the demand curve occurs when change in price is not. In general, the curve that shifts
the price changes and causes a change in the quantity the greater distance has a greater effect on the changes
demanded. When economists talk of changes in in price and quantity.
demand, they mean shifts of the demand curve—a 11. Even when a market is efficient, governments often
change in the quantity demanded at any given intervene to pursue greater fairness or to please a
price. An increase in demand causes a rightward shift powerful interest group. Interventions can take the
of the demand curve. A decrease in demand causes a form of price controls or quantity controls, both
leftward shift. of which generate predictable and undesirable side ef-
4. There are five main factors that shift the demand curve: fects, consisting of various forms of inefficiency and il-
legal activity.
■ A change in the prices of related goods, such as sub-
stitutes or complements 12. A price ceiling, a maximum market price below the
equilibrium price, benefits successful buyers but creates
■ A change in income: when income rises, the demand
persistent shortages. Because the price is maintained
for normal goods increases and the demand for in-
below the equilibrium price, the quantity demanded is
ferior goods decreases
increased and the quantity supplied is decreased com-
■ A change in tastes
pared to the equilibrium quantity. This leads to pre-
■ A change in expectations
dictable problems including inefficient allocation to
■ A change in the number of consumers consumers, wasted resources, and inefficiently low
5. The supply schedule shows the quantity supplied at quality. It also encourages illegal activity as people turn
each price and is represented graphically by a supply to black markets to get the good. Because of these
curve. Supply curves usually slope upward. problems, price ceilings have generally lost favor as an
economic policy tool. But some governments continue
6. A movement along the supply curve occurs when the
to impose them either because they don’t understand
price changes and causes a change in the quantity sup-
the effects or because the price ceilings benefit some in-
plied. When economists talk of changes in supply, they
fluential group.
mean shifts of the supply curve—a change in the quan-
tity supplied at any given price. An increase in supply 13. A price floor, a minimum market price above the equi-
causes a rightward shift of the supply curve. A decrease librium price, benefits successful sellers but creates a
in supply causes a leftward shift. persistent surplus: because the price is maintained
above the equilibrium price, the quantity demanded is
7. There are five main factors that shift the supply curve:
decreased and the quantity supplied is increased com-
■ A change in input prices
pared to the equilibrium quantity. This leads to pre-
■ A change in the prices of related goods and services
dictable problems: inefficiencies in the form of
■ A change in technology inefficient allocation of sales among sellers, wasted
■ A change in expectations resources, and inefficiently high quality. It also en-
■ A change in the number of producers courages illegal activity and black markets. The most
well known kind of price floor is the minimum wage,
8. The supply and demand model is based on the principle
but price floors are also commonly applied to agricul-
that the price in a market moves to its equilibrium
tural products.
price, or market-clearing price, the price at which the
quantity demanded is equal to the quantity supplied. 14. Quantity controls, or quotas, limit the quantity of a
This quantity is the equilibrium quantity. When the good that can be bought or sold. The government issues
price is above its market-clearing level, there is a sur- licenses to individuals, the right to sell a given quantity
plus that pushes the price down. When the price is of the good. The owner of a license earns a quota rent,
below its market-clearing level, there is a shortage that earnings that accrue from ownership of the right to sell
pushes the price up. the good. It is equal to the difference between the de-
mand price at the quota amount, what consumers are
9. An increase in demand increases both the equilibrium
willing to pay for that amount, and the supply price at
price and the equilibrium quantity; a decrease in demand
the quota amount, what suppliers are willing to accept
has the opposite effect. An increase in supply reduces the
for that amount. Economists say that a quota drives a
equilibrium price and increases the equilibrium quantity;
wedge between the demand price and the supply price;
a decrease in supply has the opposite effect.
this wedge is equal to the quota rent. By limiting mutu-
10. Shifts of the demand curve and the supply curve can ally beneficial transactions, quantity controls generate
happen simultaneously. When they shift in opposite di- inefficiency. Like price controls, quantity controls lead
rections, the change in price is predictable but the to deadweight loss and encourage illegal activity.

Summary 95