Market
is any arrangement that enables buyers and sellers to get information and do business with each other
Competitive Market
is a market that has many buyers and many sellers so no single buyers or seller can influence the price
relative price of a good
the ratio of its money price to the money price of the next best alternative good - is its opportunity cost
Wants
They are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy
Quantity demanded of a good/service
It is the amount that consumers plan to buy during a particular time period, and at a particular price
Law demand
Other things remaining the same, higher the price of a good, the smaller is the quantity demanded; The lower the price of a good, the larger is the quantity demanded. This law of demand results from diminishing marginal benefit / marginal utility
Substitution effect
indicates that buyers tend to substitute a relatively cheap product for a more expensive one (we buy the cheaper one) ex:hot dogs low in price people will get them instead of hamburger
Income Effect
indicates that a lower price of hot dogs increase the purchasing power of your money (your income), enabling you to purchase ore of both hot dogs and hamburgers than you could before (we can buy more of everything)
the term demand
refers to the entire relationship between the price of the good and quantity demanded of the good
demand curve
It shows the relationship between the quantity demanded of a good and its when all other influences on consumers' planned purchases remain the same
Graphing relationships among more than two variables
When a relationship involves more than two variables, we can plot the relationship between two of the variables by holding other variables constant - by using ceteris paribus
When the demand curve increases it shifts...
rightward
When the demand curve decreases it shifts...
leftward
Six main factors that change demand are
-the prices of related goods
-expected future prices
-income
-expected future income and credit
-population
- preferences
The following pairs are examples of complements
wine - cheese
computer - software
car - gas
what is a substitute?
it is a good that can be used in place of another good
What is a complement?
it is a good that is used in conjunction with another good
Expected future prices
if people think the price of a good will rise in the future, current demand for the good decreases and the demand curve shifts to the left (decrease left - increase right)
Normal good
i most cases an increase in income causes the quantity demanded of the good to rise at every price (ex: laptop, books, etc)
Inferior goods
In some cases, an increase in income reduces the quantity demanded of the good at every price (ex: McDonalds, kraft dinner, bus tickets)
Expected Future Income and Credit
when expected future income increases or when credit is easy to obtain, the demand might increase now
Population
the larger the population, the greater is the demand for all goods
Preferences
people with the same income have different demands if they have different preferences
Change in taste can shift the demand curve
-hot weather therefore more ice cream is demanded
-when population becomes more health-conscious therefore more organic foods are demanded
Movement along the demand curve
when the price of the good changes and everything else remains the same, the quantity demanded changes in response - there is a movement along the demand curve
A Shift of the Demand Curve
if the price remains the same but one of the other influences on buyers' plans changes, demand changes and the demand curve shifts
Two ways to influence quantity demanded by consumers
-change the price so quantity demanded moves along the demand curve
-change other factors so demand curve shifts
Supply
if a firm supplies a good or service, then the firm
-has the resources ad the technology to produce it, (able to produce) - recall production
-Can profit from producing it (willing to produce)
-has made a definite plan to produce and sell it (plan to prod
Quantity supplied of a good or service
is the amount that producers plan to sell during a given time period at a particular price
The Law of Supply
other things remaining the same, the higher the price of a good, the smaller is the quantity supplied; and the lower the price of a good, the greater is the quantity supplied. Producers are willing to supply a good only if they can at least cover their ma
Supply Curve and Supply Schedule
the term supply refers to the entire relationship between the quantity supplied and the price of a good. The supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers' planned sales re
change in quantity supplied or change in supply
when price of the product changes, there is a movement along the supply curve - change in quantity supplied. when any other determinant of supply changes, there is a shift in the supply curve - change in supply
A change in supply
Any change that increases the quantity supplied AT EVERY PRICE shifts the supply curve to the right and is called an increase in supply. Any change that reduces the quantity supplied AT EVERY PRICE shifts the supply curve to the left and is called a decre
The five main factors that change supply of a good are...
- the prices of factors of production
- the prices of related goods produced
- expected future prices
- the number of suppliers
- technology
- state of nature
When there is change in any of the above factors, the supply curve shifts
Prices of factors of production - input prices
If the input price (price of a factor of production) used to produce a good rises, the quantity supplied increases and the supply curve shifts rightward
How would an increase in minimum wage affect supply of hamburgers in the fast food restaurants?
the supply of hamburgers in fast food restaurants will increase due to the increase in income
Prices of related goods produced - shift resources among different industries
A substitute in production for a good is another good that can be produced using the same resources - the supply of a good will increase if the price of a complement in production rises
The number of suppliers
The larger the number of suppliers of a good, the greater is the market supply (the sum of all individual supply) of the good. An increase in the number of suppliers shifts the supply curve rightward
Technology
Advances in technology creates new products and lower the cost of producing existing products. So advances in technology decrease supply at each and every price level and shift the supply curve rightward
The state of nature
The state of nature includes all the natural forces that influence production, such as the weather. A natural disaster decreases supply and shifts the supply curve leftward
Change in technology shifts the supply curve
An improvement in technology reduces production costs and shifts the supply curve to the right
Movement along the supply curve
When the price of the good changes and other influences on sellers' plans remain the same, the quantity supplied changes and there is a movement along the supply curve. This is a change in the quantity supplied
A shift of the supply curve
If some other influences on sellers' plans changes, the quantity supplied is now different at each price level. This is a change in supply.
Market Equilibrium
It is a situation in which opposing forces balance each other. Equilibrium in a market occurs when the price balances the plans of buyers and sellers
The equilibrium price
It is the price at which the quantity demanded equals the quantity supplied. On a graph, it is the price at which the supply and demand curves intresect
The equilibrium quantity
It is the quantity demanded and the quantity supplied at the equilibrium price. On a graph, it is the quantity at which the supply and demand curves intersect
How does market reach equilibrium - adjustment mechanism?
- Price adjusts when plans don't match. In this adjustment, quantity is cause and price is effect. On a graph, this is a shift of the curve
- Price regulates buying and selling plans. Price is cause and quantity is effect. On a graph, this is the movement
Causality, Cause - Effect
If the price (P) change causes the quantity demanded and the quantity supplied (Q) to change, P is cause and Q is effect
-On a graph, this is a movement along the curve
-in this case, a lower price is associated with a higher quantity demanded. This is th
Change in demand (shift of curve) leads to disequilibrium
The quantity demanded is not equal to the quantity supplied any more at the initial price level. Hence price needs to adjust. In this case, Q i cause and P is effect
-On a graph, this is a shift of demand curve
-in this case, a lower price is associated w
Change in taste shifts the demand curve
Hot weather the price of ice cream will be high according to the law of demand demand for ice cream should be smaller, rather than larger
Change in input prices shifts the supply curve
North Dakota lost million acres of wheat to heavy rain and flooding that year. High price of wheat causes high price of pasta according to the law of supply supply of pasta should be larger
At any price above the equilibrium price
A surplus forces the price down
At any price below the equilibrium price
A shortage forces the price up
At the equilibrium price
Demand equals supply and the price won't change until some event changes either demand or supply
An increase in demand
When demand increases the demand curve shifts rightward. At the original price, there is now a surplus. The price rises. As the price adjusts, the quantity supplied increases along the initial supply curve and the quantity demanded increases along the new
Change in demand with no change in supply
When demand increases, the equilibrium price and the equilibrium quantity increases. When demand decreases, the equilibrium price falls and the equilibrium quantity decreases.
An increase in supply
That when supply increases the supply curve shifts rightward. At the original price, there is now a surplus. The prices falls. As the price falls, the quantity demanded decreases along the initial demand curve and the quantity supplied increases along the
Change in supply with no change in demand
When supply increases, the equilibrium price falls and the equilibrium quantity increases
A decrease in supply
When supply decreases the supply curve shifts leftward. At the original price, there is now a shortage. The price rises. As the price rises, the quantity demanded increases along the initial demand curve and the quantity supplied decreases along the new s
Increase in both demand and supply
An increase in demand and an increase in supply cause the equilibrium quantity to increase. The change in equilibrium price is uncertain because the increase in demand raises the equilibrium price but the increase in supply lowers it
Decrease in both demand and supply
A decrease in both demand and supply decreases the equilibrium quantity. The change in equilibrium price is uncertain because the decrease in demand lowers the equilibrium price but the decrease in supply raises it
Decrease in demand and increase in supply
A decrease in demand and an increase in supply lowers the equilibrium price. The change in equilibrium quantity is uncertain because the decrease in demand decreases the equilibrium quantity and the increase in supply increases it
Increase in demand and decrease in supply
An increase in demand and a decrease in supply raises the equilibrium price. the change in equilibrium quantity is uncertain because the increase in demand increases the equilibrium quantity and the decrease in supply decreases it