Unit 2 econ- The free market system- supply and demand

Money

the commodity accepted by the general consent that facilitates the exchange of goods and service

Three functions of money

Medium of exchange

Store of value

Unit of account

Medium of exchange

people use it to exchange for goods and services

Store of value

retains value as a medium of exchange over time

Unit of account

capable of precisely accounting for the value of goods and services

Commodity money

money that is backed up by a physical commodity (such as gold/silver)

Fiat money

government issued currency that is not backed by a phsycial commodity but by the stability of the government

cryptocurrency

digital currency in which transactions are verified and records maintained by a decentralized system rather than government

market system

decentralized economic system that determines what to produce through supply and demand

demand

shows how much of a good or service consumers will be willing to buy at various prices (consumer side of market)

Quantity demanded

shows how much of a good consumers are willing to buy at a specific price

law of demand

higher price- people buy less

lower price- people buy more

endogenous variables

variables built into a model (price and QD )

can be traced on demand curve

exogenous variables

variables whom exist outside the model

 still affect demand curve but not on axes

changes in exo.variables will lead to change in demand which is a shift in demand curve

exogenous variables that can shift demand curve

T- tastes and preferences
R- price of related goods

I- changes in income

B- consumer predictions
E- change in number of consumers

elasticity of demand

how sensitive quantity demanded is to changes in price

inelastic demand

quantity demanded is not sensitive to a change in a price level of product

customers will buy product regardless of price

steep

large change in P; small change in QD

nessesity, addictive, no subs, small portion of income

Elastic Demand

QD very sensitive to a change in price of a product

flatter

many subs, not nessesity, large share of income

Small change in p, large change in qd