Unit 2 Marco

Competitive Market

Market in which there are many buyers & sellers of the same good or service.  No individual’s actions have a noticeable effect on the price at which the goods or services are sold.  

Supply & Demand model

model that describes the competitive market

5 key aspects that effect the supply & demand model:

1. Demand curve

2. Supply curve

3. Set of factors that cause both curves to shift

4. Market equilibrium, which includes the equilibrium price & equilibrium quantity

5. The way market equilibrium changes when the supply curve or demand curve shifts.    

High prices consequences:

High price -> less ppl want to buy. & Low price -> more ppl want to buy.  

PRICE CHANGES WHAT?

• Price can change the quantity of demand, which is the actual amount consumers are willing to buy at some specific price.  

Demand Sechdule

Table showing how much of a good or service consumers will want to buy at different prices.  

Demand Curve

Graphical representation of the demand schedule, another way of showing the relationship between the quantity demanded and the price.  

Law of Demand

Proposition that a higher price for a good, all other things being equal, leads people to demand a smaller quantity of that good.

Change in Demand

The increase in the quantity demanded at any given precise, represented by a shift.  

Movements Along the Demand Curve results from what?

Changes in the quantity demanded of a good that results from a change in that good’s price. 

Increase in demand leads to what on the graph?

Increase in demand -> Rightward shift.  Consumers demanded a larger quantity of the good or service than before    

Decrease in demand leads to what on the graph?

Decrease in demand -> Leftward shift.  Consumers demanded a smaller quantity of goods or services than before.

Principles that shift the demand curve (think piten)

Principal factors that shift the demand curve.

1. Prices of related goods

   1. Substitutes

   2. Compliments 

2. Income

   1. Normal goods

   2. Inferior goods

3. Tastes/ preferences

4. Expectations

5. Number of buyers

Substitutes

 If a rise in the price of one of the goods leads to an increase in the demand of the other good.  

Compliments

If a rise in the price of one of the goods leads to a decrease in the demand for the other good.  

Normal Good

When a rise in income increases the demand for a good (the normal case)

Inferior Good

When a rise in income decreases the demand for a good. 

Individual Demand Curve

Relationship between quantity demanded & price for an individual consumer.  

What is the market demand curve?

Market demand curve is the horizontal sum of the individual demand curves of all consumers in that market.  

Quantity Supplied

 The quantity that producers are willing to produce and sell depends on the price they are offered.

Supply Schedule

How the quantity of coffee beans made available varies with the price.

Supply Curve

Demonstrates a supply schedule graphically, with each point representing an entry on the table.

Law of Supply

With things being “=”, the price and quantity supplied of a good are positively related.  

price of smth increases, so will the cost for its productions

Change in Supply

A change in the supply schedule leads to a shift in the supply curve.  

Movements along the supply curve

 Changes in the quantity supplied that results from a change in price.  

Increase in supply sequence

Rightward shift on the supply curve -> Producers supply a larger quantity of the good than before

decrease in supply sequence

Leftward shift on the supply curve -> Producers supply a smaller quantity of the good than before. 

Shifters in a Supply curve

 

Input (Resource) prices

Prices of related goods or services

Technology

Expectations

Number of sellers

Equilibrium

When no individual would be better off doing something different.  

When does the competitive market reach equilibrium?

• The competitive market reaches equilibrium when the price has moved to a level at which the quantity of a good demanded =s the quantity of that good supplied.  

 equilibrium price/market-clearing price

The price at which this takes place is the

equilibrium quantity.

The quantity of the goods bought and sold at the price is an

Surplus

A good when the quantity supplied exceeds the quantity demanded.  Surpluses occur when the price is above its equilibrium.

Shortage

A good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level. 

If there is a shortage in a market, how will the "invisible hand" move the market toward equilibrium?

The price will rise, decreasing quantity demanded and increasing quantity supplied.

What happens when demand for a good increases?

When demand for a good or service increases, the equilibrium price and the equilibrium quantity of the good or service both rise. 

What happens when demand for a good decreases?

When demand for a good or service decreases, the equilibrium price and the equilibrium quantity of the good or service both fall. 

What happens when supply for a good decreases?

When a supply of a good or service decreases, the equilibrium price of the good or service rises and the equilibrium quantity of the good or service falls.

What happens when supply for a good increases?

When a supply of a good or service increases, the equilibrium price of the good or service falls and the equilibrium quantity of the good or service rises.

What happens when demand increase and supply decreases?

• When the demand increases and supply decreases, the equilibrium price rises but the change in the equilibrium quantity is ambiguous.  

What happens when demand decrease and supply increases?

•  When the demand decreases and supply increases, the equilibrium price falls but the change in the equilibrium quantity is ambiguous. 

What happens when both demand & supply increase?

• When both demand and supply increase, the equilibrium quantity increases but the change in equilibrium price is ambiguous. 

What happens when both demand & supply decrease?

• When both demand and supply decrease, the equilibrium quantity decreases but the change in equilibrium price is ambiguous. 

What is an ambiguous changE?

An "ambiguous" change in price or quantity occurs during a double shift because - the two shifts pull the variable in opposite directions.

Price controls

When a government intervenes to regulate prices, we say that it imposes price controls.  

Types of Price controls

• Upper limit & Legal Max price = Price Ceiling

• Lower Limit & Legal Min price = Price Floor

Problems w/ Price Ceilings

inefficient allocation to consumers

Wasted Resources

Inefficiently Low Quality

Black Market

Problems w/ Price Floors

Surplus of goods

Inefficient allocation of sales among sellers

Inefficient high quality

Price Ceilings characteristics

• below -ibrum price

• shortage

  • rent control is an example

Price floor characteristics

• above =ibrium price

• surplus

• minimum wage is an example

Quantity Control/Quota

An upper limit on the quantity of some goods that can be bought or sold.  

License

Gives its owner the right to supply a good or service.  

Demand Price

Given quantity is the price at which consumers will demand that quantity.

Supply Price

Given quantity is the price at which producers will supply that quantity.  W

Wedge

The price paid by buyers ends up being higher than that received by sellers.  Usually between demand price and the supply price of a good. 

Quota Rent

The difference between the demand & supply price at the quote amount.  Its = to the market price of the license when the licenses are traded (aka The earnings that accrue to the license-holder from ownership of the right to sell the good). 

Deadweight Loss

he lost gains associated with transactions that do not occur due tro market intervention.

What is a quantity control?

A quantity control is binding (effective) only if the quota limit is set below the equilibrium