econ 200 - midterm 1

market economy

an economy in which private individuals, rather than a centralized planning authority, make the decisions

market

buyers and sellers who trade a particular good or service

how are market boundaires set

changes based in SCOPE of trades being made (small business vs CEO)

competitive amrket

a market in which fully informedd, price taking buyers and seller easily trade a standridized good or service

price taker

a buyer or seller who cannot affect the market price. In a perfectly competitive market, firms are price takers as a consequence of many sellers selling standardized goods

standardized good

a good for which any two units have the same features and are interchangeable

transaction costs

the costs incurred by buyer and seller in agreeing to and executing a sale of goods or services

are transcation costs in competitive markets

nope!!! you dont have to pay anything for the privieldge of buying or selling in the makret. (like getting gas - you dont have to have special equitment to get gas or pay a fee for enterance)

four characteristics of perfectly competitive markets

participants are price takers, standarized good, full infomration, no transaction costs

participants are price takers

neighter buyers nor sellers have the power to affect the market price

standardized good

any two units of the good have the same features and are interchangebale

full info

market participants know eveyrthing about the price and features of the good

no transaction costs

no cost to participate or exhcnage in the market

are perfectly compettive markets common

nope!!

why do we assume perfect competitive if markets in the real world are rarely like that?

• leads us to useful insights because it’s simplified

demand

describes how much fo something people are willing and able to buy under certain circumstances

overall market demand

adding up all individual choices people made when deciding to buy/not buy a certain product (diff peopel bought their first phone at diff prices, some were willing to buy some were not)

quantity demanded

the amount of a particular good that buyers will purchase at a given price during a specified period

law of demand

a fundamental characteristic of demand that states that, all else equal, quantity demanded rises as price falls

• when all else is held equal (when all other factors remain the same), quantity demanded rises as price falls

• also known as ceteris paribus

ceteris paribus

law of demand

what is ceteris paribus used for

to isolate the expected effect of single change in the economy.

example: prwdicted what would ahppen to cell phones if cell phone prices go down

• if cell phone prices god down, holding all else EQUAL, quantity demanded will go up

what statement is super impirtant when using ceteris paribus

“hold all else equal” → cannot apply if the eocnomy is not doing well in said situation, etc.

when the trade-off between costs and benefits tips toward benefits

more people will want to buy the good

nonprice detemrinates of demand

incomes, expectations and tastes (all factors OUTSIDE of prices) that impact a choice to buy a product

demand schedule

a table that shows the quantities of a particular good or service that consumers are willing and able to purchase (demand) at various prices

• because the law of demand says that the quanity of a product demanded will be DIFFERENT AT EVERY PRICE LEVEL

what does the demand schedule assume

fatcors other than price remain the same / all else is held equal

demand curve

a graph that shows the quantities of a particular good or service that consumers will demand at various prices

demand curve picture / structure deatils

• downward slope

• inverse relationship between price and quantity

• only reps the relationship between price and quanity demanded with EVERYTHING ELSE HELD CONSTANT - if not, curve shifts

what does demand curve represent

• shows quanityies of a particular good that consumers will demand at various prices

• CONSUMER’S WILLINGNESS TO BUY/the highest amount consumers will pay for any given quanity

non price detemrinates of demand can be divided in 5 major caterogries

• consumer prefereneces

• the rpices of related goods

• income of the consumers

• expectations of future prices

• the number of buyers in the market

what do non price detemrinates impact

either the benefits or the opporutuity cost of buying a good, even if the price remains the same

non price detemrinates deal with prices though…why do you call if non-price then?

differentiates them from the effect of the current price of the good on demand for that good

consumer preferences =

oikes and dislikes that make buyers more or less inclined to purcahse a good

• some are constant

• some arise from personality traits

• some are due to external events

substitutes

goods that serve a similar-enough purpose that a consumer might purchase one in place of the other

• if two good are quite similar

complements

goods that are consumed together, so that purchasing one will make consumers more likely to purchase the other

complements example

• peanut butter and jelly

• cereal and milk

• if the price of one increases, demand of rthe other will likely decrease

normal goods

goods for which demand increases as income increases (what most goods are)

inferior goods

goods for which demand decreases as income increases

• canned food, when income rises, less likely to buy these

expectations (notes)

• if consumers expect prics to fall in the future, they may postpone a purchase → demand decreases. or they delay in upgrading their product in hope that the current model price drops

• if expecting prices ot rise, they may wish to purchase a ssoon as possible, more demand

increase in the number of potential buyers →

increase in demadn in that market and vice versa

if one of the five nonprice detemrinates of demand changes (?)

• whole demand curve shifts , either to the left or right

• HORIZATONAL SHIFT (becayse it affects the quanityt demanded at EACH price)

when quanity demaded at a price is now higher, the point of the demand curve corresponinding to that price is now…

further right!!!

when quanity demaded at a price is now lower, the point of the demand curve corresponinding to that price is now…

further left!!

demand curve SHIFTS picture

what are shifts in the demand curve caused by?

chnages in the nonprice deteminates of demand

• reciession would lower incomes and move the whole demand curve to the left (“demand decreases”)

what if the price goes up but there r no changes in the nonprice detemrinnts of demand

• the demand curve is about the demand at any possible price, not JUST current market price

• we dont have to shift the curve

• look at diff point of the curve to see what would happen

how to find the quanity that consumers will want to purchase at this new price.?

move along the existsing demand curve form the old price ot the new one

supply

how muhc of a good or service producers will offer for sale under given circumstances

quantity supplied

the amount of a particular good or service that producers will offer for sale at a given price during a specified period

law of supply

a fundamental characteristic of supply that states that, all else equal, quantity supplied rises as price rises

teh higher the price of a good…

the more of that good producers will want to supply and vice versa

how to find overall makret supply

adding up the indviduals decisison of each producer. each prodcuer will have a differnet rpice point at which it decides its worthwhile to supply cell phones (law of supply)

why does supply vary with price?

because the decision to produce a good is about the TRADE OFF between the benefit the producer will recieve from selling the good and the opporutunity cost that go into it.

when prices rise of a product, but not the raw materials needed to make said product…

the producers will increase their activity/supply!!!. when prces drop, they cut back

supply schedule

a table that shows the quantities of a particular good or service that producers will supply at various prices

supply curve

a graph that shows the quantities of a particular good or service that producers will supply at various prices

what does supply curve show

producer’s willingess to sell. the minimum price producers must recieve to supply any given quantity

what impacts the producers willingness to supply a good or service

nonprice factors (just like demand)

when a nonprice determinat of supply changes… what happens

the entire supply curve will shift

five major cateorgies of nonprice determinates of supply

• prices of related goods

• tech

• prices of inputs

• expectation

• the number of sellers

what do the nonprice determinates of supply show

determines the opportunity cost of production RELATIVE to the price (aka the trade-off that producers face).

why does the price of related goods detemrine supply?

IT AFFECTS THE OPP. COST OF PRODUCTION

ur a farme.r if the rpice of corn increases, the quanity of wheat you are willing to grow…

falls. why? because each acre u devote to wheat is one fewer acre you can use to grow corn.

what is the effect of price of the inputs used to produce a good on cost

when prices of inputs rise, production cost rises, and the quanity of the prodcut that producers r willing to supply DECREASES (bc less profit)

when input prices falll..

supply increases!

expectations of price example - and how that affects supply

expecting prices of houses to go up in the future →hold off on buidling NOW so you can make more profit later → less supply.

prices of real estate expected to fall → projects r rushed to compleetion so they can sell at a higher price

the number of sellers in the market is considered to be BLANK of the supply curve

a fixed part of it. the number of seller does not change based on price (in the short run). the only thing that changes is the amount sellers r willing to provide based on price (higher price of good = more supply)

non price factors can cause the number of sellers to change in a market and move the supply curve, tho!! true or false

true!!! like lisencing requirements

changes in price cause suppliers to move to ____ on the same supply curve

a different point

what actually shifts the full supply curve itself

changes in the nonprice determinants

what increases/decreases supply

a change in a nonprice determinant

what changes (increases/decreases) the quanitity supplies

a change in the price!!!

increase in supply shifts the curve to the

right

a decrease in supply shifts the curve to the

left

language used to show a SHIFT of the entire supply curve

"increase/decrease in supply” ( caused by a change in one of the nonprice determinantes of supply )

language used to show MOVEMENT ALONG the supply curve

say that a change in price causes “an increase/decrease in the quantity supplied”

interaction of supply with demand =

prices and quanities exchanged in the REAL WORLD

equilibrium

the situation in a market when the quantity supplied equals the quantity demanded; graphically, this convergence happens where the demand curve intersects the supply curve

equilibrium price

the price at which the quantity supplied equals the quantity demanded

equilibrium quantity

the quantity that is supplied and demanded at the equilibrium price

when a market works well, what happens with the quanity and the supply

the qyanity supplies exactly equals the quanityt demanded

market equilibrium graph

shortage / excess demand

a situation in which the quantity of a good that is demanded is higher than the quantity supplied

when do sellers have an incentive to increase/decrese the price

at any price above or below equilibrium

money making incetives…

drive the market toward the equailibrium price

a shift in either curve supply or demand will. change what

change the market equailibrium

shift is supply and demand curves examples

shift is supply and demand curves examples 2

when supply increases, the price does what while the quantity does what

price decreases and quanitity increases

when demand increases more than supply increases (when they both shift…)

consumers purchase more cell phones at a higher price

when supply increases more than demand does when they both shift

consumers pruchase more cell phones at a LOWER price

holding all else equal, and increase in demand leads to an …. in price and an increase in supply leads to a …. in price

increase, decrease

what is possible to predict when supply and demand shift together

either the direction of the change in quanity OR the direction of the change in price without knowing just how much the curves shift

what can you predict when supply and demand shift in the same difection

the driection of the change in quantuty but nit the direction of the change in price

when supply and demand shift in opposute directions, what is/is not predictable

the chnage in price is predicatble but not the change in quantity

supply demand change table

what happens when demand increases and supply decreases

buyers r willing to pay more for the same quanity and sellers r willing to supply the same qauntitty only if they recieve a higher price. OTHER WORDS: they can AGREE on a higher price at any quanityt, and the eq. price will RISE

what happebs when demand decreases and supply increases

buyers r willing to buy same amount for lower price, and seller are willing to supply the same quantity for a lower price too (bc now production costs r lower, meaning they’re still making a profit) → eq price goes down

utility

a measure of the amount of satisfaction a person derives from something

increases utility

doing things you like