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market
the exchange of goods and services and the demand that exists for them.
demand
quantities of a good or service that buyers will purchase at various prices during a particular period of time
quantity demanded
single relationship between price and quantity (demand)
law of demand
quantity demanded and price move in opposite directions
supply
quantities that sellers are willing to offer at various prices in time
quantity supplied
relationship between price and quantity (supply)
law of supply
the quantity supplied of a good rises when the price of the good rises
market equilibrium
the price at which the quantity demanded equals the quantity supplied
shortages
when prices are below the equilibrium price. sellers not willing to sell as much as buyers are willing to purchase
surpluses
when prices are above the equilibrium price. buyers are not willing to purchase as much as sellers are willing to produce
determining surplus/ shortage calculation
quantity supplied - quantity demanded = surplus (+) or shortage (-)
changes in price
movement along the demand curve
non price factors
cause entire curve to shift
increase in demand
shifts demand curve right
decrease in demand
shifts demand curve left
non price factors affecting demand
income, population tastes and preferences, future price expectations, prices of substitute goods
income
increase in buyers income allows consumers to purchase more
population
increased population increases demand
tastes and preferences
individual tastes and preferences influences demand
future price expectations
eg. price increase in future, demand increases now
price of substitute goods
substitute good B price increases, demand for A increases
complementary goods
2 goods that are bought and used together, influences demand of each other
increased supply
shifts supply curve right
decreased supply
shifts supply curve left
non price factors affecting supply
cost, number of sellers, technology, nature and environment, prices of related outputs
cost
changes in production costs affects quantities that suppliers are willing to supply, directly affecting profits
number of sellers
less sellers decreases market supplies if remaining sellers do not increase production
technology
decreases production costs, increases supply
nature and environment
environmental factors affect supply
prices of related outputs
if product A is more profitable than product B, decreased supply of B, increased supply of A
perfectly competitive market
many sellers, none of which can dominate the market. 2. many buyers, no single one that can dictate price. 3. consistent quality, no price change based on quality. 4. all buyers and sellers know conditions in the market.
increase in demand
initially price stays same. causes shortage
increase in supply
initially price stays the same. causes surplus
decrease in demand
initially price stays the same. causes surplus
decrease in supply
initially price stays same. causes shortage
shortages
price increases until equilibrium is met
surpluses
price decreases until equilibrium is met
Adam Smith
self interest, invisible hand
self interest
when people act in their own self interest it manifests societal benefits at large
invisible hand
metaphor for individual pressures on market. natural fluctuation on price and flow of trade to find equilibrium
thomas robert malthus
population and food production
population and food production
humans well eventually be unable to produce enough food to sustain themselves. population-geometrically, food production-arithmetically
david ricardo
comparative advantage and free trade
comparative advantage
an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners
free trade
each country naturally devotes its capital and labour to such employments as are most beneficial to each
Karl Marx
communism and criticism of capitalism
communism
society has no class divisions or personal property
criticism of capitalism
believed that capitalism would fall due to revolutions from the lower classes
john maynard keynes
importance of government spending to stimulate economy
importance of government spending to stimulate economy
stimulate demand for common goods and bring more people back to the workforce
milton friedman
laissez-faire capitalism and the importance of the money supply
laissez-faire capitalism
minimum governmental interference in the economic affairs of individuals in society
money supply importance
government should keep money supply stable, expanding slightly each year to allow for natural economic growth
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