Micro-Economics: Demand and Supply (Ch.3)

Market

A place where buyers or sellers come together to exchange goods and services

• Determines price based on supply (how much seller offers) and demand (how much buyers want)

Competitve Market

A market that has many buyers and many sellers, so no single buyer can influence the price.

Money Price

The number of dollars that must be given up in exchange for a good or service

Relative Price

The ratio of the price of one good or service. This is an opportunity cost.

EX. Coffee = $4 per cup

Gum = $2 per pack
so coffee costs 2 gum packs

If you demand something, then you…

1. Want it

2. Can Afford it

3. Plan to buy it

Quantity Demanded

The amount of good or services that consumers plan to buy during a given time period or at a particular price

Law of Demand

If other things remain the same, if price is higher, demand goes down, and if price lowers, demand goes up

Substitution Effect

When a price of a good goes up, it becomes more expensive compared to other goods, so people try to substitute it with something else

Income Effect

When the price of a good goes up your purchasing power goes down

Demand Curve

A curve that shows the relationship between quantity demanded of a good and its price considering all other aspects are the same. 

• Links to marginal benefit → If only a few units are available, people will pay a higher price for it. If lots of a unit is available, the extra benefit of one more unit is smaller, people pay less for it

Change in Demand

A change in buyer’s plan that influences on those plans than the price of the good changes

• When demand increases, the demand curve moves rightward

• When demand decreases, the demand curve moves leftward

Price of Related Goods

• Substitutes: Goods used insted if each other. If substitute price rises → people buy more other goods

• Complements: Goods used together. If complement price falls → people buy more of both goods.

Expected Future Prices

• If you expect a goods price to rise in the future, you buy more now

• If you expect a goods price to fall in the future, you buy less now

Income

buy more normal goods and less inferior goods

• normal goods: demand increases when income increases (EX. steak)

• inferior goods: demand decreases when income increases (EX. a cup of ramen/noodles)

Expected Future Income and Creit

If people expevt more money or easier credit → They buy now

Population

Bigger Population → More demand

Preferances

People buy what they like or value, influenced by trends, information or weather.

Supply

If a firm supplies a good or service if:

1. Can produce it

2. Can profit from it

3. Plans to sell it

Quantity Supplied

The amount of good or service that producers plan to sell during a given time period

Law of Supply

Other things remaining the same, the higher price of a good, the greater quantity supplied; the lower price of a good, the smaller the quantity supplied of it.

• Producers are willing to supply a good only if they can at least cover their margincal cost of production

Supply Curve

A curve that shows the relationship between quantity supplied of a good and its price when all other influence remain the same

Prices of factors of Production

Rise in price, less production

Prices of related goods produced

Substitute in Production

Expected Future Prices

If people expect the price of a good to rise, sellers hold off selling now to earn more later, so supply falls today but increases in the future.

Number of Suppliers

As the number of firms that produce a good increases, the supply of the good increases

Technology

“Technology” means the method of using resources to make a good. A change in technology happens when a new way is found that makes production cheaper.

State of Nature

The state of nature includes all the natural forces that influence production.

Equilibrium Price 

The price at which the quantity demanded equals the quantity supplied

Equilibrium Quantity

The quantity brought an sold at equilibrium price

Price Regulates Supply & Demand

Too high a price: Supply > Demand → Surplus
Too low a price: Demand > Supply → Shortage