Chapter 3: Markets (Macro)

Why is specialization important to understand regarding trade?

People and countries tend to produce goods where there is a lower opportunity cost. Everyone cannot produce everything because we are confronted with resource, time, and talent constraints.

Market

The buyers and sellers who trade a particular good or service.

What are 4 characteristics of a perfectly competitive market?

1. Standardized goods

2. No transaction costs (Limited Barrier of entry)

3. Full information

4. Buyers and sellers are price takers

Examples of perfectly competitive markets:

• Farmers Markets

• Foreign exchange markets

• Basic commodities such as wheat, eggs, or corn

What are consumers usually driven by in the market?

maximize the utility (satisfaction) they get from available incomes.

What are businesses driven by in the market?

maximize profits by selling goods that satisfy demand while keeping costs low.

What are governments driven by in the market?

maximize the general welfare of society, constrained by a budget (sources?) and the laws of society.

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

competitive market

a market in which fully informed, price-taking buyers and sellers easily trade a standardized 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

Participants are price takers

Neither buyers nor sellers have the power to affect the market price

Full Information

Market participants know everything about the price and features of the good

Demand

How much people are willing and able to buy under certain circumstances

quantity demanded

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

law of demand

An increase in the price of a good lowers the quantity demanded of that good, while a decrease in the price of a good raises the quantity demanded of that good.

Nonprice detriments

all the factors (other than price) that affect how much of a product people want to buy or companies want to sell.

Examples of Nonprice Detriments for demand

• Income - If people earn more money, they usually buy more stuff

• Preferences - If a product becomes trendy or goes out of style

• Population - More people in an area means more potential buyers

• Prices of related goods - If Coke gets expensive, people might buy more Pepsi

• Future expectations - If people think prices will rise next month, they might buy more now

Examples of Nonprice Detriments for supply

• Production costs - If materials or labor get cheaper, companies can sell more profitably

• Technology - Better machines can produce more goods more efficiently

• Number of sellers - More companies in the market means more total supply

• Government policies - Taxes, subsidies, or regulations that affect production

• Future expectations - If companies think demand will increase, they might produce more now

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

demand curve

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

What does the demand curve show?

A decrease in price increases the quantity demand

substitutes

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

Ex: Sandals and flip flops, Coke and Pepsi, Books and Kindle, etc.

What happens to the opportunity cost for pasta when the price of pasta remains the same while the price of rice doubles?

The opportunity costs for pasta decreases because you sacrifice less of the expensive good to get each unit of the cheaper good.

complements

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

Examples of complimentary goods:

• Peanut Butter and Jelly

• Cereal and Milk

• Guns and Bullets

• Knives and Cutting Boards

normal goods

goods for which demand increases as income increases. Ex: Suits, Jewelry, buying organic food

inferior goods

goods for which demand decreases as income increases. Ex: Instant Ramen

quantity supplied

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

What happens when the demand curve shifts to the left?

The demand decreases

What happens when the demand curve shifts to the right?

The demand increases

What happens when a price change occurs on the demand curve?

A movement along the demand curve occurs but the curve itself is constant

quantity supplied

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

Supply

How much of a good or service producers are willing to offer under certain circumstances

law of supply

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

supply schedule

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

How does the price of a product affect the quantity supply on the supply curve?

Prices Rise = Increase in quantity supply

Prices Decrease = Decrease in quantity supply

supply curve

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

How does a change in price affect the supply curve?

It causes movement on the supply curve, but the supply curve itself remains constant