Econ 402 Chapter 3

Consumer, markets, firms, S/D

Markets

\-markets for goods, services, FOP, stock (money), manufactured inputs (auto parts/tech chips)

\-vary in intensity of competition

competitive market

\-market with many buyers/sellers, **no single buyer/seller can influence the price**

relative price

\-ratio of one price to another

\-is an opportunity cost

\-when predicting a price will fall, predicting relative price will fall, not the cost of item

\-often expressed as a ‘basket’ (price index)

money price

\-# of dollars given up in exchange for a g/s

demand

\-want, afford, plan to buy (able, willing, desire)

**willingness/ability-** measure of Marginal benefit (law fo demand)

**wants**- unlimited desires for g/s

**quantity demanded**- amount that consumers plan to buy at a price (in a time period). pt on D curve

\-entire relationship between price and demand

\-measured in amount/unit of time

Law of demand

\-higher price of goods → smaller quantity demanded. lower price of good → greater quantity demanded (ceteris paribus)

**Substitution effect-** prices inc, while everything stays the same → relative price/opportunity cost inc → incentive to switch to substitute g/s

**Income effect-** prices inc, while everything stays the same → relative price to income inc → can not afford → dec quantity demanded of g/s

demand curve

\-relationship between Q demanded and price (ceteris paribus)

\-D inc → shift right. D dec → shift left

**Demand Schedule-** list the quantities demanded at each price (ceteris paribus)

change in demand

**price of related goods**

\-substitute: used in place of another

\-Complement: used in conjunction with another (hot dog and buns)

**expected future prices**

\-buy more now if price will inc/wait to but if price dec

**income**

\-Normal good: demand inc as income inc (plane vs bus)

\-Inferior good: demand dec as income inc (plane vs bus)

**expected future income/credit**

\-expecting future income → demand inc now (bonus)

**population**

\-large pop → larger D, smaller pop → smaller D (parking spaces)

\-also in demographic differences

**preferences**

\-value people have for g/s

\-weather, info, service, etc.

Change in quantity demanded

\-movement on curve

\-movement of curve itself = **change in demand**

Supply

-resources to produce (technology), make profit, plans to sell

-resources/tech limit what they can produce

quantity supplied

-amount producers plan to sell in time period

-refers to pt on supply curve/movement on curve

-shift of curve = change in supply

-amount per unit of time

Supply curve: relationship between Q supplied and price

-minimum supply price one is willing to sell at (lowest MC)

law of supply

-higher price of g/s → greater quantity supplied, lower price → less supplied

-as quantity produced inc → MC of producing the g/s inc

equilibrium

equilibrium price: Q demanded = Q supplied

equilibrium quantity: Q bought and sold at equilibrium price

-market adjusts toward equilibrium naturally (self regulating)

Shortage: price below equilibrium (excess demand)

-forces price inc b/c dec Q demanded + inc Q supplied

Surplus: price above equilibrium (excess supply)

-forces price down b/c inc Q demanded and dec Q supplied (slow down production/lower price)

-competitors bid price down

-Decrease demand: when resets to equilibrium there is inc in quantity supplied but no change in supply

-Increase supply: inc in Q demanded, no change in demand

-dec in supply: price inc and Q supplied dec

Supply and demand shifts

Same direction:

-equilibrium quantity changes in same direction (no shortage or surplus)

-if D inc > S → price rises

-if S inc > D → price falls

Opposite direction:

-if D change > S → equilibrium changes in same direction as D

-if S change > D → equilibrium changes in same direction as S