Microeconomics Chapter 4

markets

a group of buyers and sellers of a particular good

competitive market

market in which there are so many buyers and sellers, that no one has substantial power over price

1st characteristic of competitive market

homogeneous good

2nd characteristic of competitive market

many buyers and many sellers

buyers and sellers are

price takers

demand

characterize the behavior of buyers

quantity demanded

amount of a good that buyers are willing and able to buy at a particular price

law of demand

as p increases, qd decreases, holding everything else constant and vice versa

for demand, price and quantity have what kind of a relationship?

negative relationship

changes in quantity demanded is caused by

changes in p

changes in demand is caused by

changes in a factor other than price that also affects buyers

1st factor that moves demand curve

changes in income

normal good

good in which an increase in income leads to an increase in demand and vice versa

inferior goods

good for which an increase in income leads to a decrease in demand and vice versa

2nd factor that moves demand curve

changes in prices of related goods

substitutes

2 goods for which an increase in the price of one leads to an increase for the other

Complements

2 goods for which an increase in the price of one results in a decrease in the demand for the other, and vice versa

3rs factor that moves the demand curve

preferences

4th factor that moves demand curve

expectations

5th factor that moves demand curve

number of buyers

Supply

characterize behavior of sellers

quantity supplied

amount of a good that sellers are willing and able to sell at a particular price

law of supply

as p increases, qs increases, holding everything else constant and vice versa

a change in p of a good leads to movement

along curve

1st factor that affects sellers other than price (supply shifter)

input prices

an increase in input prices leads to a

decrease in supply

2nd factor that affects sellers other than price (supply shifter)

technology

improvement in technology leads to

an increase in supply

3rd factor that affects sellers other than price (supply shifter)

expectations

4th factor that affects sellers other than price (supply shifter)

number of sellers

equilibrium means

balance

market equlibrium/equilibrium price

price where qd=qs

we say P* and Q* because at any other price, 

forces of demand and supply push price back to p*

surplus

when QS is greater than QD

when the price is greater than P* there is a

surplus and competition among sellers drives price down

shortage

when QD is greater than QS

when price is smaller than P*, there is a

shortage and competition among buyers drives price up