BA 21C The Market Forces of Demand

basic decision-making units

firm, entrepreneur, households

firm

an organization that transforms resources into products, the primary producing units in a market economy

entrepreneur

a person who organizes, manages, and assumes the risks of a firm, taking a new product and turning it to a business

households

the consuming units in an economy

circular flow of economic activity

shows the connections between firms and households in input and output markets

output or product markets

are the markets in which goods and services are exchanged

input markets

are the markets in which resources— land, labor, and capital used to produce products are exchanged

circular flow diagram

payment flow is counter-clockwise, market activities is clockwise

input markets include:

labor, capital, land market

labor market

households supply work for wages to firms that demand labor

capital market

households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods

land market

households supply land or other real property in exchange for rent

market

is a group of buyers and sellers of a particular product

competitive market

is one with many buyers and sellers, each has a negligible effect on price

in a perfectly competitive market:

all goods are exactly the same, buyers and sellers are numerous that no one can affect market price

law of demand

the claim that the quantity demanded of a good falls when the price of the good rises, other things equal

quantity demanded

of any good is the amount of the good that buyers are willing and able to purchase

demand

the willingness and the ability of buyers to purchase goods and services

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

demand curve

is a graph illustrating how much of a given product a household would be willing to buy at different prices

factors affecting demand

increase in # of buyers, income, prices of related goods, tastes, expectations, quality, advertisement

income

the sum of all household’s wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time

normal goods

are goods for which demand goes up when income is higher and for which demand goes down when income is lower

inferior goods

are goods for which demand falls when income rises

substitutes

are goods that can serve as replacements for one another

perfect substitutes

are identical products

complements

are goods that go together

change in quantity demanded

a movement along the demand curve caused by a change in the price of the good itself

change in demand

a shift in the demand curve caused by a change in the factors/variables affecting demand

4 basic types of elasticity

price elasticity of demand and supply, income elasticity of demand, cross price elasticity of demand

price elasticity of demand

is a measure of how much the quantity demanded of a good responds to a change in the price of that good

elasticity

is measured in percentage terms

kinds of demanded elasticity

elastic, inelastic, unit elastic or unitary

total revenue

is the amount paid by buyers and received by sellers of a good

income elasticity of demand

the responsiveness of demand to changes in incomes

cross price elasticity of demand

the responsiveness of demand of one good to changes in the price of a related good—either a substitute or a complement

determinants of elasticity

time period, number and closeness of substitutes, proportion of income taken up by the good, importance of the good