Principles of Economics Lecture Notes
Definition: A market is a structured system where buyers and sellers engage in the exchange of goods and services. This system facilitates transactions and governs how resources are allocated in an economy.
Competitive Market:
In a competitive market, there are many buyers and sellers, leading to a scenario where each individual buyer or seller has a negligible impact on the overall market price.
Characteristics of a competitive market include:
Freedom of entry and exit for firms, allowing dynamics in supply and demand to shift naturally.
Homogeneous products, where all units of a particular good are identical.
Perfect information, where consumers and producers have access to all relevant price and quality information.
In a perfectly competitive market:
All goods are exactly the same, meaning there is no brand differentiation.
Buyers and sellers are so numerous that no individual can affect the market price; each participant is considered a "price taker." This maintains market equilibrium and efficiency in resource allocation.
Understanding Demand
Quantity Demanded: The quantity demanded by consumers is influenced by several factors including price, consumer preferences, and income levels.
Law of Demand: This fundamental principle states that the quantity demanded of a good falls when its price rises, assuming all other factors remain constant. This creates an inverse relationship between price and quantity demanded, represented graphically by a downward-sloping demand curve.
Demand Curve
Demand Schedule: A demand schedule is a table that illustrates the relationship between the price of a good and the corresponding quantity demanded at those prices. It provides data that can be graphically represented as a demand curve.
Example: Helen’s demand for lattes.
Helen's Demand Schedule Example
Price of Lattes | Quantity Demanded |
|---|---|
$0.00 | 16 |
$1.00 | 14 |
$2.00 | 12 |
$3.00 | 10 |
$4.00 | 8 |
$5.00 | 6 |
$6.00 | 4 |
Market Demand vs Individual Demand
Market Demand: Market demand is defined as the total quantity demanded by all consumers in the market at various price levels.
Example Calculation:
If Helen and Ken are the only two buyers in the market, their quantities demanded at different price points lead to an aggregation of individual demand to establish the market demand.
Market Demand for Lattes Example
Price | Helen’s Qd | Ken’s Qd | Market Qd |
|---|---|---|---|
$0.00 | 16 | 6 | 24 |
$1.00 | 14 | 5 | 21 |
$2.00 | 12 | 4 | 18 |
$3.00 | 10 | 3 | 15 |
$4.00 | 8 | 2 | 12 |
Demand Curve Shifters
Definition: Demand curve shifters are factors that cause the entire demand curve to shift to the left or right, as opposed to movement along the curve that is caused merely by price changes.
Examples of Demand Curve Shifters
Number of Buyers: An increase in the number of buyers leads to an increase in the quantity demanded at every price, resulting in a rightward shift of the demand curve.
Income: Consumer income levels greatly affect demand for goods. For normal goods, demand increases as income rises (right shift). Conversely, for inferior goods, demand tends to decrease as income rises (left shift).
Prices of Related Goods:
Substitutes: When the price of one good increases, the demand for its substitute may increase as consumers switch preferences (e.g., price increases of pizza may boost hamburger demand).
Complements: If two goods are typically consumed together, an increase in the price of one may decrease the demand for the other (e.g., a rise in computer prices may lead to reduced demand for software).
Tastes: Consumer preferences can shift due to trends, leading to increased demand for specific goods; for instance, rising awareness of health benefits has increased the demand for Matcha tea.
Expectations: Anticipated future changes in prices or income can influence current demand levels, where consumers may choose to buy now if they expect prices to rise later.
Understanding Supply
Quantity Supplied: This refers to the total amount that producers are willing and able to sell in the market at a given price.
Law of Supply: The law states that the quantity supplied of a good increases as its price rises, assuming all other factors remain constant. This is exhibited through an upward-sloping supply curve where higher prices incentivize increased production.
Supply Schedule
A supply schedule is a table that reveals the relationship between the price of a good and the quantity supplied at those prices. It serves as a basis for creating the supply curve.
Example: Mulliri’s supply of lattes.
Mulliri's Supply Schedule Example
Price of Lattes | Quantity Supplied |
|---|---|
$0.00 | 0 |
$1.00 | 3 |
$2.00 | 6 |
$3.00 | 9 |
$4.00 | 12 |
$5.00 | 15 |
$6.00 | 18 |
Market Supply vs Individual Supply
Market Supply: This is defined as the total quantity supplied by all producers in the market at various price levels.
Example Calculation: If Mulliri and another seller, say John, are the only two suppliers in the market, their individual quantities supplied at different prices will be aggregated to find the total market supply.
Supply Curve Shifters
Definition: Supply curve shifters are factors that lead to a permanent shift in the entire supply curve of a good due to non-price-related changes.
Examples of Supply Curve Shifters
Input Prices: When input prices decline, suppliers can produce larger quantities at lower costs, resulting in a right shift of the supply curve.
Technology: Technological advancements can enhance efficiency or reduce costs, resulting in increased supply at every price point (right shift).
Number of Sellers: An increase in the number of sellers participating in the market boosts the quantity supplied at each price, shifting supply rightward.
Expectations: Expectations regarding future prices may lead suppliers to adjust their current output; if prices are expected to rise, suppliers might withhold supply now to sell at higher prices later.
Summary
Demand Variables: Movements along the demand curve are primarily caused by price changes. Non-price variables, including the number of buyers, income, prices of related goods, consumer preferences, and expectations lead to shifts in the demand curve.
Supply Variables: Movements along the supply curve also occur due to price changes, while non-price factors, such as input costs, technology improvements, changes in the number of sellers, and expectations about future prices, shift the supply curve.