The Competitive Market

2.1: Consumers and Demands 


Definations 

  • Market- buyers and sellers meet together to carry out a mutually beneficial exchange 

  • Competitive market- many buyers and sellers who can not control price or prevent others from entering or exiting the market 

  • Demand (D)- the quantity of g/s consumers are willing and able to purchase at various prices

  • Quanity Demand (QD)-  the quantity of g/s consumers are willing and able to purchase at a specific price 

  • Demand Schedule: When we see D and QD in a table

  • Demand Graph: 

    • Y axis is ALWAYS price, 

    •  X axis is ALWAYS quantity 

    • Curve MUST have a D at the bottom (shown through the negative slope)

    • Why does it have a negative slope: the substitution effect and the income effect 

      • Substitution effect: when the price changes, it leads consumers to substitute one product for another (going to Starbucks instead of going to Dunkin, given  Dunkin price increase) 

      • Income effect: when price changes lead consumers to feel like they have a different income, which leads them to purchase a different quantity 

  • The Law of Demand: when the price increases, then the quantity demanded goes down

    • Also written as: when price goes down, then quantity demanded goes up: both seen in photo. 




  • Tastes and Preferences: 

    • if taste changes in favor, demand increases 

    • If taste changes AWAY demand decreases 

  • Market size: number of buyers

    • Baby bottles: if people do not have kids (demand lowers) 

  • Expectations by consumers: price expectations

    • Whole curve shifts

    • Ex: gas when a holiday comes up, the price increases 

    • If the price goes down in the future, the demand will decrease since we will wait

  • Income of consumers: difference between a normal good and an inferior good

    • Normal good: normal goods like pasta NAME BRAND

      • Income up demand up

      • Income down, demand down 

    • Inferior goods: generic products (Mancuhan ramen) 

      • Income up, demand down

      • Income down, demand up 

  • Substitutions and complements in consumption 

    • Substitutions in consumption are g/s consumers see as the same or similar (Pepsi and Coke, jelly and jam) 

      • When the price increases, demand goes up

      • Price goes down, demand goes down 

    • Complements in consumption are two items we tend to purchase together (bacon and eggs, peanut butter and jelly) 

      • When the price goes up, demand goes down

      • When the price goes dow,n demand goes up 


2-1 B Consumers & Demand

  • Elsatsity is how responsive consumers are to price changes

    • An elastic product if consumers respond 

    • An inelastic product is a product that we are not responsive to price changes

    • Unit elastic when neither elastic nor inelastic (between the two)

      • If answer is a decimal or a fraction, then its INEASTIC

      • If the answer is exactly one is UNIT ELSATIC

      • If it's greater than one it is elastic 

    • Paradox of Value: describes the apparent contradiction where a non-essential good like diamonds is more expensive than an essential good like water, even though water is vital for survival

    • Diminishing marginal utility: the economic principle stating that the satisfaction, or utility, gained from consuming each additional unit of a good or service decreases as consumption increases

2.2 Producers and Supply

Definations 

  • Supply (S)- the quantity of g/s producers are willing and able to supply at various prices 

  • Quantity Supply (QS)-  the quantity of g/s producers are willing and able to supply at a specific price

    • Supply schedule is when it's in a table format 

    • The supply curve is when it's in a graph format 

    • The higher the price of the good sold, the more profit is made 

  • Law of Supply–when the price goes up, quantity supplied goes up. When the price goes down, the quantity supplied goes down

  • At every price, QD is higher than the 

  • Input prices: g/s Producers buy to make their product

  • Replated prices: 

    • Substitute in production: two or more g/s that can be produced with the same resources.

    •  A complement in production: two or more g/s that can be produced jointly