Chapter 3 Econ: Markets

Overview of Market Concepts

• Market Characteristics: Understanding the key aspects that define a competitive market.

• Demand Curve: Construction and interpretation of demand curves.

• Movement vs. Shift: Differentiating between shifts in demand/supply and movements along the curves.

• Supply Curve: Basics of supply curve construction.

• Equilibrium: Interaction of supply and demand to reach market equilibrium.

• Market Changes: Effects of changes in supply and demand on equilibrium price and quantity.

Law of Demand

• Definition: Quantity demanded decreases as price increases, and vice versa.

• Marginal Benefit: Relates to the law of demand; marginal benefit decreases as quantity increases.

• Change in Demand vs. Quantity Demanded: Important to distinguish between the two.

Nonprice Determinants of Demand

• Factors Influencing Demand:

  • Number of consumers

  • Consumer preferences and demographics

  • Prices of related goods

  • Consumer incomes

  • Future expectations

• Substitutes: Goods that can replace one another. Example: If the price of coffee rises, demand for tea may increase.

• Complements: Goods consumed together. Example: If the price of chips rises, demand for salsa may drop.

Determinants of Demand: Price of Related Goods

• Substitutes and Complements:

  • If the price of one good rises, demand for substitutes may rise.

  • If the price of one good rises, demand for complements may fall.

Determinants of Demand: Income

• Normal Goods: Demand increases with income.

• Inferior Goods: Demand decreases as income increases.

• Summary of Demand Determinants:

  • Law of Demand includes the impact of nonprice factors.

  • Important to remember the various determinants influencing demand.

Law of Supply

• Definition: Quantity supplied increases as price increases, and vice versa.

• Producer Motivation: Profit motivation drives supply decisions.

Measuring Supply

• Quantity Supplied: The amount of a good producers wish to sell at a given price.

• Willingness-to-Sell: Price at which a seller is willing to sell an additional unit.

• Marginal Cost: Opportunity cost of producing an additional unit; tends to increase with quantity produced.

Nonprice Determinants of Supply

• Factors Influencing Supply:

  • Prices of related goods

  • Technology improvements

  • Prices and availability of inputs

  • Producers' expectations about the future

  • Number of sellers in the market

Changes in Supply with Price Relations

• Input Costs: If input costs increase (e.g., price of steel for cars), supply typically decreases.

• Producing Related Goods: When the price of one good increases (e.g., dining tables), it can impact the supply of related goods (e.g., coffee tables).

Summary of Supply Determinants

• Law of Supply: Quantity supplied rises as price rises.

• Nonprice Determinants Include:

  • Prices of related goods

  • Technology

  • Input prices

  • Expectations

  • Number of sellers

• Important Consideration: Differentiate between changes in supply and changes in quantity supplied.

Market Equilibrium

• Reaching Equilibrium: Interaction of supply and demand curves leads to market equilibrium prices and quantities.

• Effects of Price:

  • If the price is too low, there is excess demand.

  • If the price is too high, there is excess supply.

Changes in Equilibrium

• Shifts in Supply/Demand: Can be influenced by government regulations and market conditions.

• Substitutes Impacting Equilibrium: If the price of burgers rises, the equilibrium in the burrito market may shift due to changed consumer preferences.

• Influence of Input Prices: Changes in the price of tortillas can also shift burrito market equilibrium.

• Impact of Incomes: If incomes rise and burritos are considered normal goods, both price and quantity in the market will likely increase.