Economics 150: Chapter 3
Economics 150: Chapter 3 Econ 150-12
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This 4 page Class Notes was uploaded by Suzannah Hudson on Saturday April 30, 2016. The Class Notes belongs to Econ 150-12 at Brigham Young University - Idaho taught by Hirschi, Rick L. in Spring 2016. Since its upload, it has received 35 views. For similar materials see Econ Principles & Problems Micro in Economcs at Brigham Young University - Idaho.
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Date Created: 04/30/16
Chapter 3 Notes Lesson 1: Markets Markets bring together buyers (demanders) and sellers (suppliers). This chapter mainly focusses on the markets in which large numbers of independently acting buyers and sellers come together to buy and sell standardized products. Food market, stock market, and the market for foreign currencies. They all involve demand, supply, price, and quantity. The price is “discovered” through the interacting decisions of buyers and sellers. Lesson 2: Demand Demand: A schedule or a curve that shows the carious amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time. It shows the quantities of a product that can be purchased at different possible prices; other things equal. Demand Schedule: a table of numbers showing the amounts of a good or service buyer are willing to purchase. “Willing and able,” are very important words to describe demand, because even if you are willing to pay for something you must be able to back it up with actual money, or it will not be reflected in that market. Demand is simply a statement of a buyer’s intentions with respect to the purchase of the product. Unless a specific time period is stated, we don’t know whether the demand for the product is large or small. Law of Demand: A fundamental characteristic, other things equal, as the price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. Simply put, when the price goes down, you’re willing to buy more, and when the price goes up, you are willing to buy less. There is a negative (or inverse) relationship between price and quantity demanded. The other-things-equal assumption is important because of relative price. The purchase of Nike shoes does not depend on their price alone, but it depends on the prices of substitute brands such as Reebok and Adidas. If Nike’s price goes up, but the other two stay constant, then Nike will sell less shoes. Diminishing Marginal Utility: as a person increases consumption of a product, while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product. Such as the second Big Mac will yield less satisfaction than the first. Income Effect: a change in the quantity demanded of a product that results from the change in real income caused by a change in the product’s price. A lower price increases the purchasing power, enabling them to purchase more of that product. Substitution Effect: At a lower price, buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive. The product whose price has now fallen is now a better deal relative to the other products. Demand Curve: Possible price of a product (Y Axis) is associated with a quantity demanded (X Axis). The downward slope reflects the law of demand. By adding the quantities demanded by all consumers at each of the various possible prices, we can get from an individual demand to a market demand. To find a market demand for millions of buyers: assume that all buyers are willing and able to buy the same AMOUNT at each possible prices, then multiply those amounts by the number of buyers. Determinants of Demand: Factors other than price that determine the quantities demanded of a good or service. Assumed to be constant; they are the “other things equal.” Changes in Demand: Tastes, Number of Buyers, Income, Prices of Related Goods, and Consumer Expectations. Normal Goods: A good or service whose consumption increases when income increases and falls when income decreases, and the price remains the same. Products whose demand varies DIRECTLY with money income. Ex: everyday items and foods. Inferior Goods: A good for service whose consumption declines as income rises, prices held constant. Goods whose demand varies INVERSLY with money income. Ex: used items and cars, younger models of goods get switched for upgraded models. Substitute Good: A good that can be used in place of another. Ex: Pepsi instead of Coke. Complementary Good: A good that is used together with another good. Ex: Snow boots and Ski’s. Change in Demand: A shift of the demand curve to the right (increase of demand) or to the left (decrease of demand). Refer to the Determinants of Demand. Change in Quantity Demanded: A change in the quantity demanded along a fixed demand curve as a result of a change in the price of the product. Change in prices, where the points on the curve go up or down. Lesson 3: Supply Supply: The various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period. Supply Schedule: A schedule or curve that shows the possible selling prices for supplies during a specific period of time. Law of Supply: The principle that, other things equal, an increase in the price of a product will increase the quantity of is supplied, and conversely for if price decreases. A positive (or direct) relationship prevails between price and quantity supplied. Supply Curve: A curve that illustrates the supply for a product by showing how each possible price (Y Axis) is associated with a specific quantity supplied (X Axis). Upward slope reflects the law of supply. Market supply is derived the same way market demand is derived. Determinants of Supply: Prices of Resources, Technology Advancement, Taxes and Subsidies, Prices of other Goods, Producers Expectations, and Number of Sellers. Key ideas is that costs are a major factor underlying supply curves; anything that affects costs usually shifts the supply curve. Change in Supply: A change in the schedule and a shift of the curve. An increase in supply will shift it to the right, and a decrease in supply with shift it to the left. Change in Quantity Supplied: A movement from one point to another on a fixed supply curve, either up or down. Lesson 4: Market Equilibrium Equilibrium Price and Quantity: The intersection of the down sloping demand curve and the up sloping supply curve indicates the equilibrium price and quantity. Equilibrium Price: The price where the intentions of buyers and sellers match. There is neither a shortage or a surplus of goods or services. Equilibrium Quantity: The quantity at which the intentions of the buyers and sellers match, so that the quantity demanded and the quantity supplied are equal. Surplus: The amount by which the quantity supplied of a product exceeds the quantity demanded. Drives prices down. Shortage: The amount by which the quantity demanded of a product exceeds the quantity supplied. Drives prices up. Rationing Function of Prices: The ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent. Productive Efficiency: The production of a good in the least costly way; occurs when production takes places at the output at which average total cost is a minimum and marginal product per dollars’ worth of input is the same for all inputs. Allocative Efficiency: The appointment of resources among firms and industries to obtain the production of the products most want by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized. Demand reflects the marginal benefit of the good, while Supply reflects the marginal cost of producing the good. Lesson 5: Changes in Supply, Demand, and Equilibrium An increase in Demand raises both Equilibrium price and Equilibrium quantity. Conversely, a decrease in demand reduces both Equilibrium Price and Quantity. An increase in Supply will lower Equilibrium price but increases Equilibrium quantity. In contrast, a decrease in Supply will increase Equilibrium price but decrease Equilibrium quantity. Lesson 6: Application: Government-Set Prices Governments may place legal limits on how high or low a price or prices may go. Price Ceiling: Sets the maximum legal price a seller my charge for a product or service. A price at or below the ceiling is legal; a price above it is not. Price ceilings pose two problems; Rationing Problem and Black Markets. Price Floor: A legally established minimum price for a good, or service. Normally set at a price above the equilibrium price.
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