Microeconomics: Chapter 3
Terms in this set (32)
Perfectly Competitive Market
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market
A curve that shows the relationship between price of a product and the quantity of the product demanded
The demand by all consumers of a given good or service
Law of demand
The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease
The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes
The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power
Ceteris Paribus ("all else equal") condition
The requirement that when analyzing the relationship between two variables - such as price and quantity demanded- other variables must be held constant.
Variables that shift market demand
Many variables other than price can influence market demand. These five are the most important: Income, prices of related goods, tastes, population and demographics, and expected future prices
The income that consumers have available to spend affects their willingness and ability to buy a good.
A good for which the demand increases as income rises and decreases as income falls
A good for which the demand increases as income falls and decreases as income rises
Price of related goods
The prices of other goods can also affect consumers' demand for a product.
Goods and services that can be used for the same purposes. When two goods are substitutes, the more you buy of one, the less you buy of the other.
Goods and services that are used together. When two goods are complements, the more consumers buy of one, the more they will buy of the other.
Consumers can be influenced by an advertising campaign for a product. Taste is a catchall category that refers to the many subjective elements that can enter into a consumers decision to buy a product. A consumer's taste for a product can change for many reasons.
Population and demographics
As the population of a country increases, the number of consumers and the demand for most products will increase. The demographics of a population, refers to its characteristics, with respect to age, race, and gender. As the demographics of a country or region change, the demand for particular goods will increase or decrease because different categories of people tend to have different preferences for those goods.
Expected future prices
Consumers chose not only which product to buy but also when to buy them. For instance, if enough consumers become convinced that houses will be selling for lower prices in three months, the demand for houses will decrease now, as some consumers postpone their purchases to wait for the expected price decrease. Alternatively, if enough consumers become convinced the price of houses will be higher in three months, the demand for houses will increase now, as some consumers try to beat the expected price increase.
The amount of a good or service that a firm is willing and able to supply at a given price
A curve that shows the relationship between the price of a product and the quantity of the product supplied
Law of supply
The rule that, holding everything else constant, increases in price cause increases in quantity supplied, and decreases in price cause decreases in quantity supplied.
Variables that shift market supply
The following are the most important variables that shift market supply:
Prices of inputs, technological change, prices of substitutes in production, number of firms in the market, expected future prices.
Prices of inputs
The factor most likely to cause the supply curve for a product to shift is a change in the price of an input. An input is anything used in the production of a good or service.
A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.
Prices of substitutes in production
Firms often chose which good or service they will produce. Alternative products that firm could produce are called substitutes in production.
Number of firms in the market
A change in the number of firms in the market will change supply. When new firms enter a market, the supply curve shifts to the right, and when existing firms leave, or exit, a market, the supply curve shifts to the left.
Expected future prices
If a firm expects that the price of its product will be higher in the future, it has the incentive to decrease supply now and increase it in the future.
A situation in which quantity demanded equals quantity supplied
Competitive market equilibrium
A market equilibrium with many buyers and sellers
Summary A: The demand side of the market
The model of demand and supply is the most important tool in economics. The model applies exactly only to perfectly competitive markets, where there are many buyers and sellers, all the products are identical, and there are no barriers to entry. But, the model can also be useful in analyzing markets that don't meet all these requirements. The quantity demanded is the amount of a good or service that a consumer is willing and able to purchase at a given price. A demand schedule is table showing the relationship between price of a product and quantity of a product demanded. A demand curve is a graph that shows the relationship between the price of a product and the quantity of the product demanded. Market demand is the demand by all consumers of a good or service. The law of demand states that - ceteris paribus - holding everything else constant - the quantity demanded of a product increases as price decreases and decreases when the price increases. Demand curves slope downward because of the substitution effect, which is the change in quantity demanded that results from a price change making one good more or less expensive relative to another good, and the income effect, which is the change in quantity demanded of a good of a good that results from the effect of a change in the good's price on consumer purchasing power. Changes in income, the prices of related goods, tastes, populations and demographics, and expected future prices all cause the demand curve to shift. Substitutes are goods that can be used for the same purpose. Complements are goods that are used together. A normal good is a good for which demand increases as income increases. An inferior is good for which demand decreases as income increases. Demographics refer to the characteristics of a population with respect to age, race, and gender. A change in demand refers to a shift of the demand curve. A change in quantity demanded refers to a movement along the demand curve as a result of a change in the product's price.
Summary B: The supply side of the market
The quantity supplied is the amount of a good that a firm is willing and able to supply at a given price. A supply schedule is a table that shows the relationship between the price of a product and the quantity of a product supplied. A supply curve is a curve that shows the relationship between the price of a product and the quantity of the product supplied. When the price of a product rises. producing the product is more profitable, and a greater amount will be supplied. The law of supply states that, holding everything else constant, the quantity of a product supplied increases when the price rises and decreases when the price falls. Changes in the prices of inputs, technology, the price of substitutes in production, expected future prices, and the number of a firms in a market all cause the supply curve to shift. Technological change is a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs. A change in supply refers to a movement along the supply curve as a result of a change in a product's price.
Summary C: Market equilibrium - putting demand and supply together
Market equilibrium occurs where the demand curve intersects the supply curve. A competitive market equilibrium has a market equilibrium with many buyers and sellers. Only at this point is the quantity demanded equal to the quantity supplied. Prices above equilibrium result in surpluses, with the quantity supplied being greater than the quantity demanded. Surpluses cause the market price to fall. Prices below equilibrium result in shortages, with the quantity demanded being greater than the quantity supplied. Shortages cause the market price to rise.
Summary D: The effect of demand and supply shifts on equilibrium
In most markets, demand and supply curves shift frequently, causing changes in equilibrium prices and quantities. Over time, if demand increases more than supply, equilibrium price will rise. If supply increases more than demand, equilibrium price will fall.
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