Chapter 2 Flashcards
- Describe the characteristics that define a market including the use of aggregation.
Broadly (macro) or narrow (micro)
Aggregation is combining a group of distinct things into a single whole. Goods and services are higher aggregated in macro, less in micro.
Product VS resources
• Product markets
– Markets in which firms sell goods and services to households
• Resource markets
– Markets in which households that own resources sell them to firms
- Use a demand schedule and a demand curve to demonstrate the law of demand.
• Law of demand
When the price of a good rises, the quantity of the good demanded will fall
• Ceteris paribus
– Latin for “all else remaining the same”
• Demand schedule
– A list: quantities of a good that consumers would choose to purchase at different prices, ceteris paribus
• Demand curve
– Graph of a demand schedule
– Curve showing the quantity of a good or service demanded at various prices, ceteris paribus
– Each point on the curve: total quantity that buyers would choose to buy at a specific price
– Downward sloping
Imperfectly VS perfectly competitive markets
• Imperfectly competitive market
– Individual buyers or sellers can control or influence the price of the product
• Perfectly competitive market
– No buyer or seller has the power to influence the price
– Each buyer and seller takes the market price as a given
– Supply and demand model
- Explain the difference between a change in demand (shift of the curve) and a change in quantity demanded (movement along the curve).
• Movement along the demand curve – Caused by a change in price – Ceteris paribus • Shift of the demand curve – Caused by a change in any variable that affects demand – Rightward shift: increase in demand – Leftward shift: decrease in demand • Change in quantity demanded – A movement along a demand curve – In response to a change in price • Change in demand – A shift of a demand curve – In response to a change in some variable other than price
Variables that lead to change in demand
income, wealth, price of related goods, population, expecteed price, tastes, other variables
Income
– The amount that a person or firm earns over a particular period
• Normal good
– A good that people demand more of as their income rises
• Inferior good
– A good that people demand less of as their income rises
Wealth -
Total value of everything a person/firm owns
• Cash, bank accounts, stocks, bonds, real estate
– At a point in time
– Minus the total amount owed
• Home mortgage, credit card debt, auto loan, student loan
Increase in wealth
Increase demand for a normal good
Decrease demand for an inferior good
Prices of related goods
– Substitutes
– A good that can be used in place of some other good
– Fulfills more or less the same purpose
A rise in the price of a substitute
– Increases the demand for a good
– Shifting the demand curve to the right
– Complements
– A good that is used together with some other good
A rise in the price of a complement
– Decreases the demand for a good
– Shifting the demand curve to the left
Population
- Increase in population increase in demand
Expected price
- An expectation that price will rise in the future
Shifts the current demand curve rightward - An expectation that price will fall
Shifts the current demand curve leftward
TAstes
– Tastes change towards a good
• Increase in demand
– Tastes change away from a good
• Decrease in demand
OTher vairables
government subsidies
demand for goods.
Use a supply schedule and a supply curve to demonstrate the law of supply.
7.
• Law of supply
– As the price of a good increases, the quantity supplied increases
– Ceteris paribus
• Supply schedule
– A list: quantities of a good or service that firms would choose to produce and sell at different prices, ceteris paribus
. Explain the difference between a change in supply (shift of the curve) and a change in quantity supplied (movement along the curve).
8 • Movement along the supply curve – Caused by a change in price • Ceteris paribus • Shift of the supply curve – Caused by a change in any variable that affects supply – Rightward shift: increase in supply – Leftward shift: decrease in supply • Change in quantity supplied – A movement along a supply curve – In response to a change in price • Change in supply – A shift of a supply curve – In response to a change in some variable other than price
