Flashcards in Lecture Two Assessable Notes Deck (26):
What is a market? And what are the two sides of it?
A market is any arrangement that brings buyers and sellers together. It's two sides are demand (buyers) and supply (sellers).
What does it mean to assume the competitive market is always clear?
The quantity demanded (QD) by buyers will always in the end, match up w the quantity supplied (QS) by sellers. When QD = QS we have what is called an equilibrium.
Explain quantity demand and quantity supply ?
QD arises out of the buyers demand for a product. We find that QD is negatively or inversely related to the price (P) of the product. This means that we P is up QD is down and P is down QD is up.
What is the law of demand?
Law of demand States: other things remaining the same, if the price of a good rises, the quantity of demand of that good decreases and if the price of a good falls the quantity demanded of that good increases.
What is the demand curve?
The demand (D) curve can be derived from the demand schedule. Demand always curves down. Thus the higher the price the lower the demand. We move along the demand curve only we change in price occurs (^P) and brings with it a change in quantity demanded (^QD).
What are shifts in demand?
Creation of a new demand curve is created. Decrease is to the left of original curve and increase is to the right. We get a shift in demand when anything other than a price change of the product occurs. This means that the P is not changing.
What are the influences or potential sources of changes (shifts) in the demand?
Prices of related goods
Expected future prices
Expected future income and credit
Number of buyers
Explain price of related goods
Goods have substitutes and complements.
A substitute for a good is another good that can be consumed in its place eg pizza or a burger - you can choose one other the other. The demand for a good and the price of one of its substitutes move in the same direction. If one of the prices of a substitute increases or decreases the demand for the products rises or decrease eg colas demand rises when Pepsi price rises.
A complement of a good is another good that is consumed with it. Say shoes and socks. The demand for a good and the price of one of its components move in opposite directions. The demand for a good decreases if the price of one of its complements rises and increases if the price of one of its complements falls. The demand for socks decreases when shoe prices rise as people buy less shoes and need less socks.
Explain expected future prices
A rise in the expected future price of a good increases the current demand for that good and a fall in the expected future price decreases current demand.
Explain income as a demand influence
A rise in income brings an increase in demand and a fall in income brings a decrease in demand for a normal good. The more money we have the more of a product we can afford to buy. If income rises then increase in demand and a shift from D0 to D1 but if income and demand drop shift from D0 to D2
Explain future income and credit
When income is expected to increase in the future, or when credit is easy to get and the cost of borrowing is low, the demand for some goods increases. And when income is expected to decrease in the future or when credit is hard to get and the cost of borrowing is high, the demand for some goods decreases. Mainly affect big items eg homes and cars.
Explain number of buyers
The greater number of buyers in the market, the greater the demand is. The demand for parking spaces for example is bigger in Sydney than Canberra due to size.
Explain preferences in demand
Tastes or preferences influence demand. When preferences change, the demand for one items increases and the demand for another item decrease. More increased interest in health will lead to more running shoe demand, higher level of interest in danger of running on joints leads to lower running shoes demand.
What is the law of supply?
Other things remaining the same, if the price of a good rises the quantity supplied of that good increases; and if the prices of the good falls so does quantity supplied. QS is positively related to Price. When price is up so is supply. The supply curve goes up
Movements and shifts in supply
Movements: moves up the supply curve and only occurs when there is a change in price. Thus if price increases or decreases so does supply and we go up or down curve.
Shifts: decrease is S2 and to left of original curve S0 and increase to right is S1. So shifts are created if anything other than price changes.
What are the potential influences or factors that create supply shifts?
Prices of related goods
Prices of resources and other inputs
Expected future prices
Number of sellers
Explain prices of related goods in supply
Related goods are either substitutes or complements.
Subs: substitute in the production for a good is another good that can be produced in its place eg shorts over long pants; the change in the Price of a substitute in production: the supply of a good decreases if the price of one of its subs in production rises: and the supply of a good increases if the price of its subs in production falls thus the supply of a good and the price of one of its substitutes in production move in opposite directions.
Complement: another good that is produced along w the original good. The supply of a good increases if the price of one of its complements in production rises; and the supply of a good increases if the price of one of its complements in production rises. And the supply of a good decreases if the price of one of its complements in production falls. The supply of a good and the price of one of its complements in production move in the same direction.
Explain price of resources and other inputs
Supply changes when the price of a resource or other input used to produce the good changes. The reason is that resource and input prices influence the cost of production. The more it costs to produce a good, the smaller is the quantity supplied of that good at each price (other things remaining the same). These resources/inputs are labour (L) which must be paid a wage, which is a cost of production, the cost of renting a factory.
Explain expected future prices in supply
Expectations about future prices influence supply's for example; a severe drought that wipes out potato crips doesn't change the production of potato chips today but will affect future production. Thus prices will have to rises and supply may be stocked up eg inventory to handle a lack of product and high prices.
Explain number of sellers (suppliers)
The greater the number of sellers in a market, the larger is the supply. For example, many new sellers have developed springs and water bottling plants in Australia and the supply of bottled water has increased. If number of suppliers increases so does supply but if number decreases so does supply.
Explain productivity in supply
Productivity is output per unit of input. Productivity rises when we can produce more with the same amount as before. A decrease in productivity leads to decrease in supply. If someone is unproductive they won't make as much stuff thus how much can be supplied is decreases.
When does market equilibrium occur?
When quantity demand is equal to quantity supply's if supply is greater then demand then we have a surplus but if demand is greater than supply we have a shortage. The equilibrium point is the only stable point and when the QD And QS meet on the graph. If we have exceed demand the market focuses the price up and QD down until we reach equilibrium but if we have excess supply market forces prices down and QD down until we reach equilibrium
Explain changes in price and quantity
Increase in demand but no change in supply = price and quantity in equilibrium to rise
Decrease in demand and no change to supply = decrease in price but quantity in equilibrium to rise
Increase in supply and no change to d = price drop and quantity in equilibrium to rise
Decrease in s and no change to d= price rise and q in equilibrium drop
Increase in both demand and supply=
Price unknown but quantity rise but if increase in demand is larger than supply then price rises and price drops if supply increase is bigger than demand increase
Decrease in both supply and demand = quantity drop but price unknown - if decrease in d is bigger than supply decrease than price drops but price rises if supply decrease is bigger than demand decrease
Increase in demand but decrease in supply = price rises but Q is unknown. If d increase is bigger than supply increase Q rises - Q falls if supply decrease is bigger than demand decrease.
Increase in supply and decrease in demand
Price falls - Q unknown
Increase supply increase in bigger than decrease in demand Q rises ;; if demand decrease is bigger than supply increase than Q falls
What are the price rigidities that affect equilibrium and price and lead to no equilibrium?
Price ceiling // price cap
Sticky price - not assessable
Explain price floor
Price floor: a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply