Unit 2 Review: MicroEconomics
Chapter 4: Demand and Supply
Market and Economy must be mixed up, but Market has four distinctive meanings:
• Can be a physical place where a product is bought and sold
• All buyers and sellers of a particular good or service aka the global market for a commodity like copper • The demand for a particular product or service
• The agreement of a mutual price and quantity between B and S
• a location
• network of buyers and sellers
• demand for a product
• price-determination process
Market itself determines price. Buyers want price low as possible, sellers want it high.
• is the quantity of a good or service that buyers will purchase at various prices during a given period of time
• Demand depends on wallet vs heart unless financial capability
• higher price, less quantity of it purchased, lower the price, better chances of more quantity of it purchased (aka “Law of Demand” where quantity demanded varies inversely with price as long as NOTHING ELSE changes)
• There is a substitution effect and income effect, as price rises we substitute other similar things that are cheaper hence substitution effect and the more money you save on a product, should the price fall, even $1, that's $1 to your income, added extra income, hence income effect, and with that extra money you could buy a lil' bit more of whatever aka increase in quantity demand.
• Demand schedules exist to show price and quantity demanded for a particular product, usually in a table (numerical tabulation)
• Market demand schedules exist to show the sum total of All the consumer demands for a product Supply
• is the quantities that sellers will offer for sale at various prices during a given period of time.
• Suppliers view: as prices rise they want to supply more, yet consumers want to purchase less.
Obviously they want the price to be higher and make more, aka more profit.
• “Law of supply:” The quantity supplied will increase if price increases and fall if prices fall, as long as NOTHING ELSE changes
• Supply schedules exist to show quantity supplied and price
• where there is no price that is a shortage or surplus
• there is no tendency for it to change
• only compromise of LOWEST PRICE between consumers and HIGHEST PRICE for sellers, win win
• price above equilibrium will result in surplus of goods as long as NOTHING ELSE changes
• price below equilibrium will result in shortage of goods as long as NOTHING ELSE changes
• The red open dot on either shortage is the quantity suppliers are willing to sell
• The green closed dot on either shortage is the quantity consumers are willing to buy
• Price below equilibrium by sellers will mean many mad customers, aka cant buy item, aka will offer more money, start bidding and price goes up because of demand
• Price above equilibrium by sellers will mean less customers wanting to spend more money, aka no sales, sellers made too much because they want profit, shortage of goods
Changes in Demand
• Five basic changes: Income, Population, Tastes and Preferences, Expectations and Prices of substitute goods
• Income is when buyers' incomes expand substantially allowing them to buy more of a product hence equilibrium price increases, and new demand curve is made.
• In terms of population, businesses monitor demographics aka population statistics that show changes in age, income and overall numbers.
• Tastes and preferences alter demand, but companies try to market their product to increase the demand for it, if advertising is successful, demand curve shifts to the right
• Demand curve will shift to the right if consumer expectations lead people to believe that prices will increase in the future (like housing especially). Increased purchases by consumers who believe things like this, ironically self-fulfil their prophecies because all of them do this simultaneously driving the