A. A market is defined as an institution or mechanism which promotes trade
bringing together buyers (demanders) and sellers (suppliers).
Replaced barter which is the direct exchange of goods.
Modern market brings money and prices into the circular flow of goods.
B. Demand is willingness to buy.
1. Demand is a schedule of the amounts of goods and services
consumers are willing and able to buy at a set of prices.
2. Total demand
Horizontal Sum of
3. Law of demand price
and quantity are inversely related and
as price goes up, quantity demanded goes down, vice versa
4. Why more is bought as price drops.
price drops, consumers feel
Substitution Effect: price drops, it becomes cheaper
to other goods and consumers buy more
or preferences of consumers
Number of consumers
Incomes of consumers
normal (superior) goods
such as steak and vacations - more is purchased as income increases.
inferior goods such as bread and hamburger
- less is purchased as income increases.
Price of related goods
are goods that compete with each other such as hot dogs and hamburgers.
If the price of a good increases, the demand for its substitutes will
are goods that are purchased together like hot dogs and rolls.
If the price of a good increases, the demand for its complement will
is Latin for all other variables remain the
same. So we change one variable at a tome.
D. Changes (shifts) in Demand
1. A decrease in demand shifts the demand curve to the left
2. An increase in demand shifts the demand curve to
E. Supply is willingness
1. Supply is a
schedule of the amounts of goods or services producers are willing and
able to sell at a set of prices.
2. Law of supply: price
and quantity supplied are directly related because price and
expected profit are directly related
a. As price goes up, quantity supplied goes up
b. As price goes down, quantity supplied goes down
1. Product costs
as affected by technology, resource prices, government involvement
2. Price of related goods
a. If 2 goods are substitutes, price up for one will increase supply of
the other (price of gasoline up,
supply of alternative fuels increases) as companies see more potential
b. If 2 goods are complements, price down of one will increase supply of
other (price of PC's down,
supply of computer software up) as the expected increase in sales of the
first item should increase
sales of the complement.
3. Number of producer
and their expectations concerning the above listed variables will
G. Changes (shifts) in supply
1. A decrease in supply
shifts the supply curve to the left
2. An increase in supply
shifts the supply curve to the right
is where suppliers and demanders agree on price and quantity as depicted
1. If the price is too high, a
surplus results and price must be lowered
2. If the price is too low, a
shortage results. This happens with toys every Christmas
(Cabbage Patch Dolls)
3. If they can not
agree, as happened with Beta videotape machines, then the curves do not
goods are not sold.
function of price makes for an efficient allocation of resources.
Whencompetitive forces of supply and demand result in an equilibrium, a
rationing function of
produce to consumers has occurred.