Chapter 3: Markets: Supply And Demand Flashcards
Market
A group of buyers and sellers of a particular good or service.
Competitive market
A market in which there are many buyers and sellers.
The market model of supply and demand is based on the following assumptions:
- Many buyers and sellers.
- Perfect information for all buyers and sellers.
- Freedom of entry and exit.
- Identical goods.
- Buyers and sellers act in self interest.
- Clearly defined property rights.
Competitive markets
Many buyers and sellers, called price takers.
Characteristics of a perfectly competitive market:
- All goods for sale are the same.
- No buyer or seller can influence market price on their own.
Quantity demanded
The amount of good that buyers are willing and able to purchase.
Law of demand
The quantity demanded of a good falls when the price of the good rises.
Demand schedule
Shows the relationship between the quantity demanded and the price of the good.
Demand curve
A graph of the relationship between the price of the good and the quantity demanded of the good.
Ceteris paribus
Other factors affecting demand are held constant so we can analyze the effect of a change in price on demand.
Shift in demand curve
Caused by a factor other than a change in price
Movement along the demand curve
Caused by a change in the price of the product
E.g a tax that raises the price of milk results in a movement along the demand curve.
Inferior goods
Goods you buy less of as your income increases
The income effect
The substitution effect
(Assume the price of milk falls - more is demanded due to the income and substitution effects)
Assume that income remains constant. A fall in the price of milk means that consumers can now afford to buy more with their income.
Milk is lower in price compared to other similar products, so some consumers will choose to substitute the more expensive drinks with the now cheaper milk.
These effects have different effects depending on the type of good.
Shift in the demand curve
Caused by any changes that alters the quantity demanded at every given price.
Shifts caused by factors other than price:
- Prices of related goods
- Income
- Tastes
- Number of buyers
- Advertising
- Expectations
- Prices of related goods
Substitutes and complements:
- substitutes: two goods for which the increase in the price of one good leads to an increase in the demand for the other. E.g milk and water. Increase in one, people buy the other
- complements: two goods for which the increase in the price of one good leads to a decrease in the demand for the other. E.g tennis rackets and tennis balls, if the price of tennis rackets goes up, the demand for tennis balls falls. Increase in one, people don’t buy the other.
- Income
Lower income - spend less on some - probably most goods
Normal goods
The demand for a good falls when income falls and rises as income rises
Inferior good
The demand for a good rises when income falls. E.g when income falls, train ticket sales go up because people can’t afford cars/fuel.
- Tastes
More people may like something
Number of buyers
Population
Advertising
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