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Market
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a group of buyers and sellers of a particular good or service
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Competitive market
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a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
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Quantity demanded
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the amount of a good that buyers are willing AND able to purchase
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Law of demand
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the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
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Demand schedule
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a table that shows the relationship between the price of a good and the quantity demanded
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Demand curve
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a graph of the relationship between the price of a good and the quantity demanded
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Normal good
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a good for which, other things equal, an increase in income leads to an increase in demand
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Inferior good
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a good for which, other things equal, an increase in income leads to a decrease in demand
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Substitutes
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two goods for which an increase in the price of one leads to an increase in the demand for the other
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Complements
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two goods for which an increase in the price of one leads to a decrease in the demand for the other
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Quantity supplied
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the amount of a good that sellers are willing and able to sell
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Law of supply
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the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
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Supply schedule
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a table that shows the relationship between the price of a good and the quantity supplied
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Supply curve
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a graph of the relationship between the price of a good and the quantity supplied.
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Equilibrium
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a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
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Equilibrium price
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the price that balances quantity supplied and quantity demanded
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Equilibrium quantity
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the quantity supplied and the quantity demanded at the equilibrium price
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Surplus
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a situation in which quantity supplied is greater than quantity demanded
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Shortage
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a situation in which quantity demanded is greater than quantity supplied
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Law of supply and demand
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the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
b. If prices are too high
i. Qs > Qd → Surplus (Qs-Qd)
ii. Leads to a downward pressure on the price until Qs = Qd
c. If prices are too low
i. Qs < Qd → Shortage (Qd-Qs)
ii. Leads to an upward pressure until Qs = Qd
b. If prices are too high
i. Qs > Qd → Surplus (Qs-Qd)
ii. Leads to a downward pressure on the price until Qs = Qd
c. If prices are too low
i. Qs < Qd → Shortage (Qd-Qs)
ii. Leads to an upward pressure until Qs = Qd
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Competitive fringes
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a bunch of little businesses near a large one (Walmart beside a bunch of mom and pop's)
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Determinants of Demand
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i. Prices don't change demand, only QD can:
1) Income
a) If income goes up, the demand for normal goods goes up (new cars, new clothes, education...)
b) If income goes up, the demand for inferior goods (bus passes, used cars, thrift shopping, ramen...) goes down
2) Tastes and preferences
a) Affected by time of year, public perception, advertisement, news, acts of god
3) Prices of Related Goods
a) If the price of good 1 goes up, the demand of good 2 goes up (substitutes)
b) If the price of good 1 goes up, the demand of good 2 goes down (compliments)
4) Expectations
a) If the price of a good is expected to rise tomorrow, the demand for it today goes up
5) Number of Buyers
a) Market demand is the sum of individual demand curves
1) Income
a) If income goes up, the demand for normal goods goes up (new cars, new clothes, education...)
b) If income goes up, the demand for inferior goods (bus passes, used cars, thrift shopping, ramen...) goes down
2) Tastes and preferences
a) Affected by time of year, public perception, advertisement, news, acts of god
3) Prices of Related Goods
a) If the price of good 1 goes up, the demand of good 2 goes up (substitutes)
b) If the price of good 1 goes up, the demand of good 2 goes down (compliments)
4) Expectations
a) If the price of a good is expected to rise tomorrow, the demand for it today goes up
5) Number of Buyers
a) Market demand is the sum of individual demand curves
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4 facts about the demand curve
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i. Shows the relationship between the price and quantity demanded
ii. If price goes up, and quantity demanded goes down = negative relationship between P and QD
iii. If D goes up, and QD goes up at all prices = demand curve shifts right
iv. If D goes down, and QD goes down at all prices = demand curve shifts left
ii. If price goes up, and quantity demanded goes down = negative relationship between P and QD
iii. If D goes up, and QD goes up at all prices = demand curve shifts right
iv. If D goes down, and QD goes down at all prices = demand curve shifts left
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Determinants of Supply
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i. Prices cannot change supply, but what can:
1) Input (Factor) Prices
a) If price of input goes up, the supply will fall
2) Technology
a) Lowers the cost of production, therefore it causes supply to go up
3) Expectations
a) If input prices are expected to rise tomorrow, the supply will increase today
b) If prices of a good are expected to rise tomorrow, the supply will decrease today
4) # of Sellers
a) Market supply represents the sum of individual supply curves
1) Input (Factor) Prices
a) If price of input goes up, the supply will fall
2) Technology
a) Lowers the cost of production, therefore it causes supply to go up
3) Expectations
a) If input prices are expected to rise tomorrow, the supply will increase today
b) If prices of a good are expected to rise tomorrow, the supply will decrease today
4) # of Sellers
a) Market supply represents the sum of individual supply curves
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5 facts about the supply curve
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i. Shows the relationship between P and QS
ii. QS = amount of a good or service a seller is willing and able to sell
iii. If P goes up, and QS goes up = positive relationship between P and QS
iv. If Supply goes up, and QS goes up at all prices = shifts right
v. If S goes down, and QS goes down at all prices = shifts left
ii. QS = amount of a good or service a seller is willing and able to sell
iii. If P goes up, and QS goes up = positive relationship between P and QS
iv. If Supply goes up, and QS goes up at all prices = shifts right
v. If S goes down, and QS goes down at all prices = shifts left
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Comparative statics
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If one or more determinants change, how does it change the equilibrium?
1) What shifts? 2) What direction? 3) What is the new equilibrium?
1) What shifts? 2) What direction? 3) What is the new equilibrium?
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If the price of steel falls, how does it affect the price and quantity sold of new cars?
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1) Supply shifts
2) Price ↓, supply ↑, shifts →
3) New price is P2, new quantity is Q2
2) Price ↓, supply ↑, shifts →
3) New price is P2, new quantity is Q2
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If the price of used cars rises, how does this affect the price and quantity sold of new cars?
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1) Demand shifts (related goods, substitutes)
2) Shifts →
3) Price of used cars ↑, demand for new cars ↑
2) Shifts →
3) Price of used cars ↑, demand for new cars ↑
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Both the price of steel falling and the price of new cars rise at the same time?
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1) Both supply and demand shift
2) Supply ↑, Demand ↑
3) Qunatity sold ↑, Price (depends on the shift; ambiguous)
2) Supply ↑, Demand ↑
3) Qunatity sold ↑, Price (depends on the shift; ambiguous)
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An increase in ________ will cause a movement along a given demand curve, which is called a change in ________.
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supply, quantity demanded. In this case, an increase in supply will cause the equilibrium price to decrease, resulting in a movement along the demand curve. The demand curve itself remains unchanged, but the quantity demanded is affected.
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Movie tickets and DVDs are substitutes. If the price of DVDs increases, what happens in the market for movie tickets?
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When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. If movie tickets and DVDs are substitutes and the price of DVDs increases, this means the demand for movie tickets will also increase. This results in the demand curve shifting to the right.
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To graph market demanded...
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you must add the number of items that all consumers have consumed/bought