Microeconomics: Chapter 3

Arrangements that individuals have for exchanging with one another.
Represent the interaction of buyers and sellers for goods and services.
Markets set the prices we pay and receive.
-Automobile Market
-Health care Market
-Labor Market
-Stock Market.

A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant.

A negative or inverse relationship between the price of any good or service and the quantity demanded, holding other factors constant.

- When the price of a good goes up, people buy less of it, other things being equal.
- When the price of a good goes down, people buy more of it other things being equal.

The price of a commodity in terms of another commodity.
The money price of one commodity divided by the money price of another commodity.

Price we observe today in today's dollars (absolute, or nominal price)

A graphical representation of the demand schedule.
A negatively sloped line showing the inverse relationship between the price and the quantity demanded (other things being equal).

The demand of all consumers in the marketplace for a particular good or service.
Summation at each price of the quantity demanded by each individual.

Determinants of the relationship between price and quantity demanded that are unchanged along a curve.
Changes in these factors cause the cause a curve to shift:
- Consumers' Income, tastes, and preferences
- The prices of related goods
- Expectations regarding future prices and future incomes.
- Market Size (number of potential buyers)

Goods for which demand rises as income rises; most goods are normal goods.
Increase in income= increase in demand, which means rightward shift.
Decrease in income=decrease in demand, which means leftward shift.

Goods for which demand falls as income rises.
Decrease in income=increase in demand, which means rightward shift
Increase in income=decrease in demand, which means leftward shift.

1. Income: Consumer income goes up demand shifts right.
2. Tastes and preferences: If consumers prefer a good then the demand shifts right. Once the consumers begin to stop preferring that good then the demand shifts left.
3. The prices of related goods:
- Substitutes
- Complements
4. Expectations:
- Future prices: If prices are said to go up in the future, consumers will buy goods now
- Income: If income is said to go up in the future, consumers will want to buy more now.
- Product availability: If a product is said to be unavailable in the future, consumers will stock up on it now.
5. Market size: Increase in market size shifts curve to the right, decrease in market size shifts curve to the left.

Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change.

Ex: Butter and Margarine are substitutes.

Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other.
Ex: Phones and apps. If price of phones goes down then more people will purchase apps.

A shift of the entire demand curve to the right or left.
The only thing that can cause the entire curve to move is a change in a determinant other than the good's own price.

A change in a good's own price leads to the movement of a single point on the demand curve.

Schedule showing relationship between price and quantity supplied for a specified time period, other things being equal.
The amount of a product or service that firms are willing to sell at alternative prices.

The higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal.

At higher prices, a larger quantity will generally be supplied than at lower prices, all other things held constant.
At lower prices, a smaller quantity will generally be supplied than at higher prices, all other things held constant.

A graphical representation of the supply schedule.
A positively sloped line (curve) showing the direct relationship between price and quantity supplied, all else being equal.

Determinants of supply:
1. Cost of Inputs:
Increase in cost=decrease in supply, curve shifts left. Decrease in cost= increase in supply, curve shifts right.
2. Technology and productivity:
Decreases in productivity=decrease in supply, left shift. Improvements in technology or increases in productivity=increase in supply, shift right.
3. Taxes and subsidies:
Increases in taxes or decreases in subsidies=decrease in supply, left shift. Decreases in taxes or increases in subsidies=increase in supply, right shift.
4. Price expectations:
Expectations of higher future prices=decrease in supply, left shift. Expectation of lower future prices=increase in supply, shift right.
5. Number of firms in industry:
Decrease in number of firms=decrease in supply, left shift. Increase in the number of firms=increase in supply, right shift.

A negative tax. A payment to a producer from the government , usually in the form of a cash grant per unit.

A shift of the entire supply curve to the right or to the left.
The only thing that can cause the entire curve to move is a change in a determinant other than the good's own price.

A change in the good's own price leads to a change in the quantity supplied (a single point on a supply curve).
A movement along the same supply curve.

The price that clears the market.
The price at which quantity demanded=quantity supplied.
The price where the demand curve intersects the supply curve.

- The situation when quantity supplied equals quantity demanded at a particular price.
- There tends to be no movement of the price of the quantity away from this point unless demand or supply changes.
- Equilibrium is a stable point--any point that is not equilibrium is unstable and will not persist.

- The price toward which the market price will automatically tend to gravitate.
- There is no outcome better than this price for both consumers and producers.

The situation where Quantity Demanded is greater than Quantity Supplied.
- Quantity Demanded>Quantity Supplied
Exists at any price below the market clearing price.

The situation where Quantity Supplied is greater than Quantity Demanded.
- Quantity Supplied>Quantity Demanded.
Exists at any price above the market clearing price.