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OU ECON 1123 - Competitive markets, supply graphing, changes in supply and demand

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ECON 1123 1st EditionLecture 4Outline From Previous Lecture I. The Circular Flow of IncomeA. Resource MarketsB. Output MarketsII. Price Determination in Competitive Markets A. DemandB. SupplyIII. Demand/ Determinants of Demand (Review but with some new things added)IV. Demand CurvesV. Determinants of SupplyA. Price of the output or resourceB. Prices of the resources used to produce the outputC. TechnologyD. Number of SellersE. Sellers expectation about future pricesOutline Lecture 4I. Supply: A Graphical ViewII. Demand, Supply and Price Determination in Competitive MarketsIII. Changes in Demand and SupplyA. Increases in buyer’s incomesB. Stronger Buyer’s tastesC. Buyer’s expect higher future prices and/or higher future incomesD. More buyers in the marketE. Higher prices for substitutesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.F. Lower Price for ComplimentsIV. Relationship Between individual Demand and Market DemandLecture 4 NotesV. Supply: A Graphical ViewWhen drawing a supply diagram, the vertical axis will have the price per unit, labeledas ($/Q1). The horizontal axis will have your quantity over time, labeled as (Q/T).Note: When drawing diagrams in this class you must always label the axisThe supply schedule will most always increase to the right, and the demand scheduledecreases to the right. This means that the graph of these together should make an “X” shape. The point where the two schedules intersect is called the equilibrium point. This will give us both the equilibrium price and the equilibrium quantity. This point is usually where we stay, unless there is some type of law that permits us. If the price is decreased lower than the equilibrium point, there are more people out there willing to buy at the new low price, but fewer people willing to sell. This excess demand is what causes shortages.Note: Sellers want to sell things at the highest possible price, buyers want to buy things at the lowest possible price. These may seem like conflicts of interest, but these conflicts are reconciled when we reach the equilibrium price. VI. Demand, Supply and Price Determination in Competitive MarketsIn Competitive Markets, non-equilibrium prices and quantities are temporary and self-correcting if there are no artificial controls on price.Note: In 1776, There was a book written by Adam Smith called Wealth of Nations. Heproposed an idea of “invisible hands” that in competitive markets are always there tolead us to the equilibrium point. This thought still applies to economics today.The only time the invisible hands do not work is when there is some type of control on price. Such as, a Legal Price Ceiling where the maximum price is set by law and one cannot charge over it. This leads to a gap in how much buyers want to buy and how much sellers want to sell. This typically leads to shortages and problems with the quality of the product.VII. Changes in Demand and SupplyThese changes are shown by shifts in the demand and/or supply schedule.Increases in demand can be due to any one or any combination of these factors:G. Increases in buyer’s incomesH. Stronger Buyer’s tastesI. Buyer’s expect higher future prices and/or higher future incomesJ. More buyers in the marketK. Higher prices for substitutesL. Lower Price for ComplimentsNote: Demand shifts to the right if there is an increase in demand. This creates more quantity of the product at the same price.VIII. Relationship between Individual Demand and Market DemandNote: An individual cannot do anything about the set price of something. They are “pricetakers”An individual demand schedule will look just like a regular demand schedule, only the horizontal axis is labeled with a lowercase (q/t) and the demand will be labeled with a lowercase d. These are to show that it is an individual rather than a firm. In the case that there are three individuals in a market, the quantity that all three are willing to buy at the set price of the good is the full quantity demanded for the firm. This would be a capital


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