MarketsAn institution that enable buyers and sellers to interact and transact with one anotherSellers determine what goods to sell by comparing their pricesEconomists call our market economy the price systemPrices contain a wealth of information for buyers and sellersDemandWhen you purchase a product you are voting with your moneyRefers to the goods and services people are willing and able to buy during a certain period of time at various prices, holding all other relevant factors constantAs the price increases the quantity demanded decreases because fewer and fewer people will be willing to spend their money on such thingsNegative relationship between price and quantity demandedLaw of demand states that the lower a product’s price, the more of that product consumers will purchase during a given time periodPrices of goods requires not only monetary costs but their opportunity cost as wellDemand CurveIllustrates the law of demandMarket Demand CurveUsed to predict changes in product price and quantitySum of individual demandAdding up how many units of a product all consumers will purchase at each price is called horizontal summationDeterminants of demandAll the other factors held constantWhat their income isWhat people likeHow much related products cost5 key determinants are tastes and preferences, income, prices of related goods, the number of buyers, and expectations regarding future prices, income, and product availabilityWhen these change the entire demand curve changesTastes and PreferencesWhen things become a far or just more popular the demand curve shifts outwardIncomeAs income rises the demand for most goods will increaseThe products for which demand is linked to income are called normal goodsThere are products that decline when income rises called inferior goods like public transportationPrices of Related GoodsMovies, concerts, plays, and sporting events are often substitute goods because if the price drops on one and maybe rises on another you will likely go to the one that has a cheaper priceMovies and popcorn are complementary goods because if there is an increase in consumption of one the other is probably going to have an increase as wellCars and gasoline, hot dogs and buns are complementary goodsThe Number of BuyersThe more consumers there are the higher the demand will beAs more people want smart phones less people want razers so the demand declinesExpectations about Future Prices, Incomes, and Product AvailabilityConsumer expectationsIf they expect a shortage consumers will go out and buy the productIf they expect a rise in income they will start spending moreChanges in Demand vs. Changes in Quantity DemandedChanges in demand occur whenever one or more of the determinants of demand change and the demand curves shiftA change in quantity demanded can be causes by only a change in product priceThe Relationship Between Quantity Supplied and PriceSupply is the maximum amount of a product that producers are willing and able to offer for sale at various pricesProducing more units makes it more expensive for producers to produce each individual unit and the increasing costs give rise to the positive relationship between product price and quantity supplied to the marketLaw of SupplyHigher prices will lead producers to offer more of their products for sale during a given periodIf prices fall producers will offer fewer products to the marketThe higher the price the greater the potential for higher profits and greater incentive to produce and sell more productsSupply CurveShows the maximum amounts of product a producer will furnish at various prices during a given periodSlopes up and to the rightHigher the price the greater the quantity suppliesMarket Supply CurvesHorizontally summing up the supplies of individual producersDeterminants of SupplyProduction technologyCosts of resourcesPrices of other commoditiesExpectationsThe number of sellers in the marketTaxes and subsidiesProduction TechnologyHow much output can be produced from given quantities of resourcesCosts of ResourcesIf raw materials of labor become more expensive, production costs will rise and supply will be reducedIf the cost of something like petroleum goes up then the costs of products using petroleum goes upPrices of Other CommoditiesA change in price of one item may influence the quantity of other items brought to the marketIf a farmer is growing celery and rice and the price of rice goes up then they will want to sell more rice but they have limited land so you will have to give up selling some celery so the supply of celery shiftsExpectationsWhen producers expect the price of their goods to rise in the near future they will increase the production of that goodNumber of SellersThe market supply will increase based on number of sellersTaxes and SubsidiesAn increase in taxes will shift supply to the left and reduce itIf the government subsidizes a product, supply will shift to the right and riseChanges in Quantity Supplied versus Changes in SupplyChange in supply results from a change in one or more of the determinants of supply, it causes the entire supply curve to shiftMarket EquilibriumA market will determine the price at which the quantity of a product demanded is equal to the quantity supplied this means equilibriumThe amount of the product that consumers are willing and able to purchase is matched exactly by the amount that producers are willing and able to sellEquilibrium price is also called the market clearing priceMarkets work to establish thisExcess is surplusIf a price is initially set too low it’s a shortagePrice CeilingsLegally mandating the maximum price that can be charged for a product or serviceEffective is when it is below equilibriumRent control is a good examplePrice FloorsA government mandated minimum price that can be charged for a product or serviceHas to be above equilibrium to be effectiveMinimum wageMarkets and EfficiencyMechanisms for allocating resourcesRequirements for workable marketsInformation is widely availableKeeps transaction costs lowNegotiations will be kept smootherWithout this it is hard to value the productProperty rights are protectedProvide a powerful incentive for optimal use of resourcesYou can actually own things and they will belong to youPrivate contracts are enforced such that people can be trusted to live up to their promisesSmaller businesses rely on honestyLarge and complex markets need a well running legal system that enforces contracts and