1. What should we produce?2. How should we produce it?3. Who should consume what we produce?• Markets give the answer most of these questions^• Markets contain 2 actors:• Buyers- the demand side of the market• Sellers- the supply side of the market• Market- a group of buyers and sellers of a particular good or service• A competitive market- a market in which there are many buyers and many sellers so that each has a negligible impact on the market price• if you try and charge an unreasonable amount, you will make no sells (in a competitive market)DEMAND• Determinants of demand• price of good• price of other goods• ex: when buying gas, the price of taking the metro• Income• Preferences(tastes) • fads, popularity • demographic factors• expectations• ex: not buying a house now because housing prices are expected to drop• Number of buyers (market demand) • Individual demand schedule- is a table that shows the relationship between the price of a good and the quantity demanded.• Individual demand curve- is a graph of the relationship between the price of a good and the quantity demanded. • price is on Y- axis• quantity on X- axis• yet quantity is a function of price (opposite graphing rules of math) • Market demand schedule- is a table that shows the relationship between the price of a good and the quantity demanded by all buyers. • the sum of the buyers quantity demanded • Market demand curve- is a graph of the market demand schedule• horizontal summation of the individual demand curve• Law of demand-is a claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises• price and quantity move in opposite directions--> inverse relationship between the price of a product and its demand• demand curves have negative slopes• Changes in demand- change in the numbers of the demand schedule• caused by a change in one of the determinants of demand (NOT price) [Curve shifters]• results in shifts of the demand curve • shift to the right--> increase in demand (every • price consumers wish to buy more) • shift to the left-->decrease in demand (every price consumers wish to buy less)• Changes in quantity demanded- when the price of the good changes but everything else remains the same. • results in movements along the demand curve• only caused by price SUPPLY• Comes from the behavior of sellers• determinants • Price of the product• Price of other goods• Price of inputs (goods used in production)• Technology (machinery used in production)• Individual supply schedule- a table that shows the relationship between the price of a good and the quantity supplied• Individual supply curve- a graph of the relationship between the prices of a good and the quantity supplied• Market supply- the sum of the quantities supplied by all sellers at each price. • Market supply schedule- is a table that shows the relationship between the price of a good and the quantity supplied by all sellers.• the sum of the sellers quantity supplied• Market supply curve- The graph of the market demand schedule• horizontal summation of the individual supply curve• Law of supply- the claim that the quantity supplied of a good rises when the price of the good rises, other things equal• positive relationship• positive slopes• Changes in supply-• Changes in quantity supplied- • Quantity supplied-is the amount that sellers are willing and able to sell Supply and demand together• equilibrium-The point has reached the level when quantity supplied equals the quantity demanded. • there is no surplus• there is no shortage• supply=demand• who gets access to what is produced?• those who are willing (and able) to pay for the good can purchase it at the equilibrium price• equilibrium quantity- the quantity supplied and quantity demanded at the equilibrium price• surplus- when quantity supplied is greater than quantity demanded• too much supplied• facing a surplus, sellers try to increase sales by cutting the price• which cause quantity demanded to rise• and quantity supplied to fall• until the market reaches equilibrium • Shortage- when quantity demanded is greater than quantity supplied• an excess demand• facing a shortage sellers raise the price• causing quantity demanded to fall• and quantity supplied to rise• until the market reaches
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