ECON200 – Lecture 2 9/4/12 10:58 AM September 4, 2012 o What should be produced in the economy? o How are we going to produce it? o Who should get to consume what is produced? o Some countries governments answer these questions o In the united states we rely on markets to figure out the answers to these questions o Markets have two sets of actors: • Buyers – call this the demand side of the market • Sellers – call this the supply side of the market o Markets and competition o A market is a group of buyers and sellers of a particular product o A competitive market is one with many buyers and sellers, each buyer and seller has a negligible effect on price • Buyer and sellers decisions to matter to anyone else o In a perfectly competitive market: • All goods are exactly the same • Buyers and sellers are so numerous that no one individual can affect the market price – each is a “price taker” o Everyone is a buyer in some marketDemand o Determinants of demand for gas • Price of gas • Prices of other goods • Income (more income you have, more gas you use) • Preferences (peoples preferences change, effect how much gas they consume) • Demographic factors • Expectations o A demand schedule is a table that shows the relationship between the price of a good and the quantity demanded o A demand curve is a graph of the relationship between the price of a good and the quantity demanded • Price is on the vertical axis • Quantity is on the horizontal axis o The law of demand is a claim that, other things being equal (have to be), the quantity demanded of a good falls when the price of the good rises • When expectations change the quantity demanded changes o A market demand schedule is a table that shows the relationship between the price of a good and the quantity demand by all buyers • Sum of person 1 and person 2’s demand = market demand (see table in slides) • Add both curves to get a market demand curve **review the demand curve What happens when Demand Shifters Change? Prices of related goods o Two goods are substitutes if an increase in the price of one causes an increase in demand for the other • Example: chicken and beef. An increase in the price of chicken increases demand for beef, shifting beef demand curve to the right (outward) o Others: coke and pepsi, car and metroo Two good are complements if an increase in the price of one causes a fall in demand for the other • Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curves shifts left (inward) • Others: peanut butter and jelly, bagels and cream cheese Income o A normal good is a good for which, other things being equal, an increase in income leads to an increase in demand o An inferior good is a good for which, other things being equal, an increase in income leads to a decrease in demand Tastes (preferences) o Anything that causes a shift in preferences toward a good will increase the demand for that good and will shift the entire demand curve to the right • Example: fashion, trends shift demands Demographic factors o Older people use different things than younger people Expectations o Expectations affect consumers buying decisions Determinants of supply o Price of gas o Price of inputs (supply shifters) o Expectations o Technology o A supply schedule is a table that shows the relationship between the price of a good and the quantity supplied o Law of supply – other things equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price of the good falls, the quantity supplied falls as well o An equilibrium is a situation in which supply and demand have been brought into balanceo Equilibrium price is the price that balances supply and demand (balances out the market so that the supply and demand are exactly equal to each other, unique price) o Equilibrium quantity is the quantity supplied and the quantity demanded when the price has adjusted to balance supply and
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