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OTTAWA HSS 1100 - Chapter 3

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Chapter 3Markets- Market economy- The key feature of an economy organized by the invisible hand is thatprivate individuals, rather than a centralized planning authority, make the decisionsWhat Is a Market?- Market- refers to the buyers and sellers who trade a particular good or service, not to a physical locationo Which buyers and sellers are included in the market depends on the context. What Is a Competitive Market?- Competitive market- is one in which fully informed, price-taking buyers and sellers easily trade a standardized good or serviceDemand- Demand describes how much of something people are willing and able to buy under certain circumstances- Quantity demanded- The amount of a particular good that buyers in a market will purchase at a given price during a specified periodo the lower the price, the higher the quantity demanded.- Law of demand- inverse relationship between price and quantity demandedo when all else is held equal, quantity demanded rises as price fallsThe Demand Curve- The quantity of cell phones demanded will be different at every price level.- Demand Schedule- shows the quantities of a particular good or service that consumers are willing to purchase (demand) at various prices- Demand curve- a graph that shows the quantities of a particular good or service that consumers will demand at various priceso The demand curve also represents consumers’ willingness to buy: it shows the highest amount consumers will pay for any given quantity.Determinants of Demand- The downward-sloping demand curve reflects the trade-offs that people face between o the benefit they expect to receive from a goodo the opportunity cost they face for buying it.Price of Related Goods- Another factor that affects the demand for a particular good is the prices of related goods.o Two types-Substitutes and Complements- Substitutes- when they serve similar-enough purposes that a consumer might purchase one in place of the other- Complement- Goods that are consumed together—so that purchasing one will make a consumer more likely to purchase the otherIncomes- Normal goods- increase in income causes an increase in demand and a decrease in income causes a decrease in demand- Inferior goods- as income increases, demand decreasesExpectations- If consumers expect prices to fall in the future, they may postpone a purchase until a later date, causing current demand to decreaseNumber of Buyers- an increase in the number of potential buyers in a market will increase demand; a decrease in the number of buyers will decrease itShifts in the Demand Curve- What happens to the demand curve when one of the five non-price determinants of demand changes? o The entire demand curve shifts, either to the right or to the left. o The shift is horizontal rather than vertical, because non-price determinants affectthe quantity demanded at each price.- movement along the demand curve = result of a change in price- We say that a change in one of the non-price determinants of demand causes an increase in demand or decrease in demand- We say that a change in price causes an increase in quantity demanded or decrease in the quantity demanded.Supply- Supply- how much of a good or service producers will offer for sale under given circumstances- Quantity supplied- amount of a particular good or service that producers will offer for sale at a given price during a specified period- Law of supply- quantity supplied increases as price increasesThe Supply Curve- Supply schedule-shows the quantities of a particular good or service that producers will supply at various prices- Supply curve- shows producers’ willingness to sell: it shows the minimum price producers must receive to supply any given quantityDeterminants of Supply- When a non-price determinant of supply changes, the entire supply curve will shift. o Such shifts reflect a change in the quantity of goods supplied at every price.Price of Related goods- The price of related goods determines supply because it affects the opportunity cost of production. Technology- Improved technology enables firms to produce more efficiently, using fewer resources to make a given product. o Doing so lowers production costs, increasing the quantity producers are willing to supply at each price.Price of Inputs- When the prices of inputs increase, production costs rise and the quantity of the product that producers are willing to supply at any given price decreases.Expectations- When the price of real estate is expected to rise in the future, more real estate developers will wait to embark on construction projects, decreasing the supply of houses in the near future. o When expectations change and real estate prices are projected to fall in the future, many of those projects will be rushed to completion, causing the supply of houses to rise.Number of Sellers- The market supply curve represents the quantities of a product that a particular numberof producers will supply at various prices in a given market. Shifts in the Supply Curve- Changes in price cause suppliers to move to a different point on the same supply curve, while changes in the non-price determinants of supply shift the supply curve itself. Market Equilibrium- Equilibrium-Supply=demand- Equilibrium price-price at which quantity supplied=quantity demanded- Equilibrium quantity-quantity that is supplied and demanded at the equilibrium priceo At higher prices, sellers want to sell more than buyers want to buy. o At lower prices, buyers want to buy more than sellers are willing to sell- The equilibrium price is sometimes called the market-clearing price.Reaching Equilibrium- How does a market reach equilibrium? o set prices by trial and error, or by past experience with customers- Surplus- When the quantity supplied is higher than the quantity demanded- Shortage- When the quantity demanded is higher than the quantity suppliedChanges in Equilibrium- To determine the effect on market equilibrium of a change in a non-price factor, ask yourself a few questions:1. Does the change affect demand? If so, does demand increase or decrease?2. Does the change affect supply? If so, does supply increase or decrease?3. How does the combination of changes in supply and demand affect the equilibrium price and quantity?- Remember, when we say that supply or demand increases or decreases we’re referring to a shift in the entire curve, not a movement along it, which is a change in quantity demanded.Shifts in DemandShifts in Both Demand and


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