Chapter 3 : Demand and SupplyWhat is a COMPETITIVE MARKET?● Four characteristics of perfectly competitive markets○ Standardized good■ interchangeable○ Perfect Information■ Full information about price and features○ No transaction costs■ Free participation in exchange○ Participants are price takers■ No power to change price■ Cannot change the Market● Each participant is so small compared to the wholemarket that they cannot affect the price● Demand○ As a group, consumers determine the demand for a product■ The quantity demanded is the amount of a particular good orservice that buyers are willing and able to purchase at a givenprice■ The law of demand states that the lower the price, the higherthe quantity demanded, all other things equal.● Measuring and Conceptualizing Demand○ Quantity demanded■ At a particular price, how many units do consumers want tobuy?■ If a container of blueberries costs $3, how many will bepurchased?○ Marginal Benefit■ How much benefit will a consumer receive from an additionalunit of a good?■ If you already have two containers of blueberries, what is themarginal benefit of a third container?○ Willingness-to-pass■ How much is a consumer willing to pay for an additional unit ofthe good?■ If you already have two containers of blueberries, how muchare you willing to pay for a third container?● Change in demand vs. Change in quantity demanded○ Non-price determinants of demand■ Number of consumers■ Consumer preferences (including demographics)■ Price of related goods■ Incomes■ Expectations○ What happens when one of the non-price determinants changes?■ If positive influence, demand increases.■ If negative influence, demand decreases○ What about prices of other related goods?■ Substitute goods: you may use one in place of the other■ Complements: you usually use them together● Determinants of Demand: Price of Related Goods○ Goods are Substitutes if swerve similar-enough purposes that aconsumer might purchase one in place of the other○ Two goods are substitutes if an increase in the price of one of thegoods leads to an increase in the demand for the other good.○ (And a decrease in the price of one of the goods leads to an decrease inthe demand for the other good.)● Complements○ Complements are goods that are consumed together, so that the priceof one may affect the demand for the other■ Example: Chips and salsa, peanut butter and jelly○ If two goods are complements then an increase (decrease) in the priceof one of the goods leads to a decrease(increase) in the demand for theother good.● Determinants of Demand: Income○ Normal goods are goods for which demand increases as incomeincreases. (And demand decreases when income decreases.)○ Inferior goods are goods for which demand decreases as incomeincreases● RECAP: Demand Summary○ Law of Demand: Quantity demanded rises (falls) as price falls (rises).○ Non Price Determinants of Demand■ Consumer preferences (including demographics)■ Prices of related goods■ Incomes■ Expectations● Supply○ As a group, producers determine the supply of a product○ The quantity supplied is the amount of a particular good thatproducers are willing and able to produce at a given price.○ The law of supply states, all else equal, quantity supplied rises as pricerises (and vice versa: quantity supplied falls as price falls).■ Behind the law of supply is the assumption that producers aremotivated by profit● Measuring Supply○ Quantity Supplied■ At a particular price, how many units do producers want to sell?○ Willingness-to-sell or Willingness-to-accept:■ How much is a seller willing to accept in order to sell anadditional unit of a good?○ Marginal Cost■ What is the opportunity cost of producing an additional unit ofa good?● Marginal Cost: Increasing○ This may not be intuitive○ MArginal cost is (eventually) increasing as quantity increases.● Non price Determinants of Supply○ Prices of related goods○ Technology○ Prices of inputs○ Expectations○ Number of sellers● RECAP: SUPPLY○ Law of Supply: quantity supplied rises as price rises○ Non Price Determinants of Supply■ Prices of related goods■ Technology■ Prices of inputs■ Expectations■ Number of Sellers○ CAREFUL! : Change in supply versus change in quantity supplied● What changes an equilibrium?○ Shifts of supply and demand○ Government
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