market A is a process of buyers and sellers exchanging goods and services. Supermarkets, the NY stock exchange, drdug stores, roadside stands, garage sales, internet stores, and restaurants are all markets. Markets are numerous but geographically limited for a good such as cement because transportation costs are so high relative to the selling price. Markets for gold or automobiles are global. A market facilitates trade. Buyers determine the demand side of a market and sellers determine supply. Sellers include the firms, as well as the resource owners that sell their inputs to them. A competative market is one in which are number of buyers and sellers offer similar products and have very little market power--each buyer's and seller's effect is negligible. The law of demand says that the quantity of a good or service demanded varies inverseley (negatively) with its price--that, when the price of a good or service falls, demand increases and vice versa. Needs are those things you must have at any price. Unlike goods, there are no substitutes for needs. The law of demand says even so-called needs are more or less urgent depending on the circumstances (opportunity costs). The reason the negative/inverse relationship described by the law of demand is the substitution effect. The substitution effect describes the fact that, at higher prices, buyers increasingly substitute other goods for the good that now has a higher relative price. The individual demand schedule shows the relationship between the price of the good and the quanitity demanded. An individual demand curve is a graphical representation that shows the inverse relationship between price and quantity demanded. An individual demand curve can be created by connecting the different prices and corresponding quantities demanded. The market demand curve is the horizontal summation of individual demand curves--the sum of the quantities that each person demands at each price. Over the past 50 years, few goods have fallen in money price; most prices have risen in money terms. Money price is the price one pays in dollars and cents . Money price is sometimes called absolute or nominal price, expressed in dollars of current purchasing power.
Some well-known examples of things that HAVE fallen in money price are DVD players, digital cameras, and cell phones. Economists are far more concerned with relative price than money price. Relative price is the price of one good relative to others. From 1960 to 73, gasoline prices went up but consumption did not fall because EVERYTHING was more expensive, so the relative price of gas wasn't really high. A change in a good's price leads to a change in quanitity demanded--a move along the demand curve. Other factors that influence the demand curve are called determinants of demand. A change in the determinants of demand shifts the entire demand curve and these determinant demands are called demand shifters, which lead to a change in demand. An increase in demand, shifts the curve to the right and a decrease in demand shifts the curve to the left. The prices of related goods, income, number of buyers, tastes, and expectations are all potential deman curve shifters. Two goods are substitutes if an increase in the price of one causes an increase in the demand for another or vice versa--a direct/positive relationship. If an increase in the price of a good causes a DECREASE in the demand of another (negative relationship), the two goods are called complements. Complements are goods that go together, often consumed and used simultaneously (ie. hot dogs and buns, DVDs and DVD players, or printers and ink cartridges). If demand for a good increases when incomes rise and decreases when incomes fall, it is a normal good. Most goods are normal goods. If demand for a good decreases when incomes rise and increases when incomes fall, it is called an inferior good (ie. second-hand stores). Cosumer behavior related to the price of a good itself = movement ALONG the curve; consumer behavior related to other factors changing = shifts of the demand curve. The law of supply says the higher the price of the good, the greater quantity is supplied or vice versa--a direct/positive relationship. Supply curves are upward sloping (positive) and demand curves are downward sloping (negative). The individual supply curve is a graphical representation that shows the positive relationship between the price and the quantity supplied. The market supply curve is the horizontal summation of the supply curves for individual firms. A change in the price of the good = movement along the curve, leading to quantity supplied. A
change in any other factor results in a shift, leading to a change in supply. Factors that can influence supplier behavior = input prices, prices of related products, expectations, number of suppliers, technology, regulation, taxes and subsidies, and weather. An increase in supply, shifts the curve to the right; a decrease shifts it to the left. Cotton and barley are substitutes in production because both goods can be produced using the same resources. Equilibrium price = the price at the intersection of the market demand curve and the market supply curve. Equlibrium quantity = the quantity the at intersection of the market demand curve and the market supply curve. At the equlibrium, the amount that buyers are willing/able to buy is exactly equal to the amount that sellers are willing/able to produce. If the market price is above or below the equilibrium, there will be shortages or surpluses, but the ations of many buyers and sellers will move the price back to the equilibrium. With a shortage, suppliers will cut price and increase quantity, increasing demand, and thus returning the market to equilibrium; with a surplus, suppliers would raise price, decreasing demand, and returning market to equilibrium. A shift in the demand or supply curve results in a change in both equilibrium price and equilibrium quantity (i.e. gas/strawverries in the summer). When supply and demand move at the same time, we can predict the change in one variable (price or quantity) but we cant predict the direction of the effect on the other variable with certainty. The change in the second variable is thus called indeterminate because it cant be determined without additional information. With an increase in supply and a decrease in demand, the equilibrium quantity is indeterminant and will vary depending on relative changes in supply and demand. If a decrease in demand is greater than an increase in supply, the equilibrium quantity will decrease. If the increase in SUPPLY is greater, the quantity will increase. When demand and supply change, one of the two equilibrium values (price or quantity) will change in an indeterminate manner (increase or decrease), depending on the magnitude of change. If demand increases and supply stays unchanged, equilibrium quantity increases and equilibrium price increases. If demand decreases and supply stays unchanged, equilibrium quantity decreases and equilibrium price decreases. If demand is unchanged but supply increases, equilibrium quantity increase and equilibrium price decreases. If demand stays unchanged but supply decreases, equilibrium quantity decreases and equilibrium price increases.
If demand increases and supply increases, equlibirum quantity increases and equilibrium price is indeterminate. If demand decreases and supply decreases, equilibrium quantity decreases and price is indeterminate. If demand increases and supply decreases, quantity is indeterminate and equilibrium price increases. **If demand decreases and supply increases, quantity is indeterminate and price decreases. Price ceilings and price floors are types of price controls. A price ceiling is a legally established maximum price. Price ceilings are often set for good deemed important to low income households (ie. housing). A price floor is a legally established minimum price. Price floors may be set on wages because wages (ie minimum wage). Price controls are not always implemetnted by the federal government, but can be implemented by local governments and even sometimes private companies. Rent control in Santa Monica was imposed by the local government. Rent controls distort market signals and lead to shortages. Rent control promotes housing discrimination. REVIEW An increase in supply DOES NOT lead to a movement up along the supply curve. If the demand for milk is downward sloping, then an increase in the price of milk will result in a decrease in the quantity of milk demanded. An increase in income would be the most likely cause for an increase in demand for jelly. An increase in the price of cheese will NOT cause a change in the demand for cheese (remember: only quantity demanded). An increase in the price of DVD players would NOT tend to decrease the demand for DVD players, but WOULD tend to decrease the demand ford DVDs. If, when the price of GOOD A decreases, demand for GOOD B increases, the two are complements. The difference between a change in quantity demanded and a change in demand is that a change in quantity demanded is caused by a change in a goods own price, while a change in demand is caused by a change in some other variable, such as income, taxes, or expectations. If CNN announces that bad weather in Central America has greatly reduced the number of cocoa bean plants and for this reason the price of chocolate is expected to rise soon, as a
result, the current market demand (not just quantity demanded) for chocolate will increase. An upward sloping supply curve shows that suppliers are willing to increase production of their goods if they receive higher prices for them. Higher wages for shoe factory workers, higher prices for leather, or a technological improvement reducing the waste of leather, would all affect the supply of shoes. But an increase in consumer income would not. The difference between a change in quantity supplied and a change in supply is that a change in quantity supplied is caused by a change in a goods own price, while a change in supply is caused by a change in some other variable, such as input prices, prices of related goods, expectations, or taxes. If a farmer were choosing between growing wheat on his own land and growing soybeans on his own land, an increase in the price of soybeans would decrease his supply of wheat. A leftward shift in supply could be caused by some firms leaving the industry.