ECON 2005 Lecture Notes - Lecture 5: Peanut Butter, Complementary Good, Demand Curve
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Document Summary
Must be a market for resources and those resources must be paid for. There must be a market for goods & services. People must be able to own private property** The economy must allow economic winners and losers. Firms decide how much land, labor, capital to consume and use. Buyers can not choose what price to pay. Demand relationship b/w price and quantity of a good. Quantity demanded amount of a product that a consumer would buy in a given period. Law of demand price and quantity are inversely related. As price goes up, quantity that people want to buy falls. Substitution effect as price of one good rises, switch to another good ex: price of gas goes up, you drive less and take the bus more. Income effect as price of good goes up, you buy less of everything ex: price of gas goes down, you buy more video games bc you feel richer.
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The model of competitive markets relies on these three core assumptions:
1. | There must be many buyers and sellers a few players can't dominate the market. |
2. | Firms must produce identical products buyers must regard all sellers' products as equivalent. |
3. | Firms and resources must be fully mobile, allowing free entry into and exit from the industry. |
The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry.
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Scenario |
Competitive? |
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