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Lecture 3

ECON 1B03 Lecture Notes - Lecture 3: Market Power, Ceteris Paribus, Peanut Butter

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Hannah Holmes

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Micro Econ- Lecture 3
Absolute Advantage
- Describes productivity – producing the same quantity but using fewer
resources OR using the same amount of resources to produce more quantity
makes you more productive
-If you are more productive, you have the absolute advantage in the
production of that good
- Note that comparative advantage is based on opportunity cost and absolute
is based on productivity
- The decision to trade is based on comparative, not absolute advantage – ex
although the US has absolute advantage over Canada, our comparative
advantage stills allow bene+ts from trade
-A group of buyers and sellers of a good/service
- Supply and demand refers to the behaviour or people as they interact in a
- Market demand- the sum of all individual demands for particular good/service
- Market supply- the sum of all individual supplies of particular good/service
Perfectly Competitive Market
- Homogeneous goods (identical)
- Mobility - Firms freely enter and enter the market
- Individuals cannot a2ect market price - each is price taker
- Quantity demanded – the amount of a good that consumers are willing and
able to buy at given price. P
- Price and quantity are negatively related ie when price increases, quantity
demanded decreases
- Law of Demand - Ceteris paribus (other things equal) – when price of good
rises, quantity demanded of good falls
Other determinants
- Normal good- when income increases, demand increases ex most goods
- Inferior good- when income increases demand decreases ex public transit,
thrift clothes
Price of Related Goods
- Substitutes – if price of one good increases the demand for the other will
increase and vice versa ex pepsi and coke
- Compliments – if price of one good increases, demand for the other
decreases and vice versa
ex peanut butter and jam, cars and gas
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