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Chapter #2 & #3 notes.doc

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ECN 104
Halis Yildiz

Chapter #2 & #3 Notes Quick Review CHAPTER #2 • The market system rests on the private ownership of property and on freedom of enterprise and freedom of choice • The market system permits consumers, resource suppliers, and businesses to pursue and further their self-interest • Competition diffuses economic power and limits the actions of any single seller or buyer • The coordinating mechanism of capitalism is a system of markets and prices • The market systems of modern industrial economies are characterized by extensive use of technologically advanced capital goods. Such goods help these economies achieve greater efficiency in production • Specialization is extensive in market systems; it enhances efficiency and output by enabling individuals, regions, and nations to produce the goods and services for which their resources are best suited • The use of money ion market system facilitates the exchange of goods and services that specialization requires • The output mix of the market system is determined by profits, which in turn depend heavily on consumer preferences. Economic profits cause industries to expand; losses cause industries to contract • Competition forces industries to use the least costly production methods • In a market economy, consumers income and product prices determine how output will be distributed • Competitive markets reallocate resources in response to changes in consumers tastes technological advances, and changes in availability of resources • Competitive markets create incentives for technological advance and capital Chapter #3 THE DEMAND CURVE - The inverse relationship between price and quantity demanded for any product can be represented on a simple graph, we measure quantity demanded on the horizontal axis and price on the vertical axis. The downwards slope represents the law of demand - The demand curve is also known as marginal benefit curve - The curve tells us the extra benefit the consumer derives from one more unit of a good or service DETERMINANTS OF DEMAND CURVE SHIFTS Determinant Examples Change in buyer Physical fitness rises in popularity, increasing the demand for jogging tastes shoes and bicycles; cell phone popularity rises, reducing the demand for traditional phones Change in A decline in the birthrate reduces the demand for children’s toys number of buyers Change in A rise in incomes increases the demand for such normal goods as income restaurant meals, sports tickets, and MP3 players while reducing the demand for such inferior goods as cabbage, turnips, and inexpensive wine Change in the A reduction in airfares reduces the demand for bus transportation prices of related (substitute goods); a decline in the price of DVD players increases the goods demand for DVD movies (complementary goods) Change in Political instability in South America creates an expectation of higher consumer future prices of coffee beans, thereby increasing today’s demand for expectations coffee beans Summary an increase in demand—the decision by consumers to buy larger quantities of product at each possible price---(reverse these generalizations to explain a decrease in demand) - A favourable change in consumer tastes - An increase in the number of buyers
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