ECON 1000 Lecture Notes - Lecture 4: Mixed Economy, Chino Cloth, Skimmed Milk

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30 Aug 2018
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Chapter 4: How a Market System Functions
1. In a mixed economy (or pure capitalism) interaction between households and firms
takes place in markets and is facilitated by money
a. 3 functions of money
i. Medium of exchange: asset accepted as payment when purchasing
goods/services (beads, shells, precious feathers, paper money, credit
cards, etc.)
ii. Store of value: asset that serves as a means of holding wealth (e.g. banks)
iii. Unit of account/measure: a basic measure of economic activity (e.g. all
prices are expressed in “dollar terms” in the US)
2. Demand and supply
a. Demand: relationship between price and quantity of a good that consumers are
willing and able to purchase, all other factor5s fixed
i. Law of Demand: all other factors fixed, a greater quantity of a good will
be demanded at lower prices and vice-versa (demand curves are
downward sloping)
1. Relationship is negative and inverse
b. Supply: relationship between price of a good and the quantity that firms are
willing and able to sell, all other factors fixed
i. Law of Supply: all other factors fixed. A greater quantity of a good will be
supplied at higher prices and vice versa
1. Relationship: positive, same
c. Change/Shift in demand
i. Increase/shift in demandconsumers are willing to purchase the good,
so that at every price, the new quantity demanded (QD) is greater than
the previous QD
1. Rightward shift
ii. Decrease/shift in demandconsumers less willing to purchase the good,
so that at every price, the new QD is greater than the previous QD
1. Leftward shift
iii. Causing factorsINSECT
1. Iincome of consumers
a. Increased income means consumers can buy more
b. Income broken down
i. Normal goodsgoods that consumers demand
more of when incomes rise (e.g. buying name
brand products)
ii. Inferior goodgoods that consumers demand less
of when their incomes rise (e.g. shopping less at
discounted stores)
2. Nnumber of consumers
a. Growing market usually increases demand; if there is a
larger population, there will be higher demand
3. Ssubstitute price
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