ECON 104 Lecture Notes - Lecture 3: Economic Equilibrium, Progressive Alliance Of Socialists And Democrats, Exogeny
Document Summary
The s&d model is the most powerful tool in economics. Assume we are analyzing a perfectly competitive market. A perfectly competitive market is a market that has many buyers and many sellers, all firms are selling identical products, and no barriers to new firms entering the market. The law of demand states that holding all else constant, when the price of a product falls, the quantity demanded of the product will increase, and vice versa. The marginal value placed on a product by the market. The willingness of the market to pay for a certain quantity of product. The substitution effect is when consumers buy less of a product when the price goes up because it is relatively more expensive than other products. The income effect is when consumers buy less of a product when the price goes up because it now takes up a larger share of their income.
