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Chapter 4


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Bridget O' Shaughnessy

MACRO ECONOMICS CHAPTER 4 SUMMARY MARKETS & COMPETITION What is a market? -Supply and Demand refers to how people interact with each other in markets -Market: a group of buyers and sellers of a particular good or service (buyers=demand / sellers=supply) -Organized markets: where buyers and sellers meet at a specific time and place and are run by an auctioneer which helps in setting price and arranging sales -Unorganized markets occur more times than not. Ex buyers of ice cream in a town don't meet together, and the ice cream sellers set their own prices What is competition? -Competitive market: a market in which there are many buyers and many sellers so that each has a negligible impact on the market price (seller must price their products similarly to the major competitors; no single buyer can influence the price that the seller charges) -Perfect competition: 1) when all goods for sale are the same 2) when there are so many buyers and sellers that no single buyer/seller can influence over the market price -Price takers: the buyers/sellers, as they must accept the price the market determines -Monopoly: one seller, they set the prices DEMAND The Demand Curve: The Relationship Between Price and Quantity Demanded -Quantity Demanded: the amount of a good that buyers are willing and able to purchase -Law of Demand: the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises -Demand Schedule: a table that shows the relationship between the price of a good and the quantity demanded -Demand Curve: a graph of the relationship between the price of a good and the quantity demanded Market Demand vs. Individual Demand -Market Demand: the sum of all the individual demands for a particular good or service Shifts in the Demand Curve -If something happens to change the quantity demanded at any given price, the demand curve shifts (shift right=increase in demand, shift left=decrease in demand) -ex. if nutritionists discover that people who eat ice cream regularly eat ice cream live longer, demand for ice cream will increase Variables that Shift Demand Curve  INCOME o Normal Good: income decreases = demand decreases o Inferior Good: income decreases = demand increases ex. riding the bus instead of a car o Toronto Stock Exchange (TSX) index fell 50% from its peak in January 2008 in March of 2009 o Housing prices fell in Canada 7% in major cities in the last half of 2008 o Wealth Effect: the impact of changes in wealth on both the amount and composition of goods that individuals consume  PRICES OF RELATED GOODS o Substitutes: when a fall in the price of one good reduces the demand for another good ex. fall in price of frozen yogurt increases its demand and lowers demand for ice cream o Complements: when a fall in the price of one good raises the demand for another good ex. gasoline and cars, peanut butter and jelly, etc  TASTES o Based on historical and psychological forces that is beyond economics but economists still examine what happens when taste changes  EXPECTATIONS o expectations of the future influence buying behaviour ex. you expect the price for a car to be lower next month  NUMBER OF BUYERS o to increase buyers certain factors must be examined such as buyers': income, tastes, expectations and prices of related goods **the demand curve shows what happens to quantity demanded when price varies; it shifts when one of these other variables change** SUPPLY The Supply Curve: The Relations
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