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Chapter 4

Chapter 4 Economics.docx

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Department
Economics
Course Code
Economics 10a
Professor
Gregory Mankiw

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Chapter 4 Economics: The Market Forces of Supply and Demand • Market: a group of buyers and sellers of a particular good or service o Buyers determine demand and sellers determine the supply of the product in the market o Price and quantity in a market are determined by all buyers and sellers • Competitive market: a market in which there are many buyers and many sellers so that teach has a negligible impact on the market price o Each seller of a product has limited control of the market value of that item because many other sellers are offering that item as well • Perfectly competitive market: the goods offered for sale are all exactly the same; the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price o Price takers: buyers and sellers in perfectly competitive markets who accept the price that the market determines • Monopoly: markets that have only one seller of a good who sets the price of that good • 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; downward-sloping line • Market demand: the sum of all the individual demands for a particular good or service • To find the total quantity demanded at any price, we add the individual quantities, which are found on the horizontal axis of the individual demand curves • The market demand curve shows how a good varies as the price of the good varies, while all the other factors that affect how much consumers want to buy are held constant • Because the market demand curve holds other things constant, it does not need to be stable over time • Any change that increases the quantity demanded at every price shifts the demand curve to the right and is called an increase in demand • Any change that reduces the quantity demanded at every price shifts the demand curve to the left and is called a decrease in demand • Variables that shift the demand curve: the demand curve shows what happens to the quantity demanded when its price varies, holding constant all the other variables that influence buyers; if one of these variables that is not on an axis changes, the demand curve shifts o Income:Alower income means that you would have less to spend in total so you would have to spend less on some goods  Normal good: a good for which other things equal, an increase in income leads to an increase in demand; when income falls, demand also falls  Inferior good: a good for which, other things equal, an increase in income leads to decrease in demand; when income falls, demand for a good rises • Ex. Bus ride, ramen, etc. o Prices of related goods:  Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other; when a fall in the price of one good reduces the demand for another good • Ex. Hot dogs and hamburgers; sweaters and sweatshirts  Complements: two goods fro which an increase in the price of one leads to a decrease in the demand for the other; pairs of goods used together; when a fall in the price of one good raises the demand for another good • Ex. Hot fudge and ice cream; ketchup and hotdogs o Tastes: If you like a good, you will buy more of it; economists don’t predict taste, but analyze changes in taste o Expectations: the expectations of the future affect the demand for a good/service today  If you expect to make more money next month, then you will save less now and spend more of the current income  If you expect the price of a good to fall, then you will be less willing to buy the good at the current price o Number of buyers: market demand depends on the number of these buyers • Quantity supplied: the amount of a good that sellers are willing and able to sell o When the price of a good is high, selling the good is profitable and so the quantity o At a low price, the business is less profitable so sellers produce less product • Law of supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the
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