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Chapter 3

Microeconomics Chapter 3.docx

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Jennifer Berg

Microeconomics 200 - Thursday, July 18th notes * Any economy is constrained in terms of the amount of limited resources available. Market -Agroup of buyers and sellers with the potential to trade. (willing and able) ->Assumed that these individuals are voluntarily entering transactions Common way to own physical capital - through investments (purchasing stocks & bonds). -> Stock Markets = Capital Markets Circular Flow Model - Shows how resources are facilitated throughout markets Inner Loop (inputs) * Individual households are owning all the resources (with exception of some by government) -> Resources end up in resource markets -> Resources end up on firms Outer Loop (outputs) * Revenues Market Types (Product Markets, Resource Markets) * Perfect Competition - “Competitive Market” All buyers and sellers have no influence over price. (Every buyer and seller has to take the price given, e.x walking into theApple store). -> Essentially, no bargaining/negotiating. * Imperfect Competition - buyers and sellers can influence price. -> Essentially, bargaining/negotiation is present. Demand (Buyers-Consumers) * Quantity Demanded - The amount buyers will buy over a given period of time, given their constraints. (You will buy different amounts of things that are priced different - basic premise) * Law of Demand - As prices increase, quantity demanded decreases. -> “all else equal” (ceteris paribus) assumed. -> Under this condition, only price is changed, everything else is held constant (unchanged). -> It’s done this way to determine causality. Demand Curves - Shows the relationship between price and quantity demanded over a given period of time, ceteris paribus. Quantity Demanded gives you the individual points on the demand curve. (changes when prices change). * Note: when price changes, you move along the demand curve (up or down). -> If price decreases, then you move down the demand curve (increases Q-demanded) -> If price increases, then you move up the demand curve (decrease Q-demanded) Demand is the curve (the entire market for a product … changes when other things change). Determinants of Demand * Income (or wealth) Normal Goods (an increase in income shifts demand curve to the right, or upwards) Note: shifting the demand curve to the right increases demand (clothes, jewlery, electronics, organic food, maple syrup) Inferior Goods (an increase in income shifts demand curve to the left) Note: shifting the demand curve to the right (down) decreases demand -> They’re not bad! They still make you better off. (junk food, generic apparel) When something other than price changes, we call it a shift in demand (as presented above). Inflation - When prices increase steadily over a period of time. * not a big deal if it’s expected and small. Deflation - Prices keep dropping, so people hold off and stop buying (to eventually get the best deal) - which leads to inventories not clearing out, firms then lay off workers - which is ultimately bad for the economy. * This is a big deal, a bigger deal than inflation as well. Related Goods Substitute Goods - Agood that can be used in place of another good. Compliment Good - Agood that is used together with some other good. Let’s assume we have one goo
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