Econ Chapter 3

what are some other properties of demand curves?

1. They have a negative slope. 2. They intersect the quantity (X) axisa result of time limitations and diminishing marginal utility. 3. They intersect the price (Y) axis, a result of limited income and wealth The actual shape of an individual household demand curve—whether it is steep or flat, whether it is bowed in or bowed out—depends on the unique tastes and preferences of the household and other factors.

demand in product/output markets how does a household decide the quantity of a particular output to demand?

A household's decision about what quantity of a particular output, or product, to demand depends on a number of factors, including: 1. The price of the product in question. 2. The income available to the household. 3. The household's amount of accumulated wealth. 4. The prices of other products available to the household. 5. The household's tastes and preferences. 6. The household's expectations about future income, wealth, and prices.

shifts of supply versus movement along a supply curve continued...

As with demand, it is very important to distinguish between movements along supply curves (changes in quantity supplied) and shifts in supply curves (changes in supply): 1. Change in price of a good or service leads to Change in quantity supplied (movement along a supply curve). 2. Change in costs, input prices, technology, or prices of related goods and services leads to Change in supply (shift of a supply curve).

the prices of related products

Assuming that its objective is to maximize profits, a firm's decision about what quantity of output, or product, to supply depends on: 1. The price of the good or service. 2. The cost of producing the product, which in turn depends on: ■The price of required inputs (labor, capital, and land). ■The technologies that can be used to produce the product. 3. The prices of related products.

what about factors?

Change in price of a good or service leads to Change in quantity demanded (movement along a demand curve). Change in income, preferences, or prices of other goods or services leads to Change in demand (shift of a demand curve).

supply in product/output markets?

Firms build factories, hire workers, and buy raw materials because they believe they can sell the products they make for more than it costs to produce them. profit is the difference between revenues and costs

a review?

Here are some important points to remember about the mechanics of supply and demand in product markets: 1. A demand curve shows how much of a product a household would buy if it could buy all it wanted at the given price. A supply curve shows how much of a product a firm would supply if it could sell all it wanted at the given price. 2. Quantity demanded and quantity supplied are always per time period—that is, per day, per month, or per year. 3. The demand for a good is determined by price, household income and wealth, prices of other goods and services, tastes and preferences, and expectations. 4. The supply of a good is determined by price, costs of production, and prices of related products. Costs of production are determined by available technologies of production and input prices. 5. Be careful to distinguish between movements along supply and demand curves and shifts of these curves. When the price of a good changes, the quantity of that good demanded or supplied changes—that is, a movement occurs along the curve. When any other factor changes, the curve shifts, or changes position. 6. Market equilibrium exists only when quantity supplied equals quantity demanded at the current price.

what decides tastes and preferences?

Income, wealth, and prices of goods available are the three factors that determine the combinations of goods and services that a household is able to buy. Changes in preferences can and do manifest themselves in market behavior. Within the constraints of prices and incomes, preference shapes the demand curve, but it is difficult to generalize about tastes and preferences. First, they are volatile. Second, tastes are idiosyncratic.

so how are input and output markets connected?

Input and output markets are connected through the behavior of both firms and households. Firms determine the quantities and character of outputs produced and the types and quantities of inputs demanded. Households determine the types and quantities of products demanded and the quantities and types of inputs supplied.

what is the difference between changes in quantity demanded versus changes in demand?

The most important relationship in individual markets is that between market price and quantity demanded. Changes in the price of a product affect the quantity demanded per period. Changes in any other factor, such as income or preferences, affect demand. Thus, we say that an increase in the price of Coca-Cola is likely to cause a decrease in the quantity of Coca-Cola demanded. However, we say that an increase in income is likely to cause an increase in the demand for most goods

deriving market demand from individual demand curves?

Total demand in the marketplace is simply the sum of the demands of all the households shopping in a particular market. It is the sum of all the individual demand curves—that is, the sum of all the individual quantities demanded at each price.

deriving market supply from individual firm supply curves

Total supply in the marketplace is the sum of all the amounts supplied by all the firms selling in the market. It is the sum of all the individual quantities supplied at each price.

what are some expectations?

What you decide to buy today certainly depends on today's prices and your current income and wealth. There are many examples of the ways expectations affect demand. Increasingly, economic theory has come to recognize the importance of expectations. It is important to understand that demand depends on more than just current incomes, prices, and tastes.

when it shifts to the left/right?

When income increases, the demand for inferior goods shifts to the left and the demand for normal goods shifts to the right.

changes in equilibrium?

When supply and demand curves shift, the equilibrium price and quantity change

shift of the supply curve

When the price of a product changes, we move along the supply curve for that product; the quantity supplied rises or falls. When any other factor affecting supply changes, the supply curve shifts.

connection to the real world?

You can already begin to see how markets answer the basic economic questions of what is produced, how it is produced, and who gets what is produced. 1. Demand curves reflect what people are willing and able to pay for products; demand curves are influenced by incomes, wealth, preferences, prices of other goods, and expectations. 2. Firms in business to make a profit have a good reason to choose the best available technology—lower costs mean higher profits. 3. When a good is in short supply, price rises. As it does, those who are willing and able to continue buying do so; others stop buying.

firms and households what are the basic decision making units?

a firm is an organization that transforms resources (inputs) into products (outputs) firms are the primary producing units in a market economy an entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business

how about capital market?

capital market is the input/factor market in which household supply their savings, for interest or for claims for future profits, to firms that demand funds to buy capital goods

compliments,complimentary goods?

compliments,complimentary goods are goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa.

price and quantity demanded: the law of demand

demand schedule shows how much of a given product a household would be willing to buy at different prices for a given time period. a demand curve is a graph that illustrates how much of a given product a household would be willing to buy at different prices.

market equilibrium?

equilibrium is the condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change. excess demand or shortage is the condition that exists when quantity demanded exceeds quantity supplied at the current price. When quantity supplied exceeds quantity demanded at the current price, the price tends to fall. When price falls, quantity supplied is likely to decrease and quantity demanded is likely to increase until an equilibrium price is reached where quantity supplied and quantity demanded are equal

so what are some other determinants of household demands?

income and wealth

so what is income and wealth?

income is the sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure. wealth or net worth is the total value of what a household owns minus what it owes. It is a stock measure.

what are the different kinds of markets?

labor market and capital market and land market

what is labor market?

labor market is the input/factor market in which households supply work for wages to firms that demand labor

what is land market?

land market is the input/factor market in which households supply land or other real property in exchange for rent factors of production are the inputs into the production process. land, labor, and capital are the three key factors of production

what does it mean when demand curves slope downward?

law of demand law of demand is the negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as price falls, quantity demanded increases. It is reasonable to expect quantity demanded to fall when price rises, ceteris paribus, and to expect quantity demanded to rise when price falls, ceteris paribus. Demand curves have a negative slope.

what is the law of supply?

law of supply is the positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied. supply curve is a graph illustrating how much of a product a firm will sell at different prices.

from household demand to market demand?

market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

the change form individual supply to market supply?

market supply is the sum of all that is supplied each period by all producers of a single product.

shifts of supply versus movement along a supply curve

movement along a supply curve is the change in quantity supplied brought about by a change in price. shift of a supply curve is the change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.

what kind of goods are there?

normal goods and inferior goods

normal goods?

normal goods are goods for which demand goes up when income is higher and for which demand goes down when income is lower. inferior goods are goods for which demand tends to fall when income rises

input markets and output markets: the circular flow

product or output markets are the markets in which goods and services are exchanged. input or factor markets are the markets in which the resources used to produce goods and services are exchanged

what is quantity demanded?

quantity demanded is the amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

price and quantity supplied:the law of supply?

quantity supplied is the amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period. supply schedule is a table showing how much of a product firms will sell at alternative prices.

shift of demand versus movement along a demand curve?

shift of a demand curve is the change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions. movement along a demand curve is the change in quantity demanded brought about by a change in price.

substitutes/perfect substitutes?

substitutes are goods that can serve as replacements for one another; when the price of one increases, demand for the other increases perfect substitutes are identical products

what demands the prices of other goods and services?

substitutes, perfect substitutes, and complements/ complementary goods

what are the other determinants of supply?

the cost of production For a firm to make a profit, its revenue must exceed its costs. Cost of production depends on a number of factors, including the available technologies and the prices and quantities of the inputs needed by the firm (labor, land, capital, energy, and so on).