Econ 101 Chapter 2 Content

market players

-households: consume outputs, supply inputs - firms: organizations that transform resources (inputs) into products (outputs). They consume inputs and supply outputs

market demand curve

a graph plotting the total quantity of an item demanded, by the entire market at each price. It's the sum of the quantity demanded by each person in the consumer pool

expectations shifting the demand curve

if you believe prices will rise next week, you'll buy today, increasing today's demand curve

Individual Demand Curve

plots the quantity that someone plans to buy at each potential price -holds all else constant

Change in Price

shift along demand curve

market conditions change

shifts in demand curve

Price theory

the basic coordinating mechanism is price. The unfettered movement of price is what defines a free market

Movement along the demand curve

the movement from one point on a fixed demand curve to another point on the same curve that's caused by price change

Understanding demand

understanding marginal benefits

Why the US is a mixed market

- market systems don't always produce what people want at the lowest cost/there are inefficiencies - rewards (income) may be unfairly distributed, and some groups may be left out -periods of unemployment and inflation recur with some regularity -"market failures" cause more inefficiency -these are where and why the government steps in

substitution and income effects

- as the price of a good rises, people buy less of it (and vice versa) - 2 reasons for this: - 1: substitution effect -2: income effect

Free Market (in USA)

- based on the concept of private ownership - people can do what they want with what they buy and prevent others from using them - built on consumer sovereignty and free enterprise

Rational rule for buyers

- buy more of an item if the marginal benefit of one more is greater that (or = to) the price -follow this to maximize econ surplus -keep buying until price = marginal benefit

Income shifting the demand curve

- changes in income (or wealth) -normal goods shift curve right, inferior shift left

Preferences shifting the demand curve

- companies try to influence preference through advertising - social pressure/fashion trends

prices of related goods shifting the demand curve

- complementary goods: hot dog bun price rises, entire hot dog demand curve moves left - substitute goods: pepsi price goes up, entire coke demand curve shits right

congestion and network effects shifting the demand curve

- congestion shifts curve left, network shifts curve right

Input and output markets

- connected through behavior of firms and outputs -firms determine the types of quantities of products supplied (or produced) and the types of quantities of inputs demanded - households determine the types and quantities of products demanded and the types of quantities of inputs supplied

Market demand curve

- looks the same as individual demand curve, the numbers are just typically much bigger - this curve is downward sloping -have to consider all the potential customers when estimating demand because changes in price can change your customer base

type and number of buyers shifting demand curve

- market demand increases over time as population grows - more kids = more legos -more elderly = more old people stuff

change in quantity demanded

- the change in quantity associated with movement along a fixed demand curve - changes in price of a product affect the quantity demanded per period. This moves us along the D curve

How the US is a mixed economy

- traditional: tipping - command: welfare, roads, USDA, military - market: iPhones, candy bars, most stuff

Rules of thumb for shifts vs movements along demand curves

- when the price changes, you're thinking about a movement along the demand curve (change in quantity demanded) - when other factors change, you're thinking about shifts in the demand curve (change in demand)

law of demand

- when the price is lower, quantity demanded is higher, implying the demand curve is downward sloping -if something is cheaper, you buy more of it

what is an individual demand curve

- a graph plotting the quantity of an item that someone plans to buy at each price - "at this price, what quantity should I buy?" - holds all else constant

the interdependence principle and shifting demand curve

- any factor that changes your marginal benefits, also changes demand

4 step process to estimate market demand curve

1: Survey your customers, asking each person the quantity they will buy at each price 2: For each price, add up the total quantity demanded by your customers 3: scale up the quantities demanded by the survey respondents so that they represent the whole market 4: plot the total quantity demanded by the market at each price, yielding the market demand curve

3 economic questions in the USA

1: What gets produced - determined by people "voting" with their dollars (demand) -voting can vary by region 2: how is it produced? - determined by the cost of production and preferences of consumers - diff materials/tech available 3: Who gets it? - those who pay for it

6 factors of interdependence that shift demand curve (PEPTIC)

1: income 2: preferences 3: prices of related goods 4: expectations 5: congestion and network effects 6: the type and number of buyers (can only shift market demand)

3 entitlements to private property

1: the right to consume your property and use it so long as you don't harm others 2: the right to transfer or sell property (including your labor) to whomever you please - the right to exclude anyone from using your property or interfering with it

Demand curve is downward sloping

as price gets lower, the quantity demanded gets higher