chapt 4 pdf

• Market


  A group of buyers and sellers of a particular good or service
• Competitive market


  • Many buyers and many sellers so that each has a negligible impact on the market price
  • Buyers and sellers are price takers
• There are some markets in which the assumption of perfect competition applies perfectly, such as the wheat market
• Not all goods and services are sold in perfectly competitive markets, some have only one seller (monopoly)
• Quantity demanded


  The amount of a good that buyers are willing and able to purchase
• Law of demand


  Other things being equal, when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded 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


  The sum of all the individual demands for a particular good or service
• Increase in demand


  Shifts the demand curve to the right
• Decrease in demand


  Shifts the demand curve to the left
• Normal good


  A good for which demand falls when income falls
• Inferior good


  A good for which demand rises when income falls
• Substitutes


  Goods that satisfy similar desires, so a fall in the price of one reduces the demand for the other
• Complements


  Goods that are often used together, so a fall in the price of one increases the demand for the other
• Economists do not try to explain people's tastes, but they do examine what happens when tastes change
• Expectations about the future may affect demand
• Goods


  • hot dogs and hamburgers
  • sweaters and sweatshirts
  • cinema tickets and film streaming services
• The price of hot fudge falls

  You will buy more hot fudge and more ice cream
• Complements


  Two goods for which an increase in the price of one leads to a decrease in the demand for the other
• Tastes


  The most obvious determinant of your demand
• Economists normally do not try to explain people's tastes because tastes are based on historical and psychological forces that are beyond the realm of economics
• Expectations


  Your expectations about the future may affect your demand for a good or service today
• Normal good


  A good for which, other things being equal, an increase in income leads to an increase in demand
• Inferior good


  A good for which, other things being equal, an increase in income leads to a decrease in demand
• Substitutes


  Two goods for which an increase in the price of one leads to an increase in the demand for the other
• If you have trouble remembering whether you need to shift or move along the demand curve, it helps to recall a lesson from the appendix to Chapter 2. A curve shifts when there is a change in a relevant variable that is not measured on either axis. Because the price is on the vertical axis, a change in price represents a movement along the demand curve. By contrast, income, the prices of related goods, tastes, expectations, and the number of buyers are not measured on either axis, so a change in one of these variables shifts the demand curve.
• One way to reduce smoking is to shift the demand curve for cigarettes and other tobacco products. Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on television are all policies aimed at reducing the quantity of cigarettes demanded at any given price.
• Alternatively, policymakers can try to raise the price of cigarettes. If the government taxes the manufacture of cigarettes, for example, cigarette companies pass much of this tax on to consumers in the form of higher prices. A higher price encourages smokers to reduce the numbers of cigarettes they smoke.
• Economists have found that a 10 percent increase in the price causes a 4 percent reduction in the quantity demanded. Teenagers are especially sensitive to the price of cigarettes: A 10 percent increase in the price causes a 12 percent drop in teenage smoking.
• Most studies of the data are consistent with the view that tobacco and marijuana appear to be complements rather than substitutes. In other words, lower cigarette prices are associated with greater use of marijuana.
• If a firm increases advertising


  The demand curve shifts right
• Demand curve shifting right

  Increases the equilibrium price and quantity
• Shifts in supply


  Any change that raises quantity supplied at every price shifts the supply curve to the right (increase in supply)

  Any change that reduces the quantity supplied at every price shifts the supply curve to the left (decrease in supply)
• Variables that can shift the supply curve

  • Input prices
  • Technology
  • Expectations
  • Number of sellers
• Input prices


  When input prices rise, producing the good is less profitable and firms supply less of the good
• Technology


  Advances in technology that reduce the cost of production raise the supply of the good
• Expectations


  If a firm expects the price of the good to rise in the future, it will supply less to the market today
• Number of sellers


  If the number of sellers in the market changes, the market supply changes
• The supply curve shows what happens to the quantity supplied of a good when its price varies, holding constant all the other variables that influence sellers