Chapter 2-Price Mechanism :Demand & SupplyFirm is an organization that transforms resources (inputs) into products (outputs).
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.Households are the consuming units in an economy.
Output, or product, markets are
the markets in which goods and
services are exchanged.
Input markets are the markets in
which resources—labor, capital, and
land—used to produce products, are
exchanged.
Input markets include:
The labor market, in which households supply work for wages to
firms that demand labor.
The capital market, in which households supply their savings, for
interest or for claims to future profits, to firms that demand funds to
buy capital goods.
The land market, in which households supply land or other real
property in exchange for rent.
Demand ; The ability and willingness to buy specific quantities of goods in a given period of time at particular price, ceteris paribus.
Quantity demanded is the amount (number of units) of a product that a household would buy in a given time period if it could buy all it wanted at the current market price.
Determinants of Household Demand
A household’s decision about the quantity of a particular output to demand
depends on:
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 related products available to the household.
5.The household’s tastes and preferences.
6.The household’s expectations about future income,wealth, and prices.
1) Law of demand : Price as a determinant
Higher the price of a good, lower is the quantity demanded for that good and vice versa, ceteris paribus.
The law of demand states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price.
Income is the sum of all households 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.
Higher income decreases the demand for an inferior good
Higher income increases the demand for a normal good
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
falls when income rises.
Substitutes are goods that can serve as replacements for
one another; when the price of one increases, demand for
the other goes up. Perfect substitutes are identical
products.
Complements are goods that “go together”; a decrease
in the price of one results in an increase in demand for
the other, and vice versa.
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.
Quantity supplied represents the number of
units of a product that a firm would be willing
and able to offer for sale at a particular price
during a given time period.
The law of supply states that there is a positive relationship between price and quantity of a good
supplied.
Determinants of Supply
This means that supply curves typically have a positive slope.
The price of the good or service.
The cost of producing the good, which in turn depends on:
The price of required inputs (labor, capital, and land),
The technologies that can be used to produce the product,
The prices of related products.
Market Equilibrium
The operation of the market depends on the interaction between buyers and sellers.
An equilibrium is the condition that exists when quantity supplied and quantity demanded are equal.
At equilibrium, there is no tendency for the market price to
change.
Market Disequilibrium
Excess demand, or shortage, is the
condition that exists when quantity
demanded exceeds quantity supplied
at the current price.
When quantity demanded exceeds
quantity supplied, price tends to rise
until equilibrium is restored.
Market Disequilibrium
Excess supply, or surplus, is the
condition that exists when quantity
supplied exceeds quantity demanded
at the current price.
When quantity supplied exceeds
quantity demanded, price tends to fall
until equilibrium is restored.
Economic Tutorial 2
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