Chapter 3. Supply and Demand – Defining a Market - Circular Flow Model. What is a Market?. Any Place Where Goods and Services are Voluntarily Exchanged (brings together buyers and sellers) Price is a primary influence in determining allocation of resources in our free enterprise economy.
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Supply and Demand –
Defining a Market - Circular Flow Model
Any Place Where Goods and Services are VoluntarilyExchanged
(brings together buyers and sellers)
Priceis a primary influence in determining allocation of resources in our free enterprise economy.
Difference between Price, Value, Utility
Price= value of product in terms of money
Value= has to do with relative scarcity = exchange value
Utility = satisfaction that good or service can provide
This means… what is the value of the human being?
a) value of their product…. Rock singer, athlete, Shaq, Oprah, department store clerk, insurance salesman, teacher
b) supply and demand…. If lot of people doing same things you are… not likely to be paid much.(underwater welders)……. As demand for product decreases, reduces number of available jobs… gas station jobs!
c) if demand for product lacking- rewards minimal and number of competing workers is few, demand high, wages high. 20 years ago… heart surgeons
The value of the product is the worth that society puts on it….
What worth does society put on sports?
What worth does society put on music industry?
What worth does society put on sport cars, SUVs, large houses, motorcycles, eating out, designer clothes, entertainment. Etc, etc. etc. Education?
Interact to balance the economy
Payments for Goods & Services
Receive Goods & Services
Land,Labour, Capital, Entrepreneurs
Rent, Wages, Interest, Profit
S+T > I+G = Recession
I+G > S+T = Inflation
Leakage S + T = I + G Injection
Savings and Taxes
G + I greater than S + T = inflation
Supply-siders favor strong I
Demand-siders (Keynesian economy) favor strong G *** this is where we are now for most of populous thinking
Businesses not selling what it produces
Businesses then cut down on employment (hence unemployment/layoffs)
Government and investors spending more
Inventories begin to be depleted
More workers are hired
D. New Balance $54.99
Which of these would you buy? Get out your smart phone and vote
As the price of the product increases, the quantity that the supplier tends to supply also increases.
****Ceteris Paribus Ceteris Paribus Assumption[KAY-ter-us PEAR-uh-bus]
= positive relationship between the quantity of a good supplied and price.
PRICE IS THE INDEPENDENT VARIABLE
(ovens, organic farming)
Change in Supply (shifting of curve)
Change in Quantity Supplied (movement along curve)
Often the ability of an individual firm to respond to an increase in price is limited or constrained by its existing scale of operations, or capacity, or ability to obtain resources….. IN SHORT RUN
IN LONG RUN… can adjust. The greater the amount of time producers have to adjust, the greater their output response.
AS THE PRICE OF A GOOD DECREASES THE QUANTITY DEMANDED TENDS TO INCREASE….
Price once again is the independent variable!
Generally speaking…. The higher the price obstacle, the less of a product a consumers will buy.
Bargain days are based on law of demand.
1.) Just common sense- at lower prices we buy more.
2.) The more we buy of one product, the less satisfied we are. Will only buy if price is continually lowered.
3.) The lower the price of an item, the more our income will buy.
Marginal Utility… How much more utility do you get adding or subtracting units (more doughnuts… more cars… more steak in one day)
DIMINISHING MARGINAL UTILITY.
As the number of units of a product a consumer has increases, the satisfying power for each extra unit decreases.
Purpose of Utility analysis is to study howpeople behave not how they think.
Theory of consumer choice is based on the idea that each consumer spends his/her income in a way that yields the greatest satisfaction.
2.Prices of Related Goods
3.Number of Buyers
4.Expectations of future price
Taste changes throughout our lifetime.
Your preference is Coke… price skyrockets….
Affected in the market by substitute goods and complimentary goods.
*Substitute goods… anything that can be substituted for the product or service desired…
If price of Coke rises… and consumer doesn’t feel strongly about brand preference… will buy Pepsi until Coke price declines)
When two products are substitutes, the price of one good and the demand for the other are DIRECTLY RELATED.
peanut butter/jelly, beer/pretzels, milk/cookies, golf balls/golf tees,
When two goods are complements, an increase in the price of one good adversely affects the demand for the other and creates an inverse relationship.
3. Number of buyers
The number of buyers will increase demand for the product which (if supply is fixed) will drive up the price.)
Income-RATHER OBVIOUS HERE.
Superior or Normal goods= commodities whose demand varies DIRECTLY with money income.
INFERIOR OR “POOR MAN’S” GOODS.
Goods whose demand varies inversely with a change in money income.
If you are in medical school or law school, the expectation of you getting a larger income when you get out of school will affect your demand for goods… Inheriting money, winning the lottery!
Change in Demand
Change in Quantity Demanded
P x Q
To maximize utility, consumers should choose that good which delivers the most marginal utility per dollar. Optimal utility is then achieved.
Optimal consumption= mix of output that maximizes total utility for the limited amount of income you have to spend.
Supplies a lot of love!