Homework

Summary Notes - CH2

The Role of Markets

• Economic systems exist to deal with the economic problem, in order to answer the basic economic problem (Economics/1. Introduction/Homework)
• A market is said to exist when buyers and sellers exchange goods, services or resources. A market consists of three elements
  • Buyers $\rightarrow$ Create Demand
  • Sellers $\rightarrow$ Create Supply
  • Something to exchange (goods & services)
• Markets must be voluntary exchange
• There exist Competitive Markets and Imperfect Market
• In the market system, the key economic questions are answered by the price mechanism
  • The consumer is king (consumer sovereingty), and they determine the answers to the BEP questions.
  • Markets are guided by self-interest on both the supply and demand side

Competitive Markets

• Characterised by;
  • A large number of buyers and sellers
  • Firms being price takers
  • Homogenous products
  • Easy entry into market (no barriers)

Imperfect Markets

• Characterised by;
  • A small number of firms
  • Product differentiation
  • Firms being price setters
  • Restricted entry into market
• An extreme imperfect market is a monopoly market, where the market is centered around one fir,.
  • An oligopoly is a market with a few dominant firms

Demand Side

• Demand refers to the buying intentions of customers.
  • This is not a want; wants are desired but demands are desires characterised by an ability to actually buy.
  • Demand is governed by the law of demand, which is discussed in the PPT - Demand > The law of demand.
    • Income effect - higher income $\rightarrow$ more purchasing power
    • Substitution effect - when the price of a substitute increases, the price of the good increases as it becomes more attractive to buyers.
    • The effects hold true always, as long as all other factors are constant
      

Changes in the Demand Curve

• There are two changes
  • Shifts - a shift of the whole curve left or right (a decrease or increase) caused by a non-price factor
    • These factors are listed in PPT - Demand > The effect of changes in non-price factors on quantity demanded
  • Movements - a movement along the curve caused by a change in price

Supply Side

• Represents the sellres or producers side of the market.
  • More is on PPT - Supply > The law of supply
• Rational, self-interested suppliers prefer to sell their output at a higher price than a lower one in order to maximise gain
• Below, a supply curve is charted.
  

Changes in the Supply Curve

• There are once again two changes
  • Shifts - a shift of the whole curve left or right (a decrease or increase) caused by a non-price factor
    • These factors are listed in PPT - Supply > The effect of changes in non-price factors on quantity supplied
  • Movements - a movement along the curve caused by a change in price

Equilibrium

• If we graph supply & demand on the same curve we can draw the equilibrium quantity and price as the points where the two curves intersect
  • Balances buying intentions of customer with selling intentions of supplier
• If the price is below the equilibrium, there will be a shortage, and a surplus above.

Shifts

• When there are shifts in either curve, the equilbrium will change. In order for there not to be a surplus or shortage, the price will naturally increase or decrease by
  • Suppliers selling excess stock at a lower price
  • Customers bidding up the price due to lack of supply
• In the time this takes to happen, there will be a temporary shortage or surplus

Simultaneous Shifts

• What if both the demand and supply curves shifted at the same time?
• They could have different effects, detailed in the table below