Markets
There are two types of markets where factors of production (land, labor ,capital, entrepreneurship) and products are bought and sold. Factor Market A factor market is any place where the factors of production are bought and sold. Examples of factor markets include the labor market, the real estate market or the market for machinery used to produce manufactured goods. Consumers provide labor and land to businesses in the factor market. Capital goods are also purchased in factor markets by businesses.
Markets
The second type of market is called a product market. A product market is any place where finished goods and services are bought and sold. Examples of product markets include department stores, grocery stores, accounting services, and new car dealers. In product markets consumers purchase goods and services from businesses.
Governments
Factor Markets
Concept 2: Demand
Demand is the ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus. When we discuss demand, we are specifically examining consumer demand for goods and services in the product markets. Our demand for a good or service is affected by its opportunity cost what do we have to give up in order to obtain a particular good/service. It is also affected by the cost of the product and other factors known as determinants of demand.
Concept 2: Demand
The demand for products and services can be examined on an individual basis. Demand can also be examined by looking at the total demand for a product or service. This is known as the market demand. Market demand can be defined by geographic location (for example the demand for gasoline in the state of Michigan), by group (senior citizens, etc.) or as the total demand for a good or service.
Concept 2: Demand
Frequently when we examine individual demand, an individual demand schedule is developed. A demand schedule illustrates the quantities of a good or service a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus. The next page illustrates a demand schedule.
Demand Schedule Freds demand schedule reflects his interest in music and his desire to add to his CD music collection compared with other needs and desires Fred has. It also reflects Freds interest in purchasing more CDs when the price drops or fewer CDs when the price rises. A demand schedule does not tell us why Fred will buy different quantities of CDs it just tells us what Fred is willing and able to purchase at different price levels.
Demand Curve
We can take the information from a demand schedule and draw a simple graph. The graph of the demand schedule indicates the quantity demanded at each price level. Demand curves are usually drawn with the price on the y axis, and the quantity demanded on the x axis.
Dema
$30.00 $25.00 $20.00
r ce
C rve
r CDs
Demand Curve
The demand curve illustrates Freds current demand schedule for CDs. When a price change occurs, there is movement along the existing curve. For example if the price of CDs falls, there is movement down along the demand curve in response to the price change. If the previous price was $20 and the new price is $15, the quantity demanded changes from 2 to 3.
Movements vs Shifts
Price $20.00 15.00 10.00 7.50 5.00 4.00 3.00 2.00 1.00 0 Shift in demand A Movement along curve B increased demand initial demand 2 4 6 8 10 12 14 16 18 20 22 Quantity
Movements vs Shifts
If we have a change in the quantity demanded, it means we have movement along a given demand curve, in response to a price change (from point A to point B on the graph). If we have a change in demand, it means the demand curve has shifted due to changes in the determinants of demand: tastes, income, other goods, expectations, number of buyers (from point A to point C on the graph).
Marke Dema
$30.00 $25.00 $20.00
r ce
C rve
r CDs
18
26
Concept 3: Supply
Supply is defined as the ability and willingness to sell specific quantities of a good or service at alternative prices in a given time period, ceteris paribus. When we discuss supply we are examining the behavior of businesses and their willingness to sell their products and services at different price levels.
Concept 3: Supply
Market Supply is the total quantities of a good or service that all sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus. Similar to demand, there are determinants of market supply. The determinants of market supply are Technology, Factor Costs, Other Goods, Taxes and Subsidies, Expectations, Number of Sellers.
49
Shift of Supply
$30.00
urve
$25.00
$20.00
Price
$15.00
$10.00
$5.00
$0.00 0 100 200 300 400 500 600 700 800 900
Quantity
Concept : Equilibrium
At some point buyers and sellers will agree on a price and quantity demanded. This location is known as the market equilibrium price and quantity. The market equilibrium price is the price at which the quantity of a good or service demanded in a given time period equals the supply. The market equilibrium price changes when the determinants of demand or supply change, or when the price changes.
Market Equilibrium
$30.00
$25.00
$20.00
Price
$15.00
$10.00
$5.00
$0.00 0 10 20 30 40 50 60
Quantity
Concept : Equilibrium
At equilibrium if the demand curve shifts to the right, demand increases but price also rises. When the demand curve shifts to the left, demand and price declines. At equilibrium if the supply curve shifts to the right, supply increases and price falls. If the supply curve shifts to the left, supply declines and prices rise.
$25.00
$20.00
Price
$15.00
Surplus
$10.00
C
$5.00
Shortage
$0.00 0 10 20 30 40 50 60
Quantity
Summary
The major concepts from this unit are: Circular flow Demand and its determinants Supply and its determinants Equilibrium Shortages and Surpluses