Download BUAD 200: Classnotes Week 5 S08

ECON 160 Spring 2011, Week 04: Classnotes February 15-17, 2011
Review:
Economic competition: the process of exchange in which buyers compete with each other for the
goods produced by offering dollars, and sellers of goods compete with each other for the dollars
by offering goods for exchange.
Circular Flow Diagram of the Economy: Shows the two economic agents; Households (max.
utility) interact with Business Firms (max. ) in three forms of markets, Resource markets,
Product markets and Credit Markets (exchange of the use of money over time)
The Circular Flow diagram of an Exchange Economy:
Goods &
Services
Goods &
Services
Product
Markets
$'s Revenue
$'s
Credit
Markets
HOUSEHOLDS
FIRMS
$'s Income
Resources
$'s
Resource
Markets
Inputs
Role of Money: Money is defined as the amount of currency in circulation plus the amount of
checkable deposits. Money plays a key role in an exchange system as one half of each exchange.
New:
1.The Market Forces of Demand and Supply ( Chapter 4)
The Study of Markets is the study of the interaction of Buyers and Sellers. Before studying the
interaction it is best to focus on the behavior of each group, and observe the factors that affect
choices.
Ceteris Paribus: We want to isolate separate things that affect a decision maker, so we look at
one factor at a time, employing the assumption of Ceteris Paribus: All other things held equal.
A. Buyers: Demand: We have limited resources, and unlimited wants so we have to make
choices about which goods to acquire and how much of each. Our choices depend on how much
we value different goods.
1. We measure the personal marginal value as the most $s (dollars) we are willing to
give up to acquire one more unit of a good. While many things affect our relative value of
different goods, one relationship seems to hold for any good. Diminishing marginal value: The
more you have of any good, the lower the personal marginal value of an additional unit.
Ex. Plot the marginal value of additional gallons of water consumed in a week.
$
Marginal
Value
2 4 6 8 10 12 14 16 18 20
QTY / Time period
2.. Since the marginal value of any good declines, we can then plot to amount of the good
an individual would be willing to buy at alternative prices by comparing marginal value with the
Price in the market place. From this analysis we derive the Demand for a good.
$ Price
8
6
Demand
4
2
2 4 6 8
10
12 14 16 18 20
QTY/ Time period
3. DEMAND: A schedule of the alternative quantities that an individual is willing and
able to buy at alternative prices. (***** Definition)
A. First Law of Demand: the lower the price of a good, the greater the quantity
demanded, the higher the price, the lesser the quantity demanded. : Demand curve slopes
downward.
B. Change in Demand vrs. Change in Quantity demanded Demand traces the different
amounts we would buy at different prices. A change in price is a movement along the demand
schedule. A change in something other than price will shift the curve. An increase in demand
means larger amounts purchased at any price, thus a rightward shift of the curve.
C. Determinants of Individual Demand: ( what factors will cause demand to shift?)
1.Taste and Preference: ;  T & P   Dx
How much you like the good. If your taste and preference increase, your demand increases
(rightward shift). If you like the good less, than your demand will decrease (leftward shift)
2.Income: A change in income will effect our demand for products.
a. Normal Goods:  Income   Dx . For most goods, an increase in
income will increase demand.
b. Inferior Goods:  income   Dx. For some goods, as income
goes up, demand goes down. These are called inferior goods. (Ex.
Hamburger Helper)
3. Price of other goods: A change in the relative price of other goods will
affect our demand for a product.
a. Substitutes: Substitutes are alternative products which give us
satisfaction. Price of Sub.   Dx. If a substitute good rises in
price, we will buy more of a product thus increasing demand. (Ex.
Dominos vrs Pizza Hut) If the substitute becomes cheaper, our
demand will decrease.
b. Complements: Some products are used together for an activity.(Ex.
Tennis balls, racquets, shoes, courts.)  Price of Complement  
Dx.
4. Expectations: A change in expectations of future price will change
demand today.  Expected future Price   Dx today. (Ex. Coffee price expectations)
D. Market Demand: The total demand for a market is derived by adding up the demands
of the individual buyers in the market. An increase in the number of buyers
will increase Market demand. (rightward shift)
B. Sellers : Supply
1. Supply is a schedule of the alternative quantities which suppliers are willing and able
to sell at alternative prices. In General, supply is an upward sloping relationship showing an
increase in quantity supplied at higher prices. This reflects the increasing nature of costs as we
produce more of any product.( Note: recall the increasing cost principle from the production
possibilities function)
$ Price
10
Marginal Cost
8
6
4
2
2 4 6
8
10
12 14 16 18 20
QTY/ Time period
2. Determinants of Supply: (shift factors)
A. Price of inputs: a change in input prices will affect the willingness of
suppliers to sell units of the good.  Price of Inputs   Supply (leftward shift)
B. Value of alternative outputs: The opportunity cost of producing one good
(X) is the value you could have earned from producing the best alternative output (Y).
C. Technology of Production: An increase in technology would increase the
supply as producers can get more output from the same resources.
D. Number of Sellers: The Market supply is the sum of the supply curves of
individual sellers. An increase in the number of sellers will increase market supply. (rightward
shift)
$ Price
10
SUPPLY:
8
The quantity at each
price, sellers are willing
to sell
6
4
2
2 4 6
8
10
12 14 16 18 20
QTY/ Time period
C. Market Analysis: Since the market for a good is the interaction of buyers and sellers, it can be
analyzed by the interrelationship between demand and supply.
$ Price
10
SUPPLY
8
6
4
DEMAND
2
2 4 6
8
10
12 14 16 18 20
QTY/ Time period
1. Surplus: A surplus exists if (at a given price) the quantity supplied is greater than the
quantity demanded. If a surplus exists, some sellers are dissatisfied, and competition between
sellers will cause the price to fall.
2. Shortage: A Shortage exists if (at a given price) the quantity demanded is greater than
the quantity supplied. If a shortage exists, some buyers are dissatisfied, and competition between
buyers will cause the price to rise.
3. Equilibrium: Market Clearing Price: An equilibrium price exists in the market when
the quantity demanded is equal to the quantity supplied. This is called a market clearing price
because both sides of the market clear.