Macro

Homework 06/10/15 Slava Lutso

Outline: Chapter 3 & 4

Chapter 3 Where prices come from: The interaction of demand and supply

Power of demand and supply is the most powerful tool in economics.

Perfectly Competitive Market: The market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no berries to new firms entering the market. (Mostly applied to products of agriculture)

3.1 – The demand part of market

When we refer to demand, it’s important to keep in mind that it’s not only what the consumer wants to buy but what they want and able to buy.

Demand Schedule and Demand Curves

Demand Schedule: a table that shows the relationship between a price of a product and the product demanded.

Quantity Demanded: the amount of goods or service that a consumer is willing and able to purchase at a given time.

Demand Curve: a curve that shows the relationship between the price of the product and the quantity of the product demanded.

Market Demand: the demand of all the consumers of a given good or service.

The Law of Demand

The Law of Demand: provided that everything else is held at a constant, the inverse relationship between the price of the product and the quantity of the product demanded. (The law of demand hold true for any market demand curve. Economist found very few exceptions.)

* When the price of the product falls, the demand will increase. When the price of the product rises, the demand will decrease.

Substitution Effect: the change of the quantity demanded of a good that results of a change in price, making the good more or less expensive relative to other goods that are substitutes.

Income Effect: the change of the quantity demanded of a good that results from the effect of a change of the good’s price on consumer’s purchasing power.

The substitution effect and the income effect occur simultaneously, even though we can analyze them individually.

The...