Microeconomics
1.1 competitive markets: demand and supply
MARKETS
* A market a ‘place’ where buyers and sellers are in communication with the intention of exchanging goods and services for money.
* Goods and services are sold in product markets, while resources (or factors of production) are sold in resource markets
DEMAND
the law of demand
explain the negative casual relationship between price and quantity demanded
Demand: the quantity of a particular good or service consumers are willing and able to buy at a given price and time
* The theory is:
* As price rises quantity demand falls
* As price falls quantity demand rises
* There is a negative causal relationship between the price and quantity demanded
E.g. If I buy two hundred chickens from the market, it will cost X dollars. However, if the price of chickens increases dollars, the quantity demanded will be lower.
* So as price increases the quantity demanded decreases
FACTORS THAT UNDERLIE THE LAW OF DEMAND |
The income effect | As the price of the good decreases the quality of demand increases because consumers have more real income to spend |
The substitution effect | As the price of the good increasesconsumers switch to substitute goods |
The law of diminishing marginal utility | A we consume more of something the satisfaction (utility) that we derive for each additional unit diminishes |
describe the relationship between an individual consumer’s demand and market demand
* Individual demand: the demand for a particular product by an individual household or consumer
* Market Demand: the demand for a particular product by all consumers or households
Individual demand will depend upon:
1. Fashion
2. Income
3. Tastes
4. Price of the good itself
5. Other goods (price)
6. Preferences
Market demand will depend on those factors that influence individual demand as well as more general factors:
1. Population size
2. Age...