1.1 Competitive Markets

1. Mechanism that determines which goods and services will be produced in an economy
   1. Can also determine resource scarcity and allocation
2. Components
   1. Factor Markets
      1. e.g. Factors of Production
   2. Financial Markets
      1. e.g. Stock Market; Bond Market; Foreign Exchange Markets

Nota:

• Summarizes the behavior of buyers in a market

1. Demand Curve
   1. Negative Sloping
      1. a.k.a. "The Law of Demand"
         1. The Substitution Effect

            Nota:

            • BASICALLY: As price of X increases, substitutes becomes RELATIVElY cheaper (therefore buying substitutes)
         2. The Income Effect

            Nota:

            • BASICALLY: As the price of X increases, the purchasing power of consumers decreases (meaning that they will be able to afford less of X)
2. Goal of Consumers

   Nota:

   • - to maximize consumer's utility
3. Other Factors that shifts Demand
   1. Changes in Consumer's Income
      1. Normal VS Inferior Good (Opposite Directions)
         1. Normal Good = Brand Name Products
         2. Inferior Good = Lower-quality
   2. Changes in Prices of Other Products
      1. Complemental Goods
         1. Same Effects (almost proportional)
      2. Substitutes
         1. Opposite Directions
   3. Change in Tastes
   4. Change in the size of the market
      1. i.e. the number of consumers
4. Movements along a Demand Curve
   1. Changes in quantitity demanded due to price changes

Nota:

• It summarizes the behavior of producers (or firms) in a market

1. Supply Curve

   Nota:

   • Shows the direct relationship between price per unit of a good and the Qs per period
   1. Positive Sloping
      1. a.k.a. "The Law of Supply"

         Nota:

         • If it becomes costlier for the firm to produce more units per period of time using existing capacity, then it will be willing to do so at a higher price
2. Shifts in Supply Curve
   1. Change in the Cost of Factors of Production
   2. Changes in Technology

      Nota:

      • This ALWAYS shifts the supply curve TO THE RIGHT (as technological advances assume an increase in efficiency)
   3. Changes in Productivity

      Nota:

      • This ALWAYS shifts the supply curve TO THE RIGHT as the increase in productivity means an increase in efficiency, therefore increasing supply
   4. Changes in Government Policies

      Nota:

      • - Taxation (always shifts left as it is now more costlier to produce goods)
   5. Change in the price of a good that is jointly supplied
   6. Change in Price of a Good in Competitive Supply
   7. Change in the size of the market

      Nota:

      • i.e. the number of firms
3. Movements along S Curve
   1. Changes in Qs due to price change

Nota:

• Equilibrium price is when quantity demanded = quantity supplied (meaning there is neither excess demand nor excess supply)

1. Changes in Equilibrium
   1. Changes in Demand Conditions

      Nota:

      • Excess demand tend to cause an increase in price (therefore a greater quantity is expected) and vice versa
   2. Changes in Supply Conditions

      Nota:

      • Excess Supply tend to push down the price (and vice versa)
   3. Both Factor Changes

      Nota:

      • Can determine algebraically the effects in that case

Nota:

• Changes in consumer preferences lead to changes in relative prices which have signaling power and change incentives of market participants
• Assumes that the consumer is sovereign in a free market

1. When demand increases, excess demand

   Nota:

   • So,,, - Price increases - Extension of Supply along original supply curve - Contraction in demand along new demand curve
2. When demand decreases, excess supply

   Nota:

   • So... - Price decreases - Contraction of supply along the original supply curve - Extension of demand along the new demand curve

1. Consumer Surplus
   1. The area under the demand curve and above the price line
2. Producer Surplus
   1. The area above the supply curve and below the price line
3. Social/ Community Surplus
   1. The sum of consumer and producer surplus
4. Allocative Efficiency

   Nota:

   • When the scarce resources have been allocated in the best possible way (if the optimal amount is produced from society's point of view)