Principles of Microeconomics Markets

1) A market is an institution mechanism that brings together buyers, also known as demanders, and sellers, also known as suppliers), of particular goods, services or resources.
2) All situations that link potential buys with potential sellers are called markets. 3) We take the assumption that markets are consist of large number of independently acting buyers and sellers of standardized products. 4) We also assume that these markets are highly competitive 5) We also assume that these are markets where prices are discovered through the interacting decisions of buyers and sellers, and not markets where a handful of producers set the price of the market.

Demand 1) Demand is a schedule or a curve that shows the various amounts of a product that 1) consumers are willing and able to purchase 2) at each of a series of possible prices 3) during a specified period of time. 2) Assumption is that we say willing and able because willing alone cannot create demand as you need to have the ability to make a purchase to. You might need something but till the time you dont have the ability to potentially buy it, that willingness is not transformed into demand. 3) Since demand without supply cannot tell which price or quantity will actually exist in the market, therefore demand is simply a statement of a buyers plans, or intentions, with respect to the purchase of a product. 4) Unless a specific time period is stated, we cannot know that whether the demand made for a product is relatively large or small.

Law of Demand 1) The law states that, all else equal, as price falls, the quantity demanded rises, and as prices rise, the quantity demanded falls. 2) Therefore, there is a negative relationship between price and quantity demanded. 3) We again take the assumption in this saying that all else equal. The quantity demanded and prices also depend on other factors will which will be discussed later.

Why the inverse relationship:

There are three ways of explaining why there is an inverse relationship between P and Q in demand curve: 1) It is common sense that people buy more of a product when the prices are low. Hence price is seemed as a barrier that deters consumers from buying. The lower the barrier, greater the demand. 2) Each buyer draws less satisfaction or benefit or utility from each successive extra unit of the product consumed. That is consumption is subject to diminishing marginal utility. And because successive units of a particular product yield less satisfaction and utility, consumers will buy an extra unit only if the price of the units is progressively decreased. 3) Income effect indicates that a lower price means a greater purchasing power for the consumer. Therefore, as price decreases, a consumer has the ability to buy more. 4) Substitution effect indicates that by having a lower price for a product, you substitute that product for a similar product that is more expensive and therefore consume more of it. Because of this, as the price decreases, the quantity demanded of that product increases.

Market Demand 1) Competition requires that there are more than one buyer present in the market. By adding the quantities demanded by all consumers at each of the various possible prices, we can get from individual demand to market demand. 2) However, you cannot usually add all the millions of buyers separately to find the market demand. To avoid this, we assume that, on average, all buyers in the market are willing and able to buy the same amounts at each of the possible prices and then simply multiply the price of a product with the number of consumers.

Change in Demand 1) Although price is the most important factor, there are other factors that impact purchases. These factors are known as determinants of demand. 2) A change in the determinants of demand will cause a shift in the demand schedule or graph and is called a change in demand. 3) An increase in demand causes the demand curve to shift to the right or to the outside while a decrease in demand causes the demand curve to shit to the left or inside.

Reasons for Change in Demand Tastes

1) A favorable change in consumer tastes for a product, a change that makes the product more desirable, will increase the demand of the product at each price.. An unfavorable change will cause the change in demand to decrease. 2) New products will also impact taste of the consumer. If the new product is more favorable, the demand of the existing product will decrease. If the new product is not favorable, all else equal, the demand for the existing product at each price will increase. Number of Buyers 1) An increase in the number of buyers in the market increases demand. 2) As a result, larger markets tend to create larger demands and larger opportunities for demand. Income 1) A rise in income usually increases the demand. Products whose demand varies directly with income movements are called superior goods or normal goods. 2) However, there are times when an increase in income decreases the demand of a good. Product whose demand varies inversely with income movements are called inferior goods. Prices of Related Goods 1) A substitute good is one that can be used in place of another good. When two products are substitutes, the price of one and the demand of the other move in the same direction. 2) A complementary good is one that is used together with another good. When two products are complements the price of one good and the demand of the other good moves in the same direction. 3) The vast majority of goods is not related to each other and are called independent goods. In such a case, a change in the price of one good has little or no impact on the demand of the other good. Expectations 1) A newly formed expectation of higher future prices may cause consumers to buy now in order to beat the anticipated price rises, thus increasing current demand. 2) Similarly a newly formed expectation that product availability in the future might decrease may lead to an increase in current demand and vice versa. 3) A rise in expectation concerning future income will also impact demand positively, hereby increasing it.

Difference between Change in Demand and Change in Quantity Demanded

1) A change in demand is a shift of the demand curve either inwards or outwards due to the changes in the consumers state of mind regarding purchase of a product due to reasons mentioned above. 2) Demand is a schedule or a curve therefore change in demand is a change in the curve. 3) Change in quantity demanded is a movement is a movement from one point to another, from one price-quantity combination to another, on a fixed demand schedule or curve. The cause of such a change is an increase or decrease in the price of the product under consideration.