Micro Econ Chapter 2 Lecture Notes PDF

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Chapter 2● (Perfectly) Competitive Market: has many buyers and sellers of the same good or service, none of whom can influence the price ● Law of Demand: the quantity demanded is higher when the price is lower, holding other constant ● The demand curve illustrates the price at which you are willing ...

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Chapter 2 ● (Perfectly) Competitive Market: has many buyers and sellers of the same good or service, none of whom can influence the price ● Law of Demand: the quantity demanded is higher when the price is lower, holding other constant ● The demand curve illustrates the price at which you are willing to buy each quantity. ○ Movement along the demand curve: price alone changes ○ A shift of the demand curve: people buying more or less at every given price ● Diminishing Marginal Benefit: each additional item yields a smaller marginal benefit than the previous item ● Substitute Goods: goods that replace each other ○ Two goods are substitutes if a decrease in the price of one leads to a decrease in demand for the other. ● Complementary Goods: goods that go together ○ Two goods are complements if a decrease in the price of one good leads to an increase in the demand for another. ● Normal Good: A good for which a higher income causes an increase in demand ● Inferior Good: A good for which a higher income causes a decrease in demand ● The supply curve illustrates the price at which the seller is willing to sell at each quantity ○ Movement along the supply curve: price alone changes ○ A shift in the supply curve: people are supplying more or less at every given price ● Law of Supply: The tendency for the quantity supplied to be higher when the price is higher ○ The supply curve illustrates the price at which the seller is willing to sell at each quantity. ● Diminishing Marginal Product: The marginal product of an input declines as you use more of that input ● Interdependence Principle tells us that sellers’ choices depend on many other factors other than price and when those factors change, so might their supply decisions ● A decrease in the price of an input increases profit and encourages more supply. ● Profitability encourages supply. ● A technological innovation lowers costs and increases supply. ● More sellers in the market increases supply. ● Fewer sellers in a market decreases supply. ● Surplus: price above its equilibrium ● Shortage: price below its equilibrium ● If the decrease in demand is relatively larger than the increase in supply, the equilibrium price and quantity fall. ● If the increase in supply is large relative to the decrease in demand, the equilibrium quantity rises as the equilibrium price falls.

● An increase in income will have an uncertain effect on price....