Principles Of Economics Chapter 2 Notes Marketing

Chapter 2 Notes – Marketing  Market - Any place where, or mechanism by which, buyers and sellers interact to trade goods, services, or resources. o Whether you buy a laptop from your local electronics store, an online retailer, or someone selling a used laptop through eBay, you and the seller are both participating in the market or laptops. Markets can take almost any form. o Formal markets, such as the New York Stock Exchange and your local retail store, are highly structured. o Informal markets, like swap meets or garage sales, are less structured, with fewer rules.  Good - A tangible product that consumers, firms, or governments wish to purchase.  Service - An intangible product or action that consumers, firms, or governments wish to purchase.  Resource - The inputs used to produce goods and services; also known as factor of production. o Resources fall into four categories: land, labor, capital, and entrepreneurial ability o Henry Ford organized resources--land, labor, capital, and his own entrepreneurial ability--in order to produce automobiles.  A market is a system where buyers and sellers interact to trade goods, services, or resources  When economists refer to resources, they are referring to any item that is used to produce goods and services  A market refers to the interaction of buyers and sellers of a particular good  The interaction of buyers and sellers in a market is fundamental for the determination of the price of goods and services  In most markets, the price of goods and services is determined by the interactions of numerous buyers and sellers  Any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services is a resource  The broadest definition of a market is a group of buyers and sellers who exchange a good, service, or resource, not necessarily at a specific place.  Generally, in a perfectly competitive market, individuals do not directly influence the prices, but collectively all individuals have an effect on price.  In a "market", prices and quantities traded are determined mostly by the interaction of buyers and sellers in a market.  Law of Demand - A principle in economics that states that as the price of a good, service, or resource rises, the quantity demanded will decrease, and vice versa, all else held constant. o If you lower the price of a cup of lemonade, the law of demand tells you that people will be more willing and able to buy a cup of lemonade and quantity demanded will increase.  Demand Schedule - A tabular representation of the relationship between the price of a good, service, or resource and the quantities consumers are willing and able to buy over a fixed time period, all else held constant.  Demand Curve - A graphical representation of the relationship between the price of a good, service, or resource and the quantities consumers are willing and able to buy over a fixed time period, all else held constant.  Quantity Demanded - The quantity of a good, service, or resource that consumers are willing and able to buy at a given price.  Competition among suppliers tend to drive prices down; competition among buyers tends to drive prices up.  When the price of a good rises, we can expect that less of the good will be purchased.  A market requires buyers who are willing and able to purchase the good.  The demand curve can be a straight line or a nonlinear curve.  In a market, competition among suppliers tends to drive prices down, and competition among buyers tends to drive prices up.  There is an inverse relationship between price and quantity demanded.  Without individuals and households that are willing and able to buy a good, the demand side of the market cannot exist.  In economics, the word "curve" is typically used to refer to almost any graphical representation between two variables.  Income Effect - The effect that a change in the price of a good, service, or resource has on the purchasing power of income. o For example, when prices decrease, the purchasing power of income increases and consumers are able to purchase more goods, services, or resources. o Suppose you have only $20 to spend on gasoline each week. When the price of gasoline rises from $2 per gallon to $4 per gallon, the purchasing power of that $20 falls from 10 to 5 gallons of gasoline. The resulting decrease in the quantity of gasoline demanded is due to the income effect.  Substitution Effect - The effect that a change in the price of one good, service, or resource has on the demand for another. o For example, an increase in the price of one good will increase the demand for its substitutes, and vice versa. o Victor usually eats an orange or an apple every day with his lunch. The substitution effect explains why, when he sees the price of oranges increase one week, he substitutes away from oranges and buys more apples instead.  Diminishing Marginal Utility - The negative relationship between the quantity of a good, service, or resource and the marginal utility obtained from each additional unit consumed in a given period of time. o For Monica, the first cup of coffee in the morning is worth $3; the second cup is worth only $1. So, if the price of coffee is $2 per cup, she buys one cup of coffee. Her first cup of coffee gives her a lot of satisfaction and is worth the price. She doesn't buy a second cup because of diminishing marginal utility: The second cup is worth only $1 to her, so she can't justify paying $2 to buy it.  The income effect, the substitution effect, and diminishing marginal utility together explain why demand curves are downward-sloping.  The demand curve for a normal good is downward sloping because  the benefit of consuming more of a good falls with each additional unit, so the price consumers are willing and able to pay also falls with increased consumption.  when consumers purchase substitutes, the quantity demanded of the good falls.  as prices rise, the purchasing power of each dollar earned falls, and consumers are willing and able to buy less of a good.  Marginal benefit, purchasing power, and substitutes are the three main reasons the demand curve is downward sloping.  Because of diminishing marginal utility, the benefit of consuming more of a good falls with each additional unit, so the price consumers are willing and able to pay falls with the increased consumption.  Market Demand - The overall, or total, demand for a good, service, or resource. o It represents the horizontal summation of the quantities demanded by individuals, firms, states, or even nations at each price over a fixed time period, all else held constant.  Change (Shift) in Demand - A change in the quantity of a good, service, or resource demanded at every price. o Graphically, an increase in demand is represented by a rightward shift of the demanded curve, while a decrease in demand is represented by a leftward shift of the demand curve o A particularly rainy fall season is likely to cause an increase in demand for umbrellas, as consumers will be more willing to buy them. A rainy fall season is also likely to result in a decrease in demand for shorts and T-shirts because fewer people will be willing to wear them in wet fall weather.  Movement Along the Demand Curve - A change in the quantity of a good, service, or resource demanded due to a change in its price. o Graphically, this change is represented as a movement along an existing demand curve.  The demand curve shifts when something other than the price of a good changes.  When a nonprice determinant of demand changes the entire demand curves shifts.  Assuming a downward-sloping demand curve and a change in price, all else held constant generates a change in quantity demanded.  A decrease in demand is shown by a leftward shift of the demand curve.  A change in quantity demanded is caused by a change in good's own price.  When the demand curve shifts to the right, more is demanded at all prices.  Normal Good - A good for which there is a direct relationship between the demand for the good and income. o For normal goods, an increase in income increases demand, and a decrease in income decreases demand; a good with a positive income elasticity of demand. o When Clara was a college student, her financial resources were limited, and she only owned two pairs of shoes. After she graduated and landed a high-paying job, Clara used her income to buy several new pairs of shoes and an entirely new wardrobe. For Clara, we know that clothing items, such as shoes, are normal goods because when her income increased, her demand for clothing increased and she bought more.  Inferior Good - A good for which there is an inverse relationship between the demand for the good and income. o For inferior goods, an increase in income decreases demand, and a decrease in income increases demand; a good with a negative income elasticity of demand.  Tastes and Preferences - The perception of the desirability associated with consuming a good, service, or resource.  Buyers - Market participants who seek to obtain goods, services, and resources.  Expectations - The anticipation by individuals and firms of costs and benefits that lie in the future.  Substitutes - Goods, services, or resources that are viewed as replacements for one another.  Complements - Goods, services, or resources that are used or consumed with one another.