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* Market is defined as an institution or mechanism which brings together buyers – “demanders” and sellers – “suppliers”.
* Demand is the amount of the good that buyers are willing and able to purchase. * Factors determine the demand for any good are as following:
Price The quantity demanded falls as the price rises and rises as the price falls, so the quantity is negatively related to the price.
Income A lower income means that you have less to spend in total so you would have to spend less on some – and probably most – goods.
Normal good is i f the demand for a good falls when income falls.
Inferior good is i f the demand for a good rises when income falls.
Price of related goods:
Substitutes are pairs of goods that are used in place of each other.
Compliments are pairs of goods that are used together.
Tastes
Expectations
*Law of demand: other things equal (ceteris paribus in Latin), when the price of a good rises, the quantity demanded of the good falls.
* Law of supply: other things equal, when the price of a good rises, the quantity supplied of the good also rises.
Factors determine the supply for any good are as following:
Price. Because the quantity supplied rises as the price rises and falls as the price falls, we say that the quantity supplied is positively related to the price of the good.
Input prices. The supply of a good is negatively related to the price of the inputs used to make the good.
Technology
Expectations
Taxes and subsidies. By reducing taxes and increasing subsidies the government provides for the increase of the supply of goods and vice versa.
VII. Equilibrium and elasticity
* Equilibrium’ as a situation in which various forces are in balance – and this also describes a market’s equilibrium.
* Equilibrium is the unique price and quantity established at the intersection of the supply and demand curves. Only at equilibrium does quantity demanded equal quantity supplied.
* At the equilibrium price/ market-clearing price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell.
* There is one point at which the supply and demand curves intersect; this point is called the market’s equilibrium. The price at which these two curves cross is called the equilibrium price, and the quantity is called the equilibrium quantity.
* Surplus of the good: suppliers are unable to sell all they want at the going price. Sellers respond to the surplus by cutting their prices. Prices continue to fall until the market reaches the equilibrium.
* S hortage of the good: Demanders are unable to buy all they want at the going price. With too many buyers chasing too few goods, sellers can respond to the shortage by raising their prices without losing sales. As prices rise, the market once again moves toward the equilibrium.
* Surplus or shortage exists at any price where the quantity demanded and the quantity supplied is not equal. When the price of a good is greater than the equilibrium price, there is an excess quantity supplied, or surplus. When the price is less than the equilibrium price, there is an excess quantity demanded, or shortage.
* Law of supply and demand says the price of any good adjusts to bring the supply and demand for that good into balance.
* Elasticity, a measure of how much buyers and sellers respond to changes in market conditions, allows analyzing supply and demand with greater precision.
*Elasticity of demand is the degree to which changes in price cause changes in quantity demanded. It is used to describe the responsiveness of one variable (demand) to another variable (price).
* Reasons for elasticity of demand:
1) the relationship between income and the cost of the product
2) whether or not substitute product is available
* Price elasticity of demand is thedegree to which changes in price cause changes in quantity demanded.
* Types of elasticity of demand:
—elastic, very responsive to price changes - greater than 1;
—unit elasticity;
—inelastic, not very responsive to price changes - less than 1.
VIII. Market structures
Market structure is the nature and degree of competition among firms operating in the same industry.
· Factors determining a market structure: (1) the number of firms selling in the market;(2) the extent to which the products of different firms in the market are the same or different; (3) the ease with which firms can enter into or exit from the market.
· Barriers to entry that prevent new firms from entering an industry are (1) ownership of an essential resource, (2) legal barriers, and (3) economies of scale. Government franchises, licenses, patents, and copyrights are the most obvious legal barriers to entry.
· Non-price competition refers to competition among firms that choose to distinguish their product via non-price means: style, delivery, location, atmosphere, promotions, etc.
· Market structures:
Oligopoly is a market structure characterized by a few sellers, standardized or differentiated products and substantial non-price competition.
Monopoly is a market structure characterized by a single seller, a product for which there are no close substitutes, and strong barriers to entry that prevent potential competitors from entering into the market.
Pure competition is a market structure characterized by many sellers, standardized products, easy entry and exit, and no artificial restrictions on the free movement of prices and wages up and down.
Monopolistic competition is a market structure characterized by many sellers, differentiated products, non-price competition, and relatively easy entry and exit.
· Pricing strategies:
Cost-plus pricing, you look at the cost of what you sell–that is, the total marginal cost–then add on the profit you need to make. That’s your price. Cost-plus means “cost plus profit”.
Competitive pricing strategy aims to price the product at the lowest price among all recognized competitor.
Value pricing strategy. In this strategy, you deliver as much value as possible to your customers – and charge them for it. With this strategy, you charge a high price and justify it by delivering high value.
IX. Market leaders, challengers, followers
Market leader is the firm with the largest market share.
Challenger is a company with the second-largest market share.
Followers present no threat to the leader and concentrate on market segmentation.
X. Gross Domestic Product and other measures of income
* Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time.
* GDP deflator a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.
* Nominal GDP is the value of all final goods based on the prices existing during the time period of production.
* Real GDP is the value of all final goods produced during a given time period based on the prices existing in a selected base year.
* Gross national product (GNP) is the total income earned by a nation’s permanent residents (called nationals). It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here.
* Net national product (NNP) is the total income of a nation’s residents (GNP) minus losses from depreciation.
* National income is the total income earned by a nation’s residents in the production of goods and services.
* Personal income is the income that households and non-corporate businesses receive.
* Disposable personal income is the income that households and non-corporate businesses have left after satisfying all their obligations to the government.
* Depreciation is the wear and tear on the economy's stock of equipment and structures.
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