ECON 104 Lecture Notes - Lecture 4: Perfect Competition, Normal Good, Exogeny
Document Summary
The supply and demand curve is the most powerful tool in economics. It is used to explain how prices are determined. Every model from here on out will relate to supply and demand. As with most models, we must make assumptions. Here we will assume that we are analyzing a perfectly competitive market, meaning many buyers and sellers, a single buyer or seller does not have an effect on market. Perfectly competitive market- a market that has many buyers and many sellers, all firms are selling identical products and no barriers to new firms entering the market. The law of demand states that holding all else constant, when the price of a product falls, the quantity demanded of the product will increase, and vice versa. Demanded is product, quantity demanded is numbers of product demanded. Substitution effect- when consumers buy less of a product when the price goes up because it is relatively more expensive than other products.
