AU26 Econ 2001.01 Chapter 4: Demand, Supply, and Equilibrium

market

economic agents who are trading a good or service puls the rules and arragnements for trading

• may have a physical location or not

market price

the price at which buyers and sellers conduct transactions.

What does the competiitive equilibrium price do?

equates the quantity demanded and the quantity supplied

prices

selection device, encourages trade between the sellers who can produce goods at a low cost and the buyers who place a high value on the goods

perfectly competitive market

• buyer pays and every seller charges the same market price

• no buyer or seller is big enough to influence that market price

• all sellers sell an identical good or service

(very few markets are perfectly competitive)

perfect competition characteristics

• easy to enter (low barriers of entry)

• Many buyers and sellers

• price takers

• similar products just sold from different sellers

quanitity demanded

the amount of a good that buyers are willing to purchase at a given price

demand schedule

table that reports the quantity demanded at differnet prices, holding all else equal

demand curve

plots the quanitity demanded at different prices

** What does marginal benefit equal for the consumer?

the consumer’s willingness to pay

Where does the demand curve show on a graph?

negative slope

market demand curve

the sum of the individual demand curves of all the potential buyers

• plots the relationship between the total quantity demanded and the market price, holding all else equal

law of demand

the quanitity demanded rises when the price falls

shifts of the demand curve

TRIPE

• Tastes and preferences

• Related goods avalibility and prices (subsitutes and complements)

• Income and weath (normal and inferior)

• Population (number and scale of buyers)

• Expectation about the future for buyers

What happens when there is a movement ALONG the demand curve?

a change in the product’s own price

Changes in Tastes and Preferences

change in what we perosnally like, enjoy, or value

Changes in Income and Wealth

a change in income affects your ability to pay for goods and services

normal good

see an increase in demand when consumer income rises

see a decrease in demand when consumer income falls

• more expensive goods

inferior good

see a decrease in demand when income rises

see an increase in demand when consumer income falls

• more cheaper goods

Changes in Related Goods Avaliability and Prices

A change in the availability and prices of related goods will shift the demand curve.

subsititute goods

goods that replace each other

ex.) beef and chicken

complementary goods

goods that are used together

ex.) milk and cereal

Changes in Population

When the number of buyers increases, the demand curve shifts right. When the number of buyers decreases, the demand curve shifts left.

Changes about Expectations

Consumers’ beliefs about the future influence demand.

quantity supplied

amount of a good that sellers are willing to sell at a given price.

supply schedule

table that reports the quantity supplied at different prices.

supply curve

Plots the quantity supplied at different prices.

market supply curve

Plots the relationship between the total quantity supplied and the market price, holding all else equal.

law of supply

 the quantity supplied rises when the price rises

Shifts of the Supply Curve

• Natural Causes

• Input Prices

• Costs & Techology

• Expectations about the future

• Government

(can also be number and scale of sellers)

What happens when there is a movement ALONG the supply curve?

a change in the product’s own price

input

good or service used to produce another good or service.

Changes in the Number and Scale of Sellers

When the numbers of sellers increases, the supply curve shifts to the right. When the number of sellers decreases, the supply curve shifts to the left. 

Changes in Sellers’ Beliefs about the Future

Corn farmers in the Midwest build storage for their crops based on the belief that prices will improve during non-harvest months

competitive equilibrium

point at which the market comes to an agreement about what the price will be (competitive equilibrium price) and how much will be exchanged (competitive equilibrium quantity) at that price.

What do Competitive markets do?

converge to the price at which quanitity supplied and quanitity demanded are the same

Excess Demand

 when consumers want more than suppliers provide at a given price

What does excess demand result in?

shortage

Excess Supply

when suppliers provide more than consumers want at a given price

What does excess supply result in?

surplus