Eco 101 Chapter 4

The Market Forces of Supply and Demand

Supply and Demand

Words economists use most often

Forces that make market economies

Refer to the behavior of people as they interact in competitive markets

Market

A group of buyers and sellers of a particular good or service

Buyers as a group determine the demand for the product

Sellers as a group determine the supply of the product

Competitive Market

Market in which there are many buyers and many sellers

Price and quantity sold are determined by all buyers and sellers as they interact in the market place

Perfectly Competitive Market

Goods offered for sale are all exactly the same

Buyers and sellers are numerous

At the market price buyers can but all they want and sellers can sell all they want

Monopoly

One company is the only seller in the market

Sets the price

Other Markets

Between perfect competition and monopoly

Law of Demand

Other things being equal, when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded rises

Quantity Demanded

Amount of a good that buyers are willing and able to purchase

Individual Demand

An individuals demand for a product

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded

Demand Curve

A graph of the relationship between the price of a good and the quantity demanded

Market Demand

The sum of all the individual demands for a particular good or service

Market Demand Curve

Shows how the total quantity demanded of a good varies as its price changes, holding constant all the other factors that affect consumer purchases

Holds other things constant

Does not need to be stable over time

Shifts in the Demand Curve

Change that increases quantity buyers want to purchase at any price shifts demand curve to the right

Change that decreases quantity buyers want to purchase at any price shifts demand curve to the left

Variables that Influence Buyers - Income

Normal good: An increase in income leads to an increase in demand

Inferior good: An increase in income leads to a decrease in demand

Variables That Influence Buyers - Prices of related goods

Substitutes: Pairs of goods that are used in place of each other; Increase in the price of one leads to an increase in the demand for the other

Complements: Pairs of goods that are used together; Increase in the price of one leads to a decrease in the demand for the other

Variables That Influence Buyers - Tastes

Unique, affected by historical and psychological forces

Variables That Influence Buyers - Expectations

Future changes in income and prices

Variables That Influence Buyers - Number of buyers

Market demand depends on how many buyers there are in the market

Law of Supply

Other things being equal, when the price of a good rises, the quantity supplied also rises, and when the price falls, the quantity supplied falls as well

Quantity Supplied

Amount of a good that sellers are willing and able to sell

Individual Supply

A sellers supply for a product

Supply Schedule

A table that shows the relationship between the price of a good and the quantity supplied

Supply Curve

A graph of the relationship between the price of a good and the quantity supplied

Market Supply

The sum of the supplies of all sellers

Market Supply Curve

Shows how the total quantity supplied varies as the price varies, holding constant all the other factors that influence producers’ decisions about how much to sell

Holds other things constant and doesn’t need to be stable over time

Supply Curve Shifts

Change that increases quantity sellers want to sell at any price shifts supply curve to the right

Change that decreases quantity sellers want to sell at any price shifts supply curve to the left

Variables That Influence Sellers - Input Prices

The supply of a good moves in the opposite direction of the prices of inputs

Variables That Influence Sellers - Technology

Technology for turning inputs into output and advances in technology increase the supply

Variables That Influence Sellers - Expectations

Future change in prices

Variables That Influence Sellers - Number of Sellers

Market supply depends on how many sellers there are in the market

Equilibrium

Quantity of the good that buyers are willing and able to buy exactly balances quantity that sellers are willing and able to sell

Equilibrium Price

Balances the quantity supplied and quantity demanded

Surplus

Quantity supplied greater than quantity demanded

Sellers respond by cutting prices

Shortage

Quantity demanded is greater than quantity supplied

Sellers can raise prices without losing sales

Law of Supply and Demand

Claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance

Steps for Analyzing Changes in Equilibrium

1. Decide if the event shifts the supply or demand curve (or perhaps both)

2. Decide in which direction the curve shifts

3. Use a supply and demand diagram to see how the shift changes the equilibrium price and quantity