ECON - Chapter 4: The Market Forces of Supply and Demand

what is a market?

market: a group of buyers and sellers of a particular good or service

buyers as a group determien the demand

sellers as a group determineth esupply

what is competition?

price and quantity are determined by all buyers and sellers as they interact with the market

competitive market: a market in which there are many buyers and many sellers so that each has a negligible impact on the market

to reach the highest form of compeption a market must have two characterisistcs:

1. the goods offered for sale are all exactly the same

2. the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price

not all goods and services follow the perfectly competitive market rules

the demand curve

quantity demand: the amount of a good that buyers is willing and able to purchase

the determinant of the good’s price plays a central role in how the market works

law of demand: the claim that other things being equal, the quantity demand of the goods falls when the price of the good rise

demand schedule: a table that shows the relationship between the price of a good and the quantity demand

demand curve: a graph of the relationship between the price of a good and the quantity demand

• slopes downward because a lower price means a greater quantity demanded

market demand vs. individual demand

Market demand: the sum of all individual demands for a particular good or service

Individual demand: the quantity of a good or service that one buyer is willing and able to purchase at various prices.

sum the individuals demand curves horizontally to obtain the market demand curve (add the individual quantities demand)

shifts in the demand curve

shifting righ inidcades an increase in demand

shifting left indicates a decrease in demand

changes in mnay vairbles can shift the demand cruve

• normal good: a good for which, ither things being eual, an increase in income leads to an increase in demand

• inferior good: a good for which, other things being eual, an increase in income leads to a decrease in demand

• substitudes: two goods for which an increase in the price of one leads to an increas in demand for the other

• complements: two goods for which an increase in the prive of one leads to a decrease in the demand for the other

• tastes: if you like something, you buy more of it

• expectations: youre expectations about eht future may affect your demand for a good or service today

• number of buyers

the supply curve

quantity supplied: the amount of a good that sellers are willing and able to sell

law of supply: the claim that, other things being equal, the quantity supplied of good rises when the price of the good rises

supply schedule: a table showing the relationship between the price of a good and the quantity supplied

supply curve: a graph representing this relationship, typically slopes upward as higher prices incentivize greater quantity supplied.

market supply vs. indivudual supply

the market supply is the sum of the supplies of all sellers

sum the indivudal supply curves horizantally to obtain the market supply curve

the market supply curve shows how thte total qunitty supplied varies as the pirce of the good varies, holding constant all other factors that influecne produces decsions about how muhc to sell

shifts in supply curve

shifts to the right indicat an increase in supply

shifts to the left indicate a decrease in supply

input prices: the supply of a good is negitivly related tot eh price of the inputs used to make the good

tehcnology: advancements can increase supply by making production more efficient.

expectations: producers' expectations about future prices can affect current supply decisions

number of sellers: market supply depends on the number of the supply’s sellers

supply and demand together: equilibrium

equilibrium: a situation in which the market price has reached the level at which quantity supplied equals jauntily demanded; two curves intersect

equilibrium price: the price at the intersecting point of quantity supplied and quantity demanded; sometimes called the “market clearing price”

equilibrium quantity: the quantity supplied, and the quantity demanded at the equilibrium

surplus: a situation in which quanaiyr supplied is greater than quanity demanded; sometimes called a sitation of excess supply

• in response to surplus sellers cut their prices to increase the demand of the product

• represents moving along the curve instead of it shifting

shortage: a situation in which wuanitty demadned is greater than quanitty supplied

• sellers can adjust by increasing prcices without losing sales

law of supply and demand: the claim that the rices of any good adjusts to bring the quanitty supplied and the quantity demaned of that good into balance

analyzing changes in equillibrium

1. decided whether the event shifts the supply curve, demand curve, or both

2. decide if the curve shifts to the right or left

3. use the supply and demand diagram to compare the initial equilibrium with the new one,

   • this shows how the shift affects the equilibrium price and quantity