The Market Forces of Supply and Demand CH 4

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

Classified according to their level of competition... its impossible for one individual to affect prices, making the market competitive

Perfectly Competitive Market

All goods are the same, buyers and sellers are so numerous that no one can affect the market price, they are "price takers"

Perfectly competitive markets have two characteristics

the goods and services bought and sold are exactly the same
there are so many buyers that a single one can affect the market price

True or False: The market for public utilities, like gas and electricity, does not exhibit the two primary characteristics that define perfectly competitive markets.

True

True or False: The market for wheat does not exhibit the two primary characteristics that define perfectly competitive markets.

False

Quantity Demanded

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

Law of Demand

States that theres an INVERSE relationship between price and quantity demanded... basically as price goes up, quantity demanded goes down

State the distinction between demand and quantity demanded

Demand is a relationship, quantity demanded is how much a person is willing and able to buy

Demand

The relationship between price and quantity demanded which tells us how much we're willing to buy

Demand Schedule

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

Market Demand

The sum of all individual demands for a good or service... basically the process of horizontally adding

Market Demand Curve

Sum the individual demand curves horizontally... to find the total quantity demanded at any price, we add the individual quantities, in doing so we arrive at market quantity demanded

The Demand Curve

Shows how price affects quantity demanded, other things being equal

What are "other things" when talking about the demand curve

They are the non price determinants of demand... these are the things that determine buyers' demand for a good, other than the good's price. These cause a SHIFT in the D curve

What is the difference between a shift and a movement?

When price changes, we slide it up and down, but when other changes happen, it shifts.

List the determinants of demand

number of buyers, income, prices of two related goods, tastes, expectations about the future

Increase in number of buyers

Increases quantity demanded at each price, shifts demand curve to the right

Decrease in number of buyers

Decreases quantity demanded at each price, shifts demand curve to the left

Normal Good

An increase in income leads to an increase in demand. Demand curve shifts right

Inferior Good

An increase in income leads to a decrease in demand. Demand curve shifts left.

Substitutes

Two goods are substitutes if the increase in price of one good leads to to increase in the demand of another good
ex. coke and pepsi

Complements

Two goods are complements if an increase in the price of one leads to a decrease in the demand of another
ex. cars and gas are complements... when gas goes up people buy less cars

Tastes (or preference)

Anything that causes a shift in tastes toward a good will increase demand for that good and hit its d curve to the right

Expectations about the future

ex. you book your airline tickets early so that you don't pay a higher price later

Quantity Supplied

Amount of a good sellers are willing and able to sell

Law of Supply

With all other thing equal, when the price of a goof rises, the quantity supplied of the good rises, and when the price falls the quantity supplied falls.... this has to do with the primary motivation of producers to make money!

Market Supply

Sum of the supplies of all sellers of a good or service (multiple sellers)

Market Supply Curve

Sum of individual supply curves horizontally. To find the total quantity supplied at any price, we add the individual quantities... remember, quantity supplied is NOT the same as market quantity supplied

The Supply Curve

Shows how price affects quantity supplied, other things being equal (the non-price determinants)

What are the "Other things" for supply curves

input prices, technology, number of sellers, expectations about the future

Input prices

supply is negatively related to prices of inputs, a fall in input prices makes production more profitable at each output price
- firms supply a larger quantity at each price, the s curve shifts to the right

Ex. of input prices

Wages, prices of raw materials

Technology

Determines how much inputs are required to produce a unit of output. A cost-saving technological improvement has the same effect as a fall in input prices- shifts s curve to the right

Number of Sellers

An increase in the number of sellers increases the quantity supplied at each price - shifts s curve to the right
when there are more producers, there will be more things produced! - shifting to right

Expectations about the future

sellers may adjust supply when their expectations of future prices change (If good not perishable)
- basically reduce supply now to make more money in the future!

Equilibrium

a point of balance where the quantity demanded and quantity supplied are exactly the same at the going price - market equilibrium price and market equilibrium quantity determine this

Equilibrium Price

Price where q supplied = q demanded

Equilibrium Quantity

Q supplied and demanded at the equilibrium price

Surplus

(excess supply) quantity supplied is greater than quantity demanded... happens when market isn't in equilibrium - when price is ABOVE free market equilibrium price (determined from supply and demand)
qs>qd

How to resolve a surplus

-sellers try to increase sales by cutting price... surplus will still be there, but eventually we'll reach equilibrium

Shortage

(excess demand) quantity demanded is greater than quantity supplied

How to resolve a shortage

Sellers will raise the prices of good when it is in high demand. Consumers who really want it will still pay, but those who do not will drop out, eventually leading us to equilibrium

What are the three steps to analyzing changes in equilibrium?

1. Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves
2. Decide whether the curve shifts to the right or to the left
3. Use the supply-and-demand diagram (compare the initial and the new equilibrium, effects on equilibrium price and quantity)

Change in Supply

A shift in the supply curve... occurs when a non-price determinant of supply changes (like technology or costs)

Change in the Quantity Supplied

A movement along a fixed supply curve occurs when price changes

Change in Demand

A shift in the demand curve occurs when a non-price determinant of demand changes (like income of # of buyers)

Change in the quantity demanded

A movement along a fixed demand curve, occurs when price changes

How prices allocate resources

in market economies, prices adjust to balance supply and demand. These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources

True or False: When both the demand and supply curves shift, you can always determine the effect on price and quantity without knowing the magnitude of the shifts.

FALSE