Chapter 4 - The Market Forces of Supply and Demand

market

Group of buyers and sellers of a particular good or service

organized markets

markets for agricultural commodities like wheat and corn

less organized markets

much more common like the ice cream market

what are price and quantity determined by?

all buyers and sellers as they interact in the marketplace

competitive market

a market in which there are so many buyers and sellers that each has no large impact on price

perfectly competitive market

1. goods offered are exactly the same

2. so many buyers & sellers that no single buyer or seller has influence over market price

price takers

buyers and sellers that must accept the price the market determines as they cannot influence prices

monopoly

market where there’s only one seller who sets the price, facing no direct competition

quantity demanded

amount of a good that buyers are willing to buy

law of demand

claim that other things equal, the quantity demanded rises when price falls

demand schedule

table showing the relationship between price of a good & quantity demanded (quantity demanded at each price)

demand curve

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

how does the demand curve slope?

downward

market demand

sum of all individual demands for a good/service (horizontal/x-axis values)

when there is an increase in demand…

demand curve shifts right

when there is a decrease in demand…

demand curve shifts left

what variables can shift the demand curve?

income, price of related goods, tastes, expectations and number of buyers

normal good

a good for which demand falls when income falls and demand increases when income increases

inferior good

a good for which demand rises when income falls, and demand falls when income rises (there’s better options)

substitutes

when a fall in the price of one good reduces the demand for another good, as consumers switch to the cheaper option (both goods satisfy similar desires)

complements

when a fall in the price of one good raises the demand for another (& vice versa); typically consumed together (cars & gasoline)

quantity supplied

amount of a good that sellers are willing or able to sell

law of supply

claim that other things equal, the quantity supplied rises when price rises

supply schedule

table showing the relationship between price of a good & quantity supplied (quantity supplied at each price)

supply curve

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

how does the supply curve slope?

upward

market supply

sum of all individual quantities supplied by sellers for a good or service

when supply curve shifts right…

increase in supply (increases quantity supplied @ every price)

when supply curve shifts left…

decrease in supply (reduces quantity supplied @ every price)

what variables can shift the supply curve?

input prices, technology, expectations, # of sellers

input prices

price of ingredients or resources required for production

cheaper input prices —> cheaper good to make —> supply curve shifts RIGHT

technology

technological advancements —> reduces labour —> reduces costs —> supply curve shifts RIGHT

equilibrium

point where supply and demand curves intersect ; indicates market price at which quantity supplied = quantity demanded

equilibrium price

market price where quantity of a good supplied = quantity demanded

equilibrium quantity

quantity of a good demanded and supplied at equilibrium price

surplus

situation where quantity supplied is greater than quantity demanded

shortage

where quantity demanded is greater than quantity supplied (unmet demand for the good)

law of supply and demand

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

steps to analyze changes in equilibrium

1. determine whether event shifts demand or supply curve (or both)

2. decide in which direction curve shifts

3. use supply and demand diagram to see how shift changes equilibrium price & quantity

increase in supply means…

price falls, quantity rises

decrease in supply means…

price rises, quantity falls

increase in demand means…

price rises, quantity rises

decrease in demand means…

price falls, quantity falls

increase in demand and supply means…

price is ambiguous, quantity rises

increase in demand and decrease in supply means…

price rises, quantity is ambiguous

decrease in demand and increase in supply means…

price falls, quantity is ambiguous

decrease in demand and decrease in supply means…

price is ambiguous, quantity falls