Principles of Economics Chapter 4: The Market Forces of Supply and Demand

market

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

buyers

determine the demand for the product

sellers

determine the supply of the product

competitive market

when there are many buyers and many sellers and each has a negligible impact on market price

perfectly competitive market

a market in which goods are all exactly the same and at the market price the buyers are able to buy all they want, and the sellers can sell all they want.

quantity demanded

the amount of a good that buyers are willing and able to pay for

law of demand

the quantity demanded of a good falls when the price of a good rises and the quantity demanded of a good rises when the price of a good falls 

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

non-price determinants of demand

things that determine buyer’s demand for a good other than the good’s price

ex. number of buyers, income, price of related goods, tastes, expectations

Number of buyers

a non-price determinant of demand

an increase in this cause the demand curve to shift right

a decrease in this causes the demand curve to shift left

income

a non-price determinant of demand

for a normal good and an increase in this - demand curve shifts right

for an inferior good and an increase in this - demand curve shifts left

normal good

goods for which the demand increases when consumer income rises

ex. organic food, brand-name clothing, dining at restaurants

inferior good

goods for which the demand decreases as consumer income rises

ex. generic brands, instant noodles, public transportation

Prices of related goods

non-price determinant of demand that involves substitutes and complements

substitutes - increase in price of one shifts demand curve to the right

complements - increase in price of one leads to demand curve shift to the left

substitutes

goods that an increase in the price of one leads to an increase in the demand for the other

ex. coke and pepsi, laptops and tablets, movie streaming and movie theater

complements

goods that an increase in the price of one leads to a decrease in the demand for the other

ex. smartphones and apps, college tuition and textbooks

Tastes

Non-price determinant of demand that is anything that causes a shift in opinions/wants about a good will increase demand for that good and shift its demand curve to the right

ex. an advertisement

expectations

non-price determinant of demand

if individuals expect an increase in income in the future than the current demand increases (shifts right)

if individuals expect higher prices to come in the future than the current demand increases (shifts right)

market demand

sum of all individual demands for a good or service

market demand curve

graph or table which shows the total demand for an item. This can be found by adding up individual demand curves/schedules

Change in demand (shift in demand curve)

occurs when a non-price determinant of demand changes (number of buyers, income, taste, price of related goods, expectations)

change in the quantity demanded (movement along fixed demand curve)

occurs when price changes

quantity supplied

the amount of a good being sold that is what sellers are willing and able to sell

law of supply

the quantity supplied of a good rises when the price of the good rises and the quantity supplied of a good falls when the price of the good falls

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

non-price determinants of supply

input prices, technology, number of sellers, expectations

input prices

non-price determinant of supply

it is the costs associated with the resources and raw materials used in the production of goods and services

A fall in this makes production more profitable for each output price meaning they can supply a larger quantity at each output price and supply curve shifts right

negatively related

technology

non-price determinant of supply

determines that amount of inputs required to produce a unit of output

can be cost-saving and decreases production costs that shift the supply curve to the right

number of sellers

non-price determinant of supply

increase in this increases the quantity supplied at each price and shifts the supply curve to the right

a decrease in this decreases the quantity supplied at each price and shifts the supply curve to the left

expectations about the future

non-price determinant of supply

sellers may adjust the supply if they expect a price change in the future

ex. reduce supply now to sell at an expected higher price later

market supply

the sum of the supplies of all sellers of a good or service

market supply curve

the total market supply which can be found by adding the quantity supplied for individual sellers

change in supply (shift in supply curve)

occurs when a non-price determinant of supply changes (technology, input price, number of sellers, expectations)

equilibrium

when the price has reached the level where quantity supplied equals quantity demanded

surplus

the quantity supplied is greater than the quantity demanded

usually involves cutting down price to increase sales until reaching equilibrium

shortage

the quantity demanded is greater than the quantity supplied

usually, sellers will raise the price until it reaches equilibrium

law of supply and demand

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