Chapter 4 - The Market Forces of Supply and Demand

4-1 The Market

What Is a Market?

• Organized markets
• Ex. Agricultural commodities dedicated to wheat and corn.
  • Buyers know what price range they have to spend on buying goods, while sellers know the price range to sell products. Buyers and sellers ensure that a specific time and place is set up for them to meet up.
  • Auctioneers maintain order and arrange all sales, while also finding a balanced price that'll satisfy buyers and sellers.
• Unorganized markets
  • Ex. Local ice cream market.
  • Ice cream buyers don't meet up at certain times or places like an organized market. Ice cream sellers offer a variety of products in different locations and they make sure to display the price of an ice cream cone.
  • Unorganized markets don't include auctioneers to call out a price.
  • Buyers have the option to choose how many cones to buy at each store.

What Is Competition?

• Ice cream sellers are aware of how similar their products are to those of other sellers, while buyers know they can choose from a plethora of sellers.
• competitive market: a market in which there are many buyers and many sellers so that each has a negligible impact on the market price.
• A market must ensure that the goods offered for sale are all identical, as well as the reassurance that no buyers or sellers have any influence over the market price.
• Some competitive markets consist of one seller, others consist of multiple.
• Price takers determine the price that buyers and sellers base their market on.
• Monopolies are markets with one seller who sets a price.

4-2 Demand

The Demand Curve: The Relationship between Price and Quantity Demanded

• A good's price determined the quantity demanded of a good.
• Quantity demanded: the amount of a good that buyers are willing and able to purchase.
• Law of demand: the claim that other things are equal, the quantity demanded of a good falls when the price of the good rises.
• 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 versus Individual Demand

• The market demand determines the sum of each of the demands for a particular good or service.
• A market demand curve depicts the total quantity demanded of a good varies as the good's price varies.

Shifts in the Demand Curve

• The demand curve can shift when the quantity being demanded at any given price alters.
  • Ex. If the American Medical Association revealed that eating ice cream leads to a longer and healthier life, ice cream sales would have a higher demand. This surplus of purchasing larger quantities of ice cream would shift the demand curve for ice cream.
• The demand curve shifts to the right when there's a change that raises the quantity that buyers wish to purchase at any given price (increase in demand).
• The demand curve shifts to the left when any given change lowers the quantity that buyers wish to purchase (decrease in demand).
• A person's income influences their demand for certain products.
• When the demand for a good drop, the income drops and it is called a normal good.
• An inferior good is when the demand for a good rises when the income drops.
• Normal good: a good for which, other things being equal, an increase in income leads to an increase in demand.
• Inferior good: a good for which, other things being equal, an increase in income leads to a decrease in demand.
• Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other.
• Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other.

4-3 Supply

The Supply Curve: The Relationship between Price and Quantity Supplied

• Quantity supplied: the amount of a good that sellers are willing and able to sell.
• Law of supply: the claim that other things are equal, the quantity supplied of a good rise when the price of the good rises.
• The supplied quantity of a good rises when the price of said good rises and vice versa.
• 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 versus Individual Supply

• To get the market supply curve, we must take the sum of the individual supply curves horizontally.
• The market supply curve shows how the total quantity supplied differs as the good's price changes, too.

Shifts in the Supply Curve

• The market supply curve shifts when one of the factors in holding the supply constant changes.
• An increase in supply can be characterized as a shift in the supply curve to the right, while a shift to the left indicates a decrease in supply.

4-4 Supply and Demand Together

Equilibrium

• Equilibrium: a situation in which the market price has reached the level at which quantity supplied equals quantity demanded.
• Equilibrium price: the price that balances quantity supplied and quantity demanded.
• Equilibrium quantity: the quantity supplied and the quantity demanded at the equilibrium.
• The denotation for equilibrium is when forces are at balance.
• The equilibrium of a price is often called the market-clearing price.
• Surplus: a situation in which quantity supplied is greater than quantity demanded.
• Shortage: a situation in which quantity demanded is greater than quantity supplied.
• A surplus is sometimes described as an excess supply of a good.
• A shortage is often referred to as excess demand.

Three Steps to Analyzing Changes in Equilibrium

• Law of supply and demand: the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance.
• The amount of products a producer wishes to sell is called the quantity supplied, while the supply itself is the position of the supply curve.
• When there are an increase in demand, the equilibrium price increases.
• A change in supply includes a shift in the supply curve.
• A movement along a fixed supply curve is often called a change in the quantity supplied.

4-5 Conclusion: How Prices Allocate Resources

• Job searching contributes to the supply of labor services.
• The price of a good will determine how much of it is produced and who produces it.