Chapter 4 - The Market Forces of Supply and Demand

4.1 Markets and Competitions

What Is a Market?

  • Market- A group of buyers and sellers of a particular good or service
  • Supply and demand
    • Forces that make market economies work
    • Determine the quantity of each good produced and the price at which it is sold
  • Markets can be organized with in-person meet ups along with an auctioneer
    • More often markets without any formal meeting

What is Competition?

  • Competition market- a market in which there are many buyers and many sellers so that each has a negligible impact on the market price.

4.2 Demand

The Demand Curve: The Relationship between Price and Quantity Demanded:

  • Quantity demanded- the amount of a good that buyers are willing and able to purchase

  • Law of demand- the claim that, other things 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

    Demand Schedule and Curve

Market Demand versus Individual Demand:

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

  • Market demand at each price is the sum of the individuals’ demands

    Sum of Individual Demands

Shifts in the Demand Curve:

  • Increase in demand- any change that increases the quantity demanded at every price and shifts the demand curve to the right

  • Decrease in demand- any change that reduces the quantity demanded at every price and shifts the demand curve to the left

  • There are many variables that can cause a shift in the demand curve

    • Income
    • Prices of related goods
    • Tastes
    • Expectations
    • Number of buyers

    Shift in Demand Curve

    Shift vs Movements in Demand Curve

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 equal, the quantity supplied of a good rise when the price of the good rises
  • Supply schedule- a table that shows the relationship between the price of a good and the quantity supplied
    • Influences how much producers of the good want to sell
  • Supply curve- a graph of the relationship between the price of a good and the quantity supplied

Market Supply versus Individual Supply:

  • Market supply- the sum of the supplies of all sellers

    Supply Schedule and Supply Curve

Shifts in the Supply Curve:

  • The market supply curve holds other things constant, the curve shifts when one of its factors change

    • Input prices
    • Technology
    • Expectations
    • Number of sellers

    Shifts in Supply Curve

4.3 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 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

  • Law of supply and demand- the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

    Equilibrium

    Not in Equilibrium

Three Steps to Analyzing Changes in Equilibrium:

  1. Decide whether the event shifts the supply or demand curve (or perhaps both).
  2. Decide in which direction the curve shifts.
  3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity