Competitive market - many buyers and sellers for the same good or service

• Behavior is described by the supply and demand model
  

Six Key Elements of the Supply and Demand Model

• The demand curve

• Set factors that cause demand to shift

• The supply curve

• Set factors that cause supply to shift

• Market equilibrium - includes equilibrium price and quantity

• Way equilibrium curve changes based on supply and demand curve shifts

Demand:

Demand Curve

• Determined by consumers/buyers

• Buyers have a desire to purchase a good

• Quantity demanded and price are inversely related

• The higher the price of an item, the less of that item people will be willing to purchase, and vice versa

Demand Schedule - table that shows how much of a certain good consumers are willing to buy at different prices

• Quantity Demanded - actual amount consumers are willing and able to buy at a certain price

• Demand - how much people want at every pricepoint
  

Demand Curve - graphical representation of a demand schedule

• Shows the relationship between quantity demanded and price
  

Law of Demand - the higher price of a good or service leads to less quantity demanded of that good or service, all other things being equal

• Demand curves are shifted due to population growth

• Shift in the demand curve (TRIBE factors, no change in price of THE good) ≠ movement along the demand curve (price change)

• Increase in demand = rightward shift in the curve

• Decrease in demand = leftward shift in the curve

Five Principle Factors that shift the demand curve (Determinants) (TRIBE)

• Changes in:

  • Taste - how people feel about a product

• Related goods or services

  • Substitutes in consumption - two goods for which a rise in the price of one of the goods leads to an increase in demand for the other good (example: Beef and Pork)

  • Complements in consumption - two goods that are used together. The rise in the price of one good leads to a decrease in demand for the other good (example: Beef and Potatoes)

• Income

  • Normal goods - a rise in income increases the demand (example: Butcher meat)

  • Inferior goods - a rise in income decreases the demand, mostly due to better, more expensive options (example: Spam, which is lower quality meat)

• Buyers (number of) (example: More parents = more baby supplies)

• Expectations (future price) (example: Buying large amounts of gasoline because of expectation of prices rising)

Individual Demand Curve - shows quantity demanded and price for a single customer

Market Demand Curve - combined quantity demanded of all consumers determined by the market price of a good

• Horizontal sum - individual demand curves of all consumers in a market

• Demand = is the curve

• Quantity Demanded = point on the curve

Supply:

Quantity Supplied - amount producers are willing to produce and sell

Supply Schedule - table that shows how much of a good or service produced will affect prices

• Supply Curve - shows the relationship between quantity supplied and price

• Price and quantity supplied are directly proportional

• Up and Down graphical movement

Law of Supply - the price and quantity supplied are directly related

• Movement along the supply curve is not the same as a shift in the supply curve

• Increase in supply = downward shift

• Decrease in supply = upward shift

Five Factors that Shift Supply Curve (IRENT)

• Input prices

  • Input - any good or service that is used to produce another good or service

  • Examples of input prices for producing donuts: Ingredients, Oven, Labor, Utility, and Rent

  • An increase in input costs leads to a decrease in supply

  • A decrease in input costs leads to an increase in supply

• Related goods or services

  • Substitutes in production (Example: Coke and BodyArmor)

  • Complements in production (Example: Cow skin and beef)

• Expectations (future price)

• Number of sellers (more sellers, more supply)

• Technology (new and better technology becomes available, leading to increase in supply)

Equilibrium

• Equilibrium: an economic condition where no individual would be better off with any alternative

• Achieved in a competitive market when quantity demanded is equal to quantity supplied (This is called the equilibrium price or market price)

• Equilibrium Quantity - quantity bought and sold at the equilibrium price

• Equilibrium can be calculated by bringing supply and demand curves together on one graph and finding where they intersect
  

Surplus - excess supply

Shortage - excess demand

• Market price always moves toward equilibrium

• When demand for a good/service increases, the equilibrium price and quantity both rise

• When supply for a good/service decreases, the equilibrium price rises, but the equilibrium quantity falls

• When both curves shift, the curve with the greatest magnitude of shift will control the equilibrium price and quantity

Price Controls - restrictions on how high or low a market price can go

• Price ceiling - the highest a price can be

  • Price ceilings above the equilibrium will not have any effect

  • This can lead to shortages

  • Wasted Resources - a form of inefficiency where people expend money, effort, and time to cope with the shortcomings experienced by a price ceiling

  • Inefficiently low quality - sellers sell lower quality goods at a lower price

  • Sparks the emergence of black markets

• Price floor - lowest a price can be

  • Price floors below the equilibrium will not have any effect

  • Includes minimum wage

  • Can lead to surpluses

  • Inefficiently low quantity

  • Inefficiently high quality
    

Quantity Controls - also known as a quota; an upper limit on the amount of a good that can be bought or sold

• Government can limit quantity by requiring licenses to produce certain products

• These create wedges in the graph, where the quantity does not meet the equilibrium point

  • This is called the quota rent

• The cost of these wedges is known as deadweight loss, or the triangle created between the wedge and equilibrium point