Ch 4: The Market Forces of Supply and DemandSunday, September 21, 20147:29 PM Market: a group of buyers and sellers of a particular good or service. The buyers determine the demand and the sellers determine the supplyCompetitive Market: a market in which there are many buyers and many sellers so that each has a negligible impact on the market priceFor a market to be perfectly competitive:1. The goods offered for sale are all exactly the same2. The buyers and sellers are so numerous that no single buyer or seller has any influence over the market priceBecause buyers and sellers in perfectly competitive markets must accept the price the market determines, they are said to be price takers.Not all goods and services are sold in perfectly competitive markets. Some markets have only one seller, and this seller sets the price. This is called a monopoly. 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-Market demand: the sum of all the individual demands for a particular good or service-When the demand curve shifts to the right, it is called an increase in demand and when the demand curve shifts to the left, it is called a decrease in demand. The most common reasons for a shift in the demand curve are:oIncome. -Normal good: a good for which, other things equal, an increase in income leads to an increase in demand-Inferior good: a good for which, other things equal, an increase in income leads to a decrease in demandoPrices of Related Goods-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 otheroTaste (ex: if you like ice cream, you buy more of it)oExpectations (your expectations about the future may affect your demand for a service or good today)oNumber of buyers (the market demand depends on the number of buyers)-A curve shifts when there is a change in a relevant variable that is not measured on either axis, such as income, prices of related goods, taste, expectations, and number of buyers. When any of these things change, there is a shift in the demand curve. Supply-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 rises when theprice of the good rises-Supply schedule: the claim that, other things equal, the quantity supplied of a good rises 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-Supply curve: a graph of the relationship between the price of a good and the quantity supplied-Market supply: the sum of the supplies of all the sellersoAny change that raises the quantity supplied at every price shifts the supply curve to the right and is called an increase in supply.oAny change that reduces the quantity supplied at every price shifts the curve to the left and is called a decrease in supply.-Some variables that can shift the supply curve:oInput prices (to produce an output, sellers use various inputs. When the price of one or more inputs rises, producing the output is less profitable so they supply less. The supply of a good is negatively related to the price of the inputs used to make the good)oTechnology (advances in technology may reduce the amount of labor necessary to make the good, so by reducing the firms' costs, the advance in technology can raise the supply)oExpectationsoNumber of sellers (if a seller retired, the supply in the market would fall)-A curve shifts only when there is a change in a relevant variable that is not named on either axis. The price is on the vertical axis, so a change in price represents a movement ALONG the supply curve. A change in other variables that are not measured on the axis' shifts the supply curve. 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-Falling and rising prices represent movements along the supply and demand curves, not shifts in the curves. -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-When analyzing how some event affects the equilibrium in a market, we proceed in three steps:1. Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves.2. Decide whether the curve shifts to the right or to the left. 3. Use the supply-and-demand diagram to compare the initial and new equilibrium-A shift IN the supply curve is called a "change in supply", and a shift IN the demand curve is called a "change in demand." A movement ALONG a fixed supply curve is called a "change in the quantitysupplied," and a movement ALONG a fixed demand curve is called a "change in the quantity