MARKETS AND COMPETITION Market A is a group of buyers and sellers of a particular good or service supply demand The terms and refer to the behavior of people as they interact with one another in competitive markets MARKETS AND COMPETITION demand Buyers determine supply Sellers determine Competitive Markets competitive market A is a market in which there are many buyers and sellers so that each has a negligible impact on the market price 1 Competition Perfect and Otherwise Perfect Competition perfect Products are Multiple buyers and sellers so that each has equal influence over price equal Buyers and Sellers are Monopoly One everything seller and seller controls Competition Perfect and Otherwise Oligopoly Limited sellers aggressive competition Monopolistic Competition sellers limited products price Each seller may set for its own product DEMAND Demand is the amount of a good that buyers are willing and able to purchase Law of Demand law of demand The states that other things equal the quantity demanded of a good falls when the price of the good rises 2 The Demand Curve The Relationship between Price and Quantity Demanded Demand Schedule demand schedule The is a table that shows the relationship between the price of the good and the quantity demanded Demand Schedule The Demand Curve The Relationship between Price and Quantity Demanded Demand Curve demand curve The is a graph of the relationship between the price of a good and the quantity demanded 3 Demand Schedule and Demand Curve Price of Ice Cream Cone 3 00 2 50 1 A decrease in price 2 00 1 50 1 00 0 50 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice Cream Cones 2 increases quantity of cones demanded Market Demand versus Individual Demand Market demand refers to the sum of all individual demands for a particular good or service Graphically individual demand curves are summed to obtain the market demand curve Shifts in the Demand Curve Change in Quantity Demanded shift Movement price Caused by a change in 4 Changes in Quantity Demanded Price of IceCream Cones B 2 00 A tax that raises the price of ice cream cones results in a movement along the demand curve A 1 00 D 0 4 8 Quantity of Ice Cream Cones Shifts in the Demand Curve Income Prices of Related Goods Tastes Expectations Number of Buyers Shifts in the Demand Curve movement Change in Demand A in the demand curve either to the left or right Caused by any change that alters the quantity curve left or right demanded 5 Shifts in the Demand Curve Price of Ice Cream Cone Increase in demand Decrease in demand Demand curve D3 Demand curve D1 Demand curve D2 Quantity of Ice Cream Cones 0 Shifts in the Demand Curve Consumer Income As income increases the demand for a normal good will increase As income increases the demand for an inferior good will decrease Consumer Income Normal Good Price of IceCream Cone 3 00 An increase in income 2 50 Increase in demand 2 00 1 50 1 00 0 50 D1 0 1 2 3 4 5 6 7 8 9 10 11 12 D2 Quantity of Ice Cream Cones 6 Consumer Income Inferior Good Price of IceCream Cone 3 00 2 50 An increase in income 2 00 Decrease in demand 1 50 1 00 0 50 0 1 D2 D1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice Cream Cones Shifts in the Demand Curve Prices of Related Goods When a fall in the price of one good reduces the demand for another good the two goods are called substitutes When a fall in the price of one good increases the demand for another good the two goods are called complements Variables That Influence Buyers 7 SUPPLY Supply is the amount of a good that sellers are willing and able to sell Law of Supply law of supply The states that other things equal the quantity supplied of a good rises when the price of the good rises The Supply Curve The Relationship between Price and Quantity Supplied Supply Schedule supply schedule The is a table that shows the relationship between the price of the good and the quantity supplied Supply Schedule 8 The Supply Curve The Relationship between Price and Quantity Supplied Supply Curve supply curve The is the graph of the relationship between the price of a good and the quantity supplied Ben s Supply Schedule and Supply Curve Price of Ice Cream Cone 3 00 1 An increase in price 2 50 2 00 1 50 1 00 0 50 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice Cream Cones 2 increases quantity of cones supplied Market Supply versus Individual Supply Market Supply refers to the sum of all individual supplies for all sellers of a particular good or service Graphically individual supply curves are summed to obtain the market supply curve 9 Shifts in the Supply Curve Technology Expectations Input Prices Number of Sellers Shifts in the Supply Curve Change in Quantity Supplied Movement the supply curve Caused by a change in anything that alters the quantity supplied Change in Quantity Supplied Price of IceCream Cone S C 3 00 A rise in the price of ice cream cones results in a movement along the supply curve A 1 00 0 1 5 Quantity of Ice Cream Cones 10 Shifts in the Supply Curve Change in Supply shift A in the supply curve either to the left or right price Caused by a change in a determinant Shifts in the Supply Curve Price of Ice Cream Cone Supply curve S3 Supply curve S1 Decrease in supply Supply curve S2 Increase in supply 0 Quantity of Ice Cream Cones Variables That Influence Sellers 11 SUPPLY AND DEMAND TOGETHER Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded SUPPLY AND DEMAND TOGETHER Equilibrium Price The price that balances quantity supplied and quantity demanded On a graph it is the price at which the supply and demand curves Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price On a graph it is the quantity at which the supply and demand curves SUPPLY AND DEMAND TOGETHER Demand Schedule Supply Schedule At 2 00 the quantity demanded is equal to the quantity supplied 12 The Equilibrium of Supply and Demand Price of Ice Cream Cone Supply Equilibrium Equilibrium price 2 00 Equilibrium quantity 0 1 2 3 4 5 6 7 8 Demand 9 10 11 12 13 Quantity of Ice Cream Cones Markets Not in Equilibrium a Excess Supply Price of Ice Cream Cone Supply Surplus 2 50 2 00 Demand 0 4 Quantity demanded 7 10 Quantity supplied Quantity of Ice Cream Cones Equilibrium Surplus When price equilibrium price then quantity supplied quantity demanded There is or a Suppliers will the price to increase sales lower thereby moving toward equilibrium 13 Equilibrium Shortage When price