SUPPLY DEMAND A MODEL OF A COMPETITIVE MARKET A market a group of producers and consumers who exchange a good or Competitive Market market in which there are many buyers and sellers of service for payment the same good or service o No individual s actions have a noticeable effect on the price at which o When a market is competitive its behavior is well described by the the good or service is sold supply and demand model 5 key elements of the model 1 Demand curve 2 Supply Curve 3 set of factors that cause the demand curve to shift and the set of factors that cause the supply curve to shift 4 Market equilibrium equilibrium price and equilibrium quantity 5 The way the market equilibrium changes when the supply curve or demand curve shifts DEMAND CURVE The quantity of any good or service that people want to buy depends on the price The higher the price the more they want to purchase Demand Schedule and the Demand Curve Demand Schedule table showing how much of a good or service consumers will want to buy at different prices o As price rises the quantity demanded the actual amount consumers are willing to buy at some specific price falls Demand Curve A graphical representation of the demand schedule the relationship between the quantity demanded and price DOWNWARD slope o Law of Demand That a higher price for a good or service other things equal leads people to demand a smaller quantity of that good or service Shifts of the Demand Curve Shift of the demand Curve A change in the quantity demanded at any given price represented by the change of the original demand curve to a new position denoted by a new demand curve o Larger population popularity of similar products Movement along the Demand Curve A change in the quantity demanded of a good that is the result of a change in that good s price Understanding Shifts of the Demand Curve o Increase in demand Rightward shift of the demand curve at any given price consumers demand larger quantity of the good or service that before o Decrease in demand Leftward shift of the demand curve at any given price consumers demand a smaller quantity of the good or service than before 5 Factors that shift the demand curve for a good service o 1 Change in price of related goods services 2 Changes in income 3 Change in taste 4 Change in expectations 5 Change in the number of consumers Willingness to Pay and the DEMAND Curve Willingness to pay maximum price at which he or she would buy the good The step formation in a demand curve for willingness to pay is illustrated with each step representing one consumer and its height indicating that consumer s willingness to pay Consumer surplus if the amount willing to pay for a good is higher than the actual price the consumer purc1hases it for Ex Willing to pay 50 but only pays 30 the net gain is then 20 o Individual consumer surplus the net gain to an individual buyer from the purchase of a good It is equal to the difference between the buyer s willingness to pay and the price paid o Total Consumer Surplus the sum of the individual consumer surpluses of all the buyers of a good in a market o Consumer Surplus used to refer to both individual and to total consumer surplus o The total consumer surplus generated by the purchases of a good at a given price is equal to the area below the demand curve but above that price The demand curve for a good is determined by each potential consumer s willingness to pay Individual consumer surplus is the net gain an individual consumer gets from buying a good The total consumer in a given market is equal to the area under the market demand curve but above the price A fall in the price of a good increases consumer surplus through 2 channels a gain to consumers who would have bought at the original price and a gain to consumers who are persuaded to buy by the lower price A rise in the price of a good reduces consumer surplus in a similar fashion Producer Surplus and the SUPPLY Curve Producer surplus and the supply curve is PARALLEL to that of consumer surplus and the demand curve Seller s Cost the lowest price at which a potential seller he or she is willing to sell a good The true measure of the cost of doing something is always its opportunity cost The real cost of something is what you must give up to get it The minimum price at which someone will sell a good as the cost of selling that good even if he or she doesn t spend any money to make the good available for sale Individual Producer Surplus the net gain to an individual seller from selling a good It is equal to the difference between the price received and the seller s cost Total Producer Surplus the sum of the individual producer surpluses of all the sellers of a good in a market o Economists use the term Producer Surplus to refer both to individual and to total producer surplus To Determine the Total Producer Surplus from sales of a good The total producer surplus from sales of a good at a given price is the area above the supply curve but below that price A fall in price reduces Producer Surplus A rise in price increases Producer Surplus Consumer Surplus Producer Surplus and the Gains From Trade o Markets are a remarkably effective way to organize economic activity generally make society as well off as possible given the available resources o Gains From Trade