Principles of Microeconomics Chapter 4 Competitive market a market so full of buyers and sellers that each has a negligible impact on the market price Perfectly competitive highest form of competition in which the goods offered are all exactly the same and buyers and sellers are so numerous that they have no influence over market price Quantity demanded the amount of a good that buyers are willing and able to purchase Price is most important determinant in demand Law of Demand other things equal the quantity demanded of a good falls when the price of a good rises and vice versa Demand curve a graph of the relationship between the price of a good and the quantity demanded P is the Y axis Q is the X axis Negative slope good service Market demand the sum of all the individual demands for a When the demand curve shifts that s called a shift in demand When a point on the demand curve shifts that s called a change in quantity demanded Any change that increases qD at every price and shifts the curve to the right is an increase in demand Any change that decreases qD at every price and shifts the curve to the left is a decrease in demand Variables that shift Demand Income if your income rises you will buy more of the good If you income falls you will buy less note depends on type of good If the demand for a good falls when income falls that is a normal good If the demand for a good rises when income falls that is an inferior good Ex Milk is a normal good breakfast burritos from McDonald s are an inferior good 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 often used in place of each other When a fall in the price of one good increases the demand for another good the two goods are called complements they go with each other ex PB and J Tastes hard to determine but play a factor Expectations If you expect an income increase in the future your demand will increase now If you expect the price of a good to fall in the future your demand will decrease now Number of buyers If more buyers entered the market overall market demand would increase Quantity supplied the amount of a good service that sellers are willing and able to sell Law of supply Other things equal when the price of a good falls the quantity supplied falls as well and vice versa Supply curve curve relating price and quantity supplied Positive slope good service Market supply the sum of the supplies of all sellers of a When the supply curve shifts that s called a shift in supply When a point on the supply curve shifts that s called a change in quantity supplied Any change that increases qS at every price and shifts the supply curve to the right is an increase in supply Any change that decreases qS at every price and shifts the supply curve to the left is a decrease in supply Variables that shift Supply Input prices when the price of one or more inputs rises supply will decrease producing more is no longer profitable Technology If a technological advance makes it easier cheaper more efficient to produce a good the supply of that good will increase Expectations If a firm expects the price of a good to rise in the future it will cut back supply today Number of sellers If a seller stopped producing overall market supply would decrease Equilibrium a situation in which the market price has reached the level at which quantity supplied equals quantity demanded when the curves are graphed together it is the point at which the curves The actions of buyers and sellers naturally move markets toward intersect equilibrium quantity demanded quantity supplied not shift the curves Surplus the quantity of the good supplied is greater than the Shortage the quantity of the demand for a good is greater than the A change in price will only move a point ALONG the curves Will Three Steps to Analyzing Changes in Equilibrium 1 Decide whether the event shifts the supply curve or the demand curve or both 2 Decide whether the curve shifts to the right or left 3 Use supply and demand diagram to compare initial and new equilibrium
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