Chapter Four How prices allocate resources Prices Signals that guide the allocation of resources Mechanism for rationing scarce resources Determine who produces each good and how much is produced Markets and Competition Market a group of buyers and sellers of a particular good or service Competitive market one with many buyers and sellers each has a negligible effect of price price taker Competitive markets are characterized by free entry exit Demand Quantity demand amount of good that buyers are willing and able to purchase Law of demand other things equal when the price of the good rises quantity demanded of a good falls Demand schedule a table relationship between the price of a good and quantity demanded Demand curse a graph relationship between the price of a good and quantity demanded Individual demand demand of one individual Market demand sum of individual demands Changes in demand Income Normal good an increase in income leads to an increase in demand Inferior good an increase in income leads to a decrease in demand Tastes do you like the good not like the good Expectations if everybody expects something to happen in the future it will happen in the present Prices of related goods Substitutes two goods an increase in the price of one leads to an increase in the demand for the other Complements two goods an increase in the price of one leads to a decrease in the demand for the other Supply Supply schedule a table relationship between the price of a good and the quantity supplied Supply curve a graph relationship between the price of a good and the quantity supplied Individual supply supply of one seller Market supply sum of individual supply Quantity supplies amount of good sellers are willing and able to sell Law of supply when the price of the good rises quantity supplied of a good also rises Shifts in supply Increase in supply any change that increases the quantity supplied at every price shift to right Decrease in supply any change that decreases the quantity supplied at every price shift to left Changes in supply Variables that can shift supply curve input prices technology expectations about future Shifts vs Movements along curves Market Equilibrium Equilibrium a situation no tendency for price to change quantity supplied quantity demanded supply and demand curves intersect Shifts in the supply curve change in supply Movement along a fixed supply curve change in the quantity supplied Movement along a fixed demand curve change in the quantity demanded Shift in the demand curve change in demand