Andrew Nahum 9 1 10 ECON200 Chapter 4 Notes Markets Competition Demand Determinants of Demand Income o Price of a specific good o Price of other goods o o Taste preferences o Demographics o Expectations Market a group of buyers and sellers of a particular good sellers o Buyers determine demand sellers determine supply Price and quantity are determined by all buyers and sellers as they interact in the marketplace Competitive market a market in which there are many buyers and sellers so that each has a negligible impact on the market price influence over the market price Perfectly competitive all goods are the same buyers sellers are so numerous that no single buyer seller has any o Buyers sellers in perfectly competitive markets must accept the price the market determines price takers Monopoly some markets have only one seller who sets the price Quantity demanded amount of a good buyers are willing able to purchase Law of demand quantities demanded of a good falls when the price rises Demand schedule table that shows relationship between the price of a good and the quantity demanded Demand curve graph of the relationship between the price of a good and quantity demanded price is y axis Shifts in the Demand Curve Increase in quantity demanded to move along the demand curve when the price changed Increase in demand demand curve shifts right at each price consumer buys more Decrease in demand demand curve shifts left at each price consumer buys less Income o Lower income means that you have less to spend on goods o Normal good good for which an increase in income leads to increase in demand curve shifts right o Inferior good good for which an increase in income leads to a decrease in demand curve shift left ex People more likely to take bus than drive o Substitutes two goods for which an increase in the price of one leads to an increase in the demand for the other o Complements two goods for which an increase in the price of one leads to a decrease in the demand for the Prices of Related Goods other Tastes Expectations Number of Buyers Summary If you like it you buy more of it o o Tastes are based on historical psychological forces that are beyond the realm of economics o Economics examine what happens when tastes change o Your expectations about the future may affect your demand for a good or service today o Market demand depends on the number of these buyers o Demand curve shows that happens to the quantity demanded of a good when its price varies holding constant all the other variables that influence buyers o When on of these other variables changes the demand curve shifts Supply Quantity supplied the amount of a good that sellers are willing able to sell When the price of a good is high selling is profitable so the quantity supplied is large When the price is low business is less profitable so producers produce less Law of supply quantity supplied of a good rises when the price of a good rises Market supply is the sum of the supplies of all sellers shows how the total quantity supplied varies as the price of the Supply schedule table that shows the relationship between price and quantity supplied Supply curve graph of the relationship between price and quantity supplied good varies As with demand curves we sum the individual supply curves horizontally to obtain the market supply curve Because the market supply curve holds other things constant the curve shifts when one of the factors change Any change that raises quantity supplied at every price shifts the supply curve to the right increase in supply Any change that reduces the quantity supplied at every price shifts the supply curve to the left decrease in supply When the price of inputs rises producing a good is less profitable firms supply less If input prices rise substantially a firm might stop producing a good Supply of a good is negatively related to the price of the inputs used to make the good o Technology technology used to produce a good reduces a firm s costs produces more goods limits manpower supply less currently o Expectations if a firm expects the price to rise in the future it will put current production into storage and o Number of sellers market supply depends on the number of sellers o Summary the supply curve shows what happens to the quantity supplied of a good when its price varies holding constant all the other variables that influence sellers When one of these other variables changes the supply curve shifts Supply Demand Together Equilibrium market price as reached the level at which quantity supplied equals quantity demanded Equilibrium price price that balances quantity demanded at the equilibrium price Equilibrium quantity quantity supplied and quantity demanded at the equilibrium price At the equilibrium price the quantity of the good that buyers are willing able to buy exactly balances the quantity that sellers are willing able to sell Surplus quantity supplied is greater than quantity demanded excess supply Shortage quantity demanded is greater than quantity supplied excess demand Law of supply and demand the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance When analyzing how some event affects the equilibrium in a market we proceed in 3 steps examples of pg 79 o Decide whether the event shifts the supply curve demand curve or both o Decide whether the curve shifts right of left o Use supply and demand diagram to compare the initial and new equilibrium which shows how the shift affects the equilibrium price and quantity
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