Andrew'Nahum'9/1/10'ECON200'Chapter'4'Notes''Markets'&'Competition:'• Market''a'group'of'buyers'and'sellers'of'a'particular'good/se ll ers'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'• Perfectly)competitiveI'all'goods'are'the'same;'buyers/sellers'are'so'numerous'that'no'single'buyer/seller'has'any'influence'over'the'market'price 'o Buyers/sellers'in'perfectly'competitive'markets'must'accept'the'price'the'market'determines'(price)takers)'• Monopoly4)some'markets'have'only'one'seller'who'sets'the'price'Demand:'• Determinants'of'Demand:'o Price'of'a'specific'good'o Price'of'other'goods'o Income'o Taste'(preferences)'o Demographics'o Expectations'• Quantity.demandedI'amount'of'a'good'buyers'are'willing/able'to'purchase'• Law.of.demandI'quantities'demanded'of'a'good'falls'when'the'price'rises'• Demand.scheduleItable'that'shows'relationship'between'the'price'of'a'good'and'the'quantity'demanded'• Demand.curveI'graph'of'the'relationship'between'the 'pric e'o f'a'g oo d'a nd 'qua nt ity 'de m an de d'(p rice 'is'yIaxis)'Shifts'in'the'Demand'Curve:'• Increase)in)quantity)demanded4)to'move'along'the'demand'curve'when'the'price'changed'• Increase)in)demand4'demand'curve'shifts'right;'at'ea ch 'pric e'c on sum e r'bu ys'm ore'• Decrease)in)demand4'demand'curve'shifts'left;'at'each'price'consumer'buys'less'• IncomeI'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'a n'in cre ase 'in'in com e 'le ad s'to 'a'd ec rease'in'demand'(curve'shift'left)'ex.'People'more'likely'to'take'bus'than'drive'• Prices'of'Related'Goods:'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'other'• Tastes:'o If'you'like'it,'you'buy'more'of'it'o Tastes'are'based'on'historical'&'psychological'forces'that'are'beyond'the'realm'of'economics'o Economics'examine'what'happens'when'tastes'change'• Expectations:'o Your'expectations'about'the'future'may'affect'your'demand'for'a'good'or'service'today'• Number'of'Buyers:'o Market'demand'depends'on'the'number'of'these'buyers'• Summary:'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'p ro d u ce 'le ss'• Law.of.supplyI'quantity'supplied'o f'a'g ood 'rises'w h en 'th e'p rice 'of'a 'go od 'rises'• Supply.scheduleI'table'that'shows'the'rela tio nsh ip'b et w ee n'p rice 'an d'qu an tit y'su pp lie d'• Supply.curveI'graph'of'the'relationship'bet we en 'pric e'a nd 'qu an tit y'su pp lied'• Market'supply'is'the'sum'of'the'supplies'of'all'sellers;'shows'how 't he 'to ta l'q ua nt ity 'supp lie d'v arie s'as't he 'pric e'o f'the'good'varies'• As'with'demand'curves,'we'sum'the'indiv idu al 'sup pl y'c urv es'h orizo nta ll y't o'o bt ain 'th e'm a rke t'sup pl y'c urv e'• Because'the'market'supply'curve'holds'other'things'c on sta nt ,'the 'cu rve 'shift s'w he n'o ne 'of't he 'fact ors'c ha ng e'• 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'su pp lie d'at 'ev ery 'pric e'sh ifts't he 'sup pl y'c urve 'to 'th e'l eft '(decrease)in)supply)'• When'the'price'of'inputs'rises,'producing'a'good'is'less'profitable,'firms'supply'less.'If'input'prices'rise'substan tially,'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 TechnologyI'technology'used'to'produce'a'good're du ce s'a'firm’s'c os ts ,'p rod u c es 'm o re'g oo ds ,'limits'manpower'o ExpectationsI'if'a'firm'expects'the'price'to'rise'in'the'fut u re,'it 'w il l'p ut'current'production'into'storage 'an d'supply'less'currently'o Number'of'sellersI'market'supply'depends'on'the'number'of'sellers'o SummaryI'the'supply'curve'shows'wha t'ha pp en s'to 'th e'q ua nt ity 'sup plie d'o f'a'g oo d'w h en 'its'p rice 'va ries,'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'd em a nde d'a t't he 'eq uil ibriu m 'pric e.• Equilibrium.quantity''quantity'supplied'and'quantit y'd em a nd ed 'at 'th e'eq uilib riu m 'p ric e.• 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).• ShortageI'quantity'demanded'is'greater'than'quantity'supplied'(excess)demand).• Law.of.supply.and.demandI'the'price'of'any'good'adjusts'to'b ring 'the 'qu an tit y'su pp lie d'a nd 'qu ant ity 'de m an de d'fo r'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
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