Chapter 4 The Market Forces of Supply and Demand Markets and Competition competitive markets o Supply and demand behavior of people as they interact with one another in o Market group of buyers and sellers of a particular good or service Sometimes markets are highly organized Ex Markets for agricultural commodities Buyers and sellers meet at specific time and place where auctioneer helps set prices and arrange sales More often markets are less organized Ex Market for ice cream No set time or location each seller posts its own price each buyer decides how much to buy o Competitive market a market in which there are many buyers and many sellers so that each has a negligible impact on the market price Each seller of ice cream has limited control over price because other sellers are offering similar products Perfectly competitive highest form of competition ex Wheat The goods offered for sale are all exactly the Demand same The buyers and sellers are so numerous that no single buyer or seller has any influence over market price Price takers buyers and sellers must accept the price the market determines Monopoly Market with one seller who sets own price Ex One local cable television company per town o Demand Curve Relationship between price and quantity demanded Quantity demanded amount of a good that buyers are willing to purchase Law of demand other things equal quantity demanded of a good falls when the price of the good rises Demand schedule table that shows relationship between price of a good and quantity demanded Demand curve graph of relationship between price of a good and quantity demanded o Market demand vs individual demand particular good or service o Shifts in demand curve Market demand sum of all the individual demands for a Increase in demand shifts curve to the right Decrease in demand shifts curve to the left Variables that shift demand curve Income lower income means you have less to spend so you have to spend less on most goods If the demand for a good falls when income falls the good is a normal good An inferior good is if the demand rises when income falls Ex As income falls you are less likely to buy a car or take a cab and more likely to ride a bus Prices of related goods frozen yogurt and ice cream if price of frozen yogurt falls you will buy more yogurt and less ice cream The two goods are called substitutes Complements are pairs of goods that are used together When a fall in the price of one good raises demands in another Ex Gasoline and automobiles Tastes If you like ice cream you buy more of it Expectations expectations about future affect demand for good or service today Ex If you expect to earn higher income next month you may choose to save less now and spend more of current income buying ice cream Number of Buyers If number of buyers increases the quantity demand in market would be higher at every price and market demand would increase Supply o The Supply curve the relationship between price and quantity supplied and able to sell Quantity supplied amount of a good that sellers are willing Law of supply claim that other things equal quantity supplied of a good rises when price of good rises Supply schedule table that shows relationship between price of good and quantity supplied Supply curve graph of relationship between price of good and quantity supplied o Market supply vs individual supply 2 o Shifts in the supply curve Market supply is the sum of the supplies of all sellers usually Input prices To produce output of ice cream sellers use various inputs cream sugar flavoring machines buildings labor of workers etc when price of one or more of these inputs rises producing ice cream is less profitable and firm supplies less ice cream Technology Invention of mechanized ice cream machine reduces amount of labor necessary By reducing firms costs advance in technology raises supply of ice cream Supply and Demand Together o Equilibrium Expectations If a firm expects price of ice cream to rise in future it will put some of current production into storage and supply less to market today Number of sellers if Ben and Jerry were to retire from ice cream business supply in market would fall Supply curve shows what happens to quantity supplied of a good when its price varies holding constant all other variables that influence sellers When one variable changes supply curve shifts Curve shifts only when there is a change in a relevant variable that is not named on either axis Price is on vertical axis so a change in price represents movement along supply curve Because input prices technology etc are not measured on either axis a change in one of them shifts the supply curve Equilibrium a situation in which the market price has reached the level at which quantity supplied equals quantity demanded Where supply and demand curves intersect Price at the intersection is equilibrium price the price that balances quantity supplied and quantity demanded The quantity at the intersection is equilibrium quantity the quantity supplied and the quantity demanded at the equilibrium price At equilibrium price the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell Surplus a situation in which quantity supplied is greater than quantity demanded Sometimes called a situation of excess supply Sellers respond to surplus by cutting prices Falling prices increase quantity demanded and decrease quantity supplied Prices continue to fall until market reaches equilibrium Shortage a situation in which quantity demanded is greater than quantity supplied Sometimes called a situation of excess demand Demanders are unable to buy all they want at going price Sellers raise prices without losing sales As price rises quantity demanded falls quantity supplied rises and market moves toward equilibrium Law of supply and demand the claim that the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance o 3 steps for analyzing changes in equilibrium 1 Decide whether the event shifts the supply or demand curve or perhaps both 2 Decide in which direction the curve shifts 3 Use the supply and demand diagram to see how the shift changes the equilibrium price and quantity
View Full Document
Unlocking...