Chapter 4 The market forces of supply and demand Demand A market is a group of buyers and sellers of a particular good or service The buyers as a group determine the demand for a product and the sellers as a group determine the supply of the product Price and quantity are determined by all buyers and sellers as they interact in the marketplace Competitive market is a market in which there are so many buyers and so many sellers that each has a negligible impact on the market force The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase One factor that plays a major role in this is the price of the good Law of Demand the claim that other things equal when the price of a good rises the demand of the good falls and when the price falls the quantity demanded rises Demand schedule a table that shows the relationship between the price of a good and the quantity demanded with everything else held constant that influences how much of the food consumers want to buy A table that shows the quantity demanded at each price Demand curve a graph of the relationship between the price of a good and the quantity demanded graphs the demand schedule and illustrates how the quantity demanded of the good changes as its price varies shows what happens to the quantity demanded of a good when its price varies holding constant all other variables that influence buyers When one of these variables changes the demand curve shifts The market demand of each price is the sum of all the individual demands for a particular good or service The market demand curve shows how the total quantity demanded of a good varies as the price of the good varies while all the other factors that affect how much consumers want to buy are held constant If something happens to alter the quantity demanded at any given price the demand curve shifts Any change that increases the quantity demanded at every price shifts the demand curve to the right and is called an increase in demand Any change that reduces the quantity demanded at every price shifts the demand curve to the left and is called a decrease in demand Changes in demand and change in quantity demanded Normal good when an increase in income leads to an increase in demand or if the demand for a good falls when income falls Inferior goods is when the demand for a good rises when income falls Substitutes is when a fall in the price of one good reduces the demand for another good Complements when a fall in the price of one good raises the demand for another good Supply The quantity supplied of any good or service is the amount that sellers are willing and able to sell Law of supply other things equal when the price of a good rises the quantity supplied of the good also rises and when the price falls the quantity supplied falls as well It is the relationship between price and quantity supplied Supply schedule a table that shows the relationship between the price of a good and the quantity supplied Supply curve a graph of the relationship between the price of a good and the quantity demanded Market supply is the sum of the supplies of all sellers Market supply curves are the sum of the individual supply curves horizontally To find the total quantity supplied at any price we add the individual quantities which are found on the horizontal axis of individual supply curves The market supply curve shows how the total quantity supplied varies as the price of the good varies holding constant all the other factors beyond price that influences producers decisions about how much to sell Because the supply curve holds other things constant the curve shifts when one of the factors changes Any change that raises quantity supplied at every price shifts the supply curve to the right and is called an increase in supply Any change that reduces the quantity supplied at every price shifts the supply curve to the left and is called a decrease in supply Variables that can shift the supply curve Input prices the higher the input price the less a company will produce of the particular good Technology through technological advancement reducing firms costs the advance in technology raises the amount supplied Number of sellers Supply and Demand together Equilibrium a situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded It s the point at which the supply and demand curves intersect Equilibrium price the price that balances quantity supplied and quantity demanded The price at the intersection of the supply and demand curves Equilibrium quantity the quantity supplied and the quantity demanded at the equilibrium price At the 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 Shortage a situation in which quantity demanded is greater than quantity supplied Law of supply and demand the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance A shift in the supple curve is called a change in supply and a shift in the demand curve is called a change in demand A movement along a fixed supply curve is called a change in the quantity supplied and a movement along a fixed demand curve is called a change in the quantity demanded Summary Economists use the model of supply and demand to analyze competitive markets In a competitive market there are many buyers and sellers each of whom has little or no influence on the market price The demand curve shows how the quantity of a good demanded depends on the price According to the law of demand as the price of a good falls the quantity demanded rises Therefore the demand curve slopes downward In addition to price other determinants of how much consumers want to buy include income the prices of substitutes and complements tastes expectations and the number of buyers If one of these factors changes the demand curve shifts The supply curve shows how the quantity of a good supplied depends on the price According to the law of supply as the price of a good rises the wuantity supplied rises Therefore the supply curve slopes downward In addition to price other determinants of how much producers want to sell include input prices technology expectations and the number of sellers If one of these factors changes the supply curve shifts The
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