chapt 4

• Market


  A group of buyers and sellers of a particular good or service
• Competitive market


  • There are many buyers and many sellers so that each has a negligible impact on the market price
  • Buyers and sellers are price takers
• Perfectly competitive markets have two characteristics: 1) The goods offered for sale are all exactly the same, 2) The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price
• Quantity demanded


  The amount of a good that buyers are willing and able to purchase
• Law of demand


  Other things being equal, when the price of a good rises, the quantity demanded 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
• Demand curve


  A graph of the relationship between the price of a good and the quantity demanded
• Market demand


  The sum of all the individual demands for a particular good or service
• Increase in demand


  Shifts the demand curve to the right
• Decrease in demand


  Shifts the demand curve to the left
• Normal good


  A good for which demand falls when income falls
• Inferior good


  A good for which demand rises when income falls
• Substitutes


  Goods that satisfy similar desires, so a fall in the price of one reduces the demand for the other
• Complements


  Goods that are often used together, so a fall in the price of one increases the demand for the other
• Economists do not try to explain people's tastes because they are based on historical and psychological forces that are beyond the realm of economics
• Goods


  • hot dogs and hamburgers
  • sweaters and sweatshirts
  • cinema tickets and film streaming services
• The price of hot fudge falls

  You will buy more hot fudge and more ice cream
• Complements


  Two goods for which an increase in the price of one leads to a decrease in the demand for the other
• Tastes


  The most obvious determinant of your demand
• Economists normally do not try to explain people's tastes because tastes are based on historical and psychological forces that are beyond the realm of economics
• Expectations


  Your expectations about the future may affect your demand for a good or service today
• Normal good


  A good for which, other things being equal, an increase in income leads to an increase in demand
• Inferior good


  A good for which, other things being equal, an increase in income leads to a decrease in demand
• Substitutes


  Two goods for which an increase in the price of one leads to an increase in the demand for the other
• If a firm increases advertising

  The demand curve shifts to the right
• Demand curve shifting to the right

  Increases the equilibrium price and quantity
• Shifts in supply


  Any change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left.
• Variables that influence sellers


  • Price of the good itself
  • Input prices
  • Technology
  • Expectations
  • Number of sellers
• Equilibrium


  A situation in which the market price has reached the level at which quantity supplied equals quantity demanded
• Equilibrium price


  The price that balances quantity supplied and quantity demanded
• 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
• The actions of buyers and sellers naturally move markets toward the equilibrium of supply and demand
• Law of supply and demand

  The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
• Three steps to 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
• Hot weather increases demand for ice cream


  Demand curve shifts to the right, increasing equilibrium price and quantity
• Change in supply vs change in quantity supplied

  A shift in the supply 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".
• Change in market equilibrium due to a shift in supply


  1. Shift in supply curve

  2. Excess demand causes price increase

  3. Equilibrium price rises

  4. Equilibrium quantity falls