Chapter 4 Market Forces of Supply and Demand

• Market


  a group of buyers and sellers of a particular product
• Competitive Market


  one with many buyers and sellers, each has a negligible effect on price.
• Perfectly Competitive Market


  All goods exactly the same

  Buyers and sellers so numerous that no one can affect market price - each is a "price taker"
• Price Taker


  a company that must accept the prevailing prices in the market of its products, its own transactions being unable to affect the market price.
• Demand


  The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.
• Law of Demand


  the claim that the quantity demanded of a good falls when the price of the good rises, other things equal
• Demand Schedule


  a table that shows the relationship between the price of a good and the quantity demanded.

  
• Demand Curve and Schedule Graph


  Graph

  
• Market Demand


  The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price. Denoted by Qᵈ (Quantity Demand).

  
• Market Demand Curve

  
• Demand Curve Shifters


  The demand curve shows how price affects quantity demanded, other things (non-price determinants of demand) being equal.

  Changes in non-price determinants of demands shift the D curve.
• Demand Curve Shifters: Number of Buyers


  Increase in # of buyers increases quantity demanded at each price.

  Shifts D curve to the right

  
• Demand Curve Shifters: Income


  Normal Good - a type of a good which experiences an increase in demand due to an increase in income

  Demand for a normal good is positively related to income.

  Increase in income causes increase in quantity demanded at each price, shifts D curve to the right.

  Inferior Good - demand decreases when consumer income rises

  Demand for an inferior good is negatively related to income.

  An increase in income shifts D curves for inferior goods to the left.
• Demand Curve Shifters: Prices of Related Goods


  Substitute Goods - Two goods, an increase in the price of one causes an increase in demand for the other.

  Complement Goods - Two goods, an increase in the price of one causes a fall in demand for the other.
• Demand Curve Shifters: Tastes


  Anything that causes a shift in tastes toward a good will increase demand for that good.

  D curve shifts to the right.
• Demand Curve Shifters: Expectations


  Expectations affect consumers’ buying decisions.

  e.g.

  If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now.

  If the economy sours and people worry about their future job security, demand for new autos may fall now.
• Variables that Influence Buyers

  
• Supply


  The quantity supplied of any good is the amount that sellers are willing and able to sell.
• Law of Supply


  the claim that the quantity supplied of a good rises when the price of the good rises, other things equal
• Supply Schedule


  A table that shows the relationship between the price of a good and the quantity supplied.

  
• Supply Schedule and Curve

  
• Market Supply


  The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price.

  
• Market Supply Curve

  
• Supply Curve Shifters: Input Prices


  
A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price.

  S curve shifts to the right.

  
• Supply Curve Shifters: Technology


  determines how much inputs are required to produce a unit of output.

  A cost-saving technological improvement has the same effect as a fall in input prices.

  shifts S curve to the right.
• Supply Curve Shifters: Number of Sellers


  An increase in the number of sellers increases the quantity supplied at each price.

  shifts S curve to the right.
• Supply Curve Shifters: Expectations


  In general, sellers may adjust supply* when their expectations of future prices change. ( * If good not perishable)

  Example:

  • Events in the Middle East lead to expectations of higher oil prices.
  • In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price. S curve shifts left.
• Variables that Influence Sellers

  
• Supply and Demand Together

  Equilibrium - P has reached the level where quantity supplied equals quantity demanded.

  
• Equilibrium Price


  the price that equates quantity supplied with quantity demanded.

  
• Equilibrium Quantity


  the quantity supplied and quantity demanded at the equilibrium price.

  
• Surplus


  excess supply.

  when quantity supplied is greater than quantity demanded.

  
• Shortage


  excess demand.

  when quantity demanded is greater than quantity supplied.

  
• Three Steps to Analyzing Changes in Equilibrium

  1. Decide whether event shifts S curve, D curve, or both.
  2. Decide in which direction curve shifts.
  3. Use supply-demand diagram to see how the shift changes equilibrium P and Q.
• Terms for Shift vs. Movement Along Curve

  • Change in supply - a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs)
  • Change in the quantity supplied- a movement along a fixed S curve occurs when P changes
  • Change in demand - a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers)
  • Change in the quantity demanded - a movement along a fixed D curve occurs when P changes
• How Prices Allocate Resources

  In market economies, prices adjust to balance supply and demand. These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources.
• CHAPTER SUMMARY 1

  • A competitive market has many buyers and sellers, each of whom has little or no influence on the market price.
  • Economists use the supply and demand model to analyze competitive markets.
  • The downward-sloping demand curve reflects the Law of Demand, which states that the quantity buyers demand of a good depends negatively on the good’s price.
  • demand depends on buyers’ incomes, tastes, expectations, the prices of substitutes and complements, and number of buyers. If one of these factors changes, the D curve shifts
• CHAPTER SUMMARRY 2

  • The upward-sloping supply curve reflects the Law of Supply, which states that the quantity sellers supply depends positively on the good’s price
  • Other determinants of supply include input prices, technology, expectations, and the number of sellers. Changes in these factors shift the S curve.
  • The intersection of S and D curves determines the market equilibrium. At the equilibrium price, quantity supplied equals quantity demanded.
• CHAPTER SUMMARY 3

  • If the market price is above equilibrium, a surplus results, which causes the price to fall. If the market price is below equilibrium, a shortage results, causing the price to rise.
  • We can use the supply-demand diagram to analyze the effects of any event on a market: First, determine whether the event shifts one or both curves. Second, determine the direction of the shifts. Third, compare the new equilibrium to the initial one.
  • n market economies, prices are the signals that guide economic decisions and allocate scarce resources.