4.1 Markets and Competitions

What Is a Market?

• Market- A group of buyers and sellers of a particular good or service

• Supply and demand

  • Forces that make market economies work

  • Determine the quantity of each good produced and the price at which it is sold

• Markets can be organized with in-person meet ups along with an auctioneer

  • More often markets without any formal meeting

What is Competition?

• Competition market- a market in which there are many buyers and many sellers so that each has a negligible impact on the market price.

4.2 Demand

The Demand Curve: The Relationship between Price and Quantity Demanded:

• Quantity demanded- the amount of a good that buyers are willing and able to purchase

• Law of demand- the claim that, other things equal, the quantity demanded of a good falls when the price of the good 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 versus Individual Demand:

• Market demand- the sum of all individual demands for a particular good or service

• Market demand at each price is the sum of the individuals’ demands

Shifts in the Demand Curve:

• Increase in demand- any change that increases the quantity demanded at every price and shifts the demand curve to the right

• Decrease in demand- any change that reduces the quantity demanded at every price and shifts the demand curve to the left

• There are many variables that can cause a shift in the demand curve

  • Income

  • Prices of related goods

  • Tastes

  • Expectations

  • Number of buyers

The Supply Curve: The Relationship between Price and Quantity Supplied:

• Quantity supplied- the amount of a good that sellers are willing and able to sell

• Law of supply- the claim that other things equal, the quantity supplied of a good rise when the price of the good rises

• Supply schedule- a table that shows the relationship between the price of a good and the quantity supplied

  • Influences how much producers of the good want to sell

• Supply curve- a graph of the relationship between the price of a good and the quantity supplied

Market Supply versus Individual Supply:

• Market supply- the sum of the supplies of all sellers

Shifts in the Supply Curve:

• The market supply curve holds other things constant, the curve shifts when one of its factors change

  • Input prices

  • Technology

  • Expectations

  • Number of sellers

4.3 Supply and Demand Together

Equilibrium:

• 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

  • 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 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