Chapter 4: Supply and Demand

Because buyers and sellers in perfectly competitive markets must accept the price the market determines, they are said to be...?

"Price Takers"

Variables that can cause a shift in the Demand Curve

1. Income 2. Prices of Related Goods 3. Tastes 4. Expectations 5. Number of Buyers

Factors that cause shifts in the supply curve

1. Input Prices (prices used to make the goods) 2. Technology 3. Expectations 4. Number of Sellers

What two qualities must a market have to be "perfectly competitive"?

1. The goods offered for sale are all exactly the same, and 2. the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.

Three steps to analyze equilibrium

1. we decide whether the event shifts the supply curve, the demand curve, or both 2. we decide whether the curve shifts to the left or right 3. we use the supply-and-demand diagram to compare the initial and the new equilibrium

When does the market demand curve shift?

A curve shifts when there is a change in a relevant variable that is not measured on either axis.

A change in price would cause?...

A move along the demand curve

Increase in Demand

Any change that increases the quantity demanded at every price, shifts the demand curve to the right

Increase in Supply

Any change that raises quantity supplied at every price, such as a fall in the price of sugar, shifts the supply curve to the right

Decrease in Demand

Any change that reduces the quantity demanded at every price shifts the demand curve to the left

What happens 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.

Shortage

Demanders are unable to buy all they want at the going price. A shortage is sometimes called a situation of excess demand. prices usually increase

Normal Good

If the demand for a good falls when income falls

Inferior Good

If the demand for a good rises when income falls

Does the Demand Curve need to be stable over time?

No, because it holds all other things constant

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.

Law of Supply

Other things being 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.

Monopoly

Some markets have only one seller, and this seller sets the price. Such a seller is called a

Surplus

Suppliers are unable to sell all they want at the going price. A surplus is sometimes called a situation of excess supply.

Quantity Supplied

The amount sellers are willing and able to sell

Supply Curve

The curve relating price and quantity supplied The supply curve slopes upward because, other things being equal, a higher price means a greater quantity supplied.

Demand Curve

The line relating price and quantity demanded The demand curve slopes downward because, other things being equal, a lower price means a greater quantity demanded.

Market Demand Curve

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.

The Law of Supply and Demand

The price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance.

Market Supply

The sum of all supplies of all sellers Because the market supply curve is drawn holding other things constant, when one of these factors changes, the supply curve shifts.

Most markets are what? (organized or unorganized)

Unorganized and highly competitive (buyers can choose from various sellers, and sellers are trying to all attract the same buyers)

Complements

When a fall in the price of one good raises the demand for another good (peanut butter and jelly)

Substitutes

When a fall in the price of one good reduces the demand for another good, the two goods are called (If price of frozen yogurt falls, people will buy more frozen yogurt and less ice cream)

The only time you shift is...?

When there is a change in a relevant variable not on either axis

Market

a group of buyers and sellers of a particular good or service

Demand Schedule

a table that shows the relationship between the price of a good and the quantity demanded, holding constant everything else that influences how much of the good consumers want to buy.

Supply Schedule

a table that shows the relationship between the price of a good and the quantity supplied, holding constant everything else that influences how much producers of the good want to sell.

Decrease in Supply

any change that reduces the quantity supplied at every price shifts the supply curve to the left

Why are Perfectly Competitive Markets the easiest to analyze?

because everyone participating in the market takes the price as given by market conditions.

When a shift happens what happens to the equilibrium?

changes

Competitive Market

describe a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price. Seller has limited control of prices because other sellers are selling similar things Buyers have limited control as individuals for the price of what their buying

Equilibrium

one point at which the supply and demand curves intersect The price at this point is called "equilibrium price" and the quantity is "equilibrium quantity" The actions of the buyer and seller naturally move towards equilibrium

Quantity Demanded

the amount of the good that buyers are willing and able to purchase.

Market Demand

the sum of all the individual demands for a particular good or service.