Chapter 4: The Market Forces of Supply and Demand

Beer and pizza are complements because they are often enjoyed together. When the price of beer rises, what happens to the supply, demand, quantity supplied, quantity demanded, and price in the market for Pizza?

When the price of beer rises, the demand for pizza declines, because beer and pizza are complements and people want to buy less beer. When we say the demand for pizza declines, we mean that the demand curve for pizza shifts to the left as in Figure 5. The supply curve for pizza is not affected. With a shift to the left in the demand curve, the equilibrium price and quantity both decline, as the figure shows. Thus, the quantity of pizza supplied and demanded both fall. In sum, supply is unchanged, demand is decreased, quantity supplied declines, quantity demanded declines, and the price falls.

inferior good

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

normal good

a good for which, other things equal, an increase in income leads to an increase in demand

demand curve

a graph of the relationship between the price of a good and the quantity demanded

market

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

competitive market

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

demand schedule

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

supply schedule

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

Why does the demand curve slope downward?

because of the law of demand—other things being equal, when the price of a good rises, the quantity demanded of the good falls. People buy less of a good when its price rises, both because they cannot afford to buy as much and because they switch to purchasing other goods.

price takers are

buyers and sellers in a perfectly competitive market must accept the price the market determines ...at market price, buyers buy what they want and sellers sell all they want

Monoploy

complete control of a product or service

Buyers

determine the demand for the product

Sellers

determine the supply of the product

Facing a surplus , sellers try to

increase sales by cutting price. Prices continue to fall until market reaches equilibrium.

Supply curve shifters

input prices, technology, number of sellers, expectations

Demand curve shifters

number of buyers, income, prices of related goods, tastes, expectations

equilibrium price

price where Q supplied = Q demanded

Shortage (excess demand)

quantity demanded is greater than quantity supplied

surplus

quantity supplied is greater than quantity demanded

Facing a shortage, sellers try to

sellers raise the price Prices continue to rise until market reaches equilibrium.

Market supply curve

sum of individual supply curves horizontally

Market demand curve

sum the individual demand curves horizontally To find the total quantity demanded at any price, we add the individual quantities

quantity demanded

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

quantity supplied

the amount of a good that sellers are willing and able to sell

Law of Demand

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

Law of Supply

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

market demand

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

complements

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

substitute goods

two goods for which an increase in the price of one leads to an increase in the demand for the other

Change in the quantity supplied

-A movement along a fixed S curve -Occurs when P changes

Number of sellers

-An increase in the number of sellers Increases the quantity supplied at each price -Shifts S curve to the right

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

Expectations for the future

-Expect an increase in income, increase in current demand -Expect higher prices, increase in current demand

input prices

-Supply is negatively related to prices of inputs Examples of input prices: wages, prices of raw materials -A fall in input prices makes production more profitable at each output price

what happens to the demand curve if the quantity demanded changes?

-if price changes....quantity demanded changes -Non price factors = demand shift -

Three steps to analyzing changes in equilibrium

1. Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves 2. Decide whether the curve shifts to the right or to the left 3. Use the supply-and-demand diagram -Compare the initial and the new equilibrium -Effects on equilibrium price and quantity

to have the highest form of competition, a market must have?? (perfect competition )

1. goods being sold that are the same 2. buyers/sellers are so numerous that no single buyer or seller has any influence over the market price

Does a change in consumer's tastes lead to a movement along the demand curve or a shift in the demand curve?

A change in consumers' tastes leads to a shift of the demand curve. If the change in consumers' tastes leads to an increase in demand, consumers want to buy more of this good at every price level.

Does a change in price lead to a movement along the demand curve or a shift in the demand curve?

A change in price leads to a movement along the demand curve. Because price is measured on the vertical axis, a change in the price represents a movement along the demand curve.

Does a change in producers technology lead to a movement along the supply curve or to a shift in the movement along the supply curve or to a shift in the supply curve?

A change in producers' technology leads to a shift in the supply curve. A change in price leads to a movement along the supply curve.

Change in the quantity demanded

A movement along a fixed D 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 supply

A shift in the S curve Occurs when a non-price determinant of supply changes (like technology or costs)

What are the supply schedule and the supply curve, and how are they related?

A supply schedule is a table showing the relationship between the price of a good and the quantity a producer is willing and able to supply. The supply curve is the upward-sloping line relating price and quantity supplied. The supply schedule and the supply curve are related because the supply curve is simply a graph showing the points in the supply schedule.

Tastes

Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right

Harry's income declines, as a result, he buys more pumpkin juice. Is pumpkin an inferior good or a normal good? What happens to Harry's demand curve for pumpkin juice?

Because Harry buys more pumpkin juice when his income falls, pumpkin juice is an inferior good for him. His demand curve for pumpkin juice shifts out to the right as a result of the decrease in his income.

Equilibrium

Price has reached the level where quantity supplied equals quantity demanded

Equilibrium quantity

Q supplied and demanded at the equilibrium price

Expectations about future

Sellers may adjust supply* when their expectations of future prices change (*If good not perishable) Ex) GASSS

The supply curve

Shows how price affects quantity supplied, other things being equal These "other things" Are non-price determinants of supply Changes in them shift the S curve...

Market supply

Sum of the supplies of all sellers of a good or service

What are the demand schedule and the demand curve, how are they related?

The demand schedule is a table that shows the relationship between the price of a good and the quantity demanded. The demand curve is the downward-sloping line relating price and quantity demanded. The demand schedule and demand curve are related because the demand curve is simply a graph showing the points in the demand schedule.

Define the equilibrium of a market. Describe the forces that move a market toward its equilibrium.

The equilibrium of a market is the point at which the quantity demanded is equal to quantity supplied. If the price is above the equilibrium price, sellers want to sell more than buyers want to buy, so there is a surplus. Sellers try to increase their sales by cutting prices. That continues until they reach the equilibrium price. If the price is below the equilibrium price, buyers want to buy more than sellers want to sell, so there is a shortage. Sellers can raise their price without losing customers. That continues until they reach the equilibrium price.

supply

The quantity of something that producers have available for sale

Why does the supply curve slope upward?

The supply curve slopes upward because when the price is high, suppliers' profits increase, so they supply more output to the market. The result is the law of supply—other things being equal, when the price of a good rises, the quantity supplied of the good also rises