What is a market?
Market: a group of buyers and sellers of a particular good/service
Some markets are organized, meaning that buyers and sellers know exactly what they want (ex. Agricultural commodities).
Some markets can be less organized (ex. Ice cream in a town).
What is competition?
Price and quantity are determined by ALL buyers and sellers as they interact.
Competitive market: a market in which there are so many buyers and sellers that each has a negligible impact on the market price
Perfectly competitive market means that: 1. The goods offered for sale are THE SAME 2. Buyers and sellers are so numerous that no SINGLE buyer/seller has influence over market price (ex. wheat market).
Price takers: buyers and sellers that accept market price (at which buyers can buy all they want, and sellers can sell all they want)
Monopoly: only one seller, who sets the price
The Demand Curve: the relationship between price and quantity demanded
Price (y); quantity demanded (x)
Quantity demanded: the amount of a good buyers are willing and able to buy
Law of Demand: other things being equal, when the price of a good RISES, the quantity demanded FALLS, and vice versa
Demand schedule: table that shows relationship between price and quantity demanded
Demand curve: Line relating price and quantity demanded, and has a NEGATIVE SLOPE
Market demand vs individual demand
Market demand: the SUM of all individual demands for a good/service
To graph market demand: add together each individual’s demand at a given price and plot that quantity demanded
Shifts in the Demand Curve
If quantity demanded CHANGES at any price, the demand curve SHIFTS
If demand curve shifts RIGHT = increase in demand and vice versa
Variables that can shift the demand curve:
Normal good: if the demand for the good FALLS when income FALLS (ex. Ice cream)
Inferior good: if the demand for the good RISES when income FALLS (ex. Bus rides)
2. Prices of related goods:
Substitutes: when a fall in the price of 1 good REDUCES the demand for ANOTHER good. This is often goods that can replace each other (ex. Ice cream & frozen yogurt)
Complements: when a fall in the price of 1 good RAISES the demand for ANOTHER good (ex. Gasoline & cars)
3. Tastes: if you like more of something, you’ll buy more
4. Expectations: if you expect the future price to drop, you’ll buy more today
5. # of buyers: more individual buyers means greater market demand
Price changes, such as taxes, represent a movement ON the demand curve, not a shift
The Supply Curve: the relationship between price and quantity supplied
Quantity supplied: the amount sellers are willing and able to sell
Law of supply: other things equal, when the price of a good RISES, the quantity supplied also RISES, and vice versa
Supply schedule: table that shows relationship between price and quantity supplied
Supply curve: Line relating price and quantity supplied, and has a POSITIVE SLOPE
Market supply vs. individual supply
Market supply: the sum of the supplies of ALL individual sellers
Shifts in the Supply Curve
When the supply curve shifts right, there has been an increase in supply
Variables that can shift the supply curve:
1. Input prices: if the input prices are LOW, then supply will INCREASE (input includes ingredients, resources, buildings/land, labor), causing the supply curve to shift RIGHT
2. Technology: better tech → reduces amount of labor/costs → supply curve shifts RIGHT
3. Expectations: expects future price to be high → put some production into storage → supply curve shifts LEFT
4. # of sellers: fewer sellers → supply curve shifts LEFT
Price of good itself only represents movement ALONG THE CURVE
Equilibrium: the point in which supply and demand curves intersect, where the price at which the quantity of good buyers are willing and able to buy BALANCES the quantity that sellers are willing and able to sell
The equilibrium price is also known as the market-clearing price, so everyone in the market is satisfied
Markets NATURALLY move towards equilibrium through changes ALONG the curves
Surplus: quantity supplied > quantity demanded; PRICE moves down
Shortage: quantity demanded > quantity supplied; PRICE moves up
In free markets, shortages/surpluses are temporary because prices moved towards equilibrium
Law of supply and demand: the price of any good adjusts to bring the quantity supplied and quantity demanded of that good into balance
Whichever shift has a LARGER MAGNITUDE (supply or demand) determines the new price
3 Steps to Analyzing Changes in Equilibrium
When analyzing how an event affects equilibrium, follow these steps: 1. Which curve moves? Just one or both? 2. Which direction (left or right)? 3. How does the new equilibrium compare to the old one, and how does the equilibrium price and quantity change?
Change in demand/supply = the CURVE shifts, whereas change in qty demanded/supplied = movement ALONG the curve