The Principles of Economics

Chapter 4: The Market Forces of Supply and Demand

4-1a What Is a Market?

-Organized markets

• Ex. Agricultural commodities dedicated to wheat and corn. 
• Buyers know what price range they have to spend on buying goods, while sellers know the price range to sell products. Buyers and sellers ensure that a specific time and place is set up for them to meet up at. 
• Auctioneers maintain order and arrange all sales, while also finding a balanced price that'll satisfy buyers and sellers. 

-Unorganized markets

• Ex. Local ice cream market. 
• Ice cream buyers don't meet up at certain times or places like an organized market. Ice cream sellers offer a variety of products in different locations and they make sure to display the price of an ice cream cone. 
• Unorganized markets don't include auctioneers to call out a price.
• Buyers have the option to choose how many cones to buy at each store.

4-1b What Is Competition?

-Ice cream sellers are aware of how similar their products are to those of other sellers, while buyers know they can choose from a plethora of sellers. 

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

-A market must ensure that the goods offered for sale are all identical, as well as the reassurance that no buyers or sellers have any influence over the market price.

-Some competitive markets consist of one seller, others consist of multiple. 

-Price takers determine the price that buyers and sellers base their market off of. 

-Monopolies are markets with one seller who sets a price. 

4-2 Demand

4-2a The Demand Curve: The Relationship between Price and Quantity Demanded

-A good's price determined the quantity demanded of a good. 

-quantity demanded: the amount of a good that buyers are willing and able to purchase.

-law of demand: the claim that, other things being 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. 

4-2b Market Demand versus Individual Demand

-The market demand determines the sum of each of the demands for a particular good or service. 

-A market demand curve depicts the total quantity demanded of a good varies as the good's price varies. 

4-2c Shifts in the Demand Curve

-The demand curve can shift when the quantity being demanded at any given price alters. 

Ex. If the American Medical Association revealed that eating ice cream leads to a longer and healthier life, ice scream sales would have a higher demand. This surplus of purchasing larger quantities of ice scream would shift the demand curve for ice scream. 

-The demand curve shifts to the right when there's a change that raises the quantity that buyers wish to purchase at any given price (increase in demand). 

-The demand curve shifts to the left when any given change lowers the quantity that buyers wish to purchase (decrease in demand). 

-A person's income influences their demand for certain products. 

-When the demand for a good drops when the income drops it is called a normal good. 

-An inferior good is when the demand for a good rises when the income drops. 

-normal good: a good for which, other things being equal, an increase in income leads to an increase in demand. 

-inferior good: a good for which, other things being equal, an increase in income leads to a decrease in demand. 

-substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other.

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

4-3 Supply

4-3a 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 being equal, the quantity supplied of a good rises when the price of the good rises. 

-The supplied quantity of a good rises when the price of said good rises, and vise versa. 

-supply schedule: a table that shows the relationship between the price of a good and the quantity supplied. 

-supply curve: a graph of the relationship between the price of a good and the quantity supplied.

4-3b Market Supply versus Individual Supply

-To get the market supply curve, we must take the sum of the individual supply curves horizontally. 

-The market supply curve shows how the total quantity supplied differs as the good's price changes, too. 

4-3c Shifts in the Supply Curve

-The market supply curve shifts when one of the factors in holding the supply constant changes. 

-In increase in supply can be characterized as a shift in the supply curve to the right, while a shift to the left indicates a decrease in supply. 

4-4 Supply and Demand Together

4-4a 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. 

-The denotation for equilibrium is when forces are at balance. 

-The equilibrium of a price is often called the market-clearing price.

-surplus: a situation in which quantity supplied is greater than quantity demanded. 

-shortage: a situation is which quantity demanded is greater than quantity supplied. 

-A surplus is sometimes described as an excess supply of a good. 

-A shortage is often referred to as an excess demand. 

4-4b Three Steps to Analyzing Changes in Equilibrium

-law of supply and demand: the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance. 

-The amount of products a producer wishes to sell is called the quantity supplied, while the supply itself is the position of the supply curve. 

-When there's an increase in demand, the equilibrium price increases. 

-A change in supply includes a shift in the supply curve. 

-A movement along a fixed supply curve is often called a change in the quantity supplied. 

4-5 Conclusion: How Prices Allocate Resources

-Job searching contributes to the supply of labor services. 

-The price of a good will determine how much of it is produced and who produces it.