ECON10004 Lecture 2: ECON10004 Week 2
Microeconomics Week 2
CHAPTER 4: THE MARKET FORCES OF SUPPLY AND DEMAND
market: a group of buyers and sellers of a particular good or service
• The buyers as a group determine demand for product and sellers determine supply
of product
• Some markets high organized; sharemarket or Sydney fishmarket: buyers and sellers
meet at specific time and place
• Other markets less organized; market for ice-cream in a town
Competitive market: a market in which there are many buyers and many sellers so that
each has a negligible impact on the market price
• Each seller has limited control over price because other sellers are offering similar
products
• Has little reason to charge less than going price and if more and charged they buyers
will make their purchases elsewhere
• Competitive because buyers know there are several sellers to choose from and no
product differentiation
• Individual sellers do not have “market power”
Assume markets are perfectly competitive which have two characteristics:
1. The goods offered are all exactly the same
2. Buyers and sellers are so numerous that no single buyer or seller has any influence
over market price
• Because buyers and sellers in a perfectly competitive market and must accept the
price the market determines, they are said to be price takers
• At market price, buyers can buy and sellers can sell all they want
• Some markets have only one seller and they set price; monopoly
Quantity demanded: the amount of a good that buyers are willing and able to purchase
• Quantity demanded is negatively related to price
• True for most goods in economy; called law of demand
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: the graph of the relationship between the price of a good and the quantity
demanded
Market demand versus individual demand
• To analyse how markets work, need to determine market demand
Market demand: the sum of all individual demands for a particular good or service
• Add demand curves horizontally to obtain market demand curve
• To find total quantity demanded at any price, add individual quantities found on the
horizontal axis of the individual demand curves
• Market demand curve shows how the total quantity demanded of a good varies as
the price of the good varies, while all other factors affect how much consumers want
to buy are held constant
Ceteris paribus: a Latin phrase translated as ‘other things being equal,’ used as a reminder
that all variables other than the ones being studied are assumed to be constant
SHIFTS IN THE DEMAND CURVE
• Shifts in demand curve to the right is an increase in demand
• Shifts in demand curve to the left is an decrease in demand
Normal good: a good for which, other things being equal, an increase in income leads to an
increase in quantity demanded, income and demand are positively related
Inferior good: a good for which, other things being equal, an increase in income leads to a
decrease in quantity demanded, income and demand are inversely related
Prices of related goods
Substitutes: two goods for which a decrease in the price of one good leads to a decrease in
the demand for the other good
Complements: two goods for which a decrease in the price of one good leads to a increase
in the demand for the other good
Tastes
• Most obvious determinant of your demand
• Economists don’t try to explain peoples but examine what happens when tastes
change
Expectations
• Expectations about future may affect your demand for a good/service today
Number of buyers
• Market demands depends on the number of these buyers
• If the number of buyers increases → quantity demanded in marker be higher at
every price → demand curve would shift to the right
SUPPLY
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
Supply schedule: a table the 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
Market supply versus individual supply
• We add individual supply curves horizontally to obtain market supply curve
• Add individual quantities on the horizontal axis of the individual supply curves
• Market supply curve shows how the total quantity supplied varies as the price of
good varies, all other things equal
SHIFTS IN THE SUPPLY CURVE
• Changes that raise quantity supplied at every price shifts supply curve to the right
and is an increase in supply
• Changes that reduces quantity supplied at every price shifts supply curve to the left
and is a decrease in supply
Input prices
• When the price of one or more inputs rises, producing ice-cream is less profitable
and sellers supply less ice-cream
• Quantity supplied of good is negatively related to price of inputs used to make the
good
