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ECON 1B03 (523)
Lecture 4

The Market Forces(Lecture 4).docx

3 Pages
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Department
Economics
Course Code
ECON 1B03
Professor
Hannah Holmes

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Description
The Market Forces of Supply and Demand DEMAND  Market – a group of buyers and sellers of a particular good or service. (Buyers determine demand, sellers determine the supply) Competition  Competitive market – a market in which there are many buyers and many sellers so that each has a negligible impact on the market price (could cause sellers to lower prices)  To reach perfectly competitive market must have 2 characteristics: o The goods offered for sale are all exactly the same o The buyers and sellers are so numerous that no single buyer or seller has and influence over the market price  Monopoly – when a market has only one seller who sets the price The Demand Curve: Relationship between Price and Quantity Demand  Quantity demand – the amount of a good that buyers are willing and able to purchase o When prices rise you buy less, when prices drop you buy more  quantity demand is negatively related to the price o Relationship is so true for most goods in the economy we call it the law of demand – other things equal the quantity demand of a good falls when the price of good rises  Demand schedule – a table that shows the relationship between the price of a good and the quantity demand # of consumers of Pepsi Max in relation to price Price of Pepsi Max Buyers Refusers $1.00 15 85 $0.75 30 70 $0.50 60 40 $0.25 80 20  Demand curve – a graph of the relationship between the price of a good and the quantity demanded o If something happens to alter the quantity demand at any given price, the demand curve shifts Shifts in the Demand Curve 1. Income – lower income = less money to spend (demand for ‘X’ drops)  Normal good – a good for which, other things equal, an increase in income leads to an increase in demand  Inferior good – a good for which, other things equal, an increase in income leads to an decrease in demand  The impact of changes in wealth on both the amount and composition of goods that individuals consume is called the wealth effect 2. Prices of Related Goods – Things that satisfy similar desires (ice cream vs. frozen yogurt)  Substitutes – two goods for which an increase in the price of one leads to an increase in the demand for the other (ice cream vs froyo)  Complements – two goods for which an increase in the price of one leads to a decrease in the demand for the other (things used together; ice cream and hot fudge) 3. Tastes – If you like something, you’ll buy more of it 4. Expectations – future expectations can influence demand for a good/service today 5. Number of Buyers – Market demand is derived from individual demands  * A curve shifts when there is a change in a relevant variable that is not measured on either axis SUPPLY The Supply Curve: Relationship between Price and Quantity Supplied  Quantity supplied – the amount of a good that sellers are willing and able to sell o Rises when the price rises and falls when the price falls (positively related to the price of the good) o Relationship between price and quantity supplied is the law of supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises  Supply schedule – a table that shows the relationship between the price of a good and the quantity supplied  Curve of supply – a graph of the relationship between the price of a good and the quantity supplied  Individual supply = market supply Shifts in the Supp
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