ECN 104 Lecture Notes - Inferior Good, Economic Equilibrium, Normal Good
2 Jul 2018
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Chapter 4 - The Market Forces of Supply and Demand
Markets and Competition
āMarket ā a group of buyers and sellers of a particular product.
āCompetitive market ā a market with many buyers and sellers, and each has a
negligible effect on price.
āPerfectly competitive market
ā All goods are exactly the same.
ā There are so many buyers and sellers that no one can affect the market price.
ā In this chapter we make the assumption that markets are perfectly competitive.
Demand
āDemand ā the quantity of a good or service that buyers will purchase at various
prices during a given period of time.
āLaw of demand ā the claim that the quantity demanded of a good falls when
the price of the good rises, and rises when the price goes down. Quantity
demanded and price are inversely related.
āQuantity demanded ā the amount of the good that buyers are willing and able
to purchase.
āMarket Demand ā the quantity demanded in the market is the sum of the
quantities demanded by all buyers at each price.
The Demand Schedule
āDemand Schedule ā a table that shows the relationship between the price of a
good and the quantity demanded.
Demand Curve Shifters
āThe demand curve shows how price affects quantity demanded, as other things
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do not change.
āNon-price factors ā a factor held constant in the relationship between price and
quantity demanded and quantity supplied. Non-price factors cause the whole
curve to shift by affecting a productās demand or supply as opposed to its
quantity demanded or quantity supplied
The 5 non price factors of demand:
1. Buyers/Population
āAn increase in the number of buyers would increase the quantity demanded at
each price, shifting the demand curve to the right.
āA decrease in population would decrease the demand, shifting the demand curve
to the left.
āBusinesses carefully monitor demographics to determine whether or not the
demand for their product is increasing.
2. Income
āAn increase in buyers income will lead to buyers willing to spend more money,
creating an increase in demand, shifting the curve up and right.
āBuyers with less income, or a decrease in income, will give them less of a will to
spend money, and therefore there demand will decrease. The demand curve
would shift down and left.
āNormal good ā a good for which, other things equal, an increase in income
leads to an income in demand
āInferior good ā a good for which, other things equal, an increase in income
leads to a decrease in demand
3. Price of Related Goods
āA change in the price of one product that can substitute another will directly
increase/decrease the demand for the competing product.
āSubstitutes ā two goods for which an increase in the price for one leads to an
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increase in the demand for the other.
Example: pizza and hamburgers
ā If the price of pizza rises, people will buy fewer pizzas and more hamburgers as
substitute. Hamburger demand curve shifts right.
āA change in the price of a product that complements another will inversely
increase/decrease the demand.
āComplements ā two goods for which an increase in rice in one leads to a
decrease in demand for the other.
Example: computers and software
ā If price in computers rises, people buy fewer computers, and therefore less software.
Software demand curve shifts left.
4. Tastes and Preferences
āAnything that causes a shift in tastes towards a good will increase demand for
that good and shift its demand curve to the right.
Example:
ā The Atkins diet because popular in the ā90ās. Caused an increase in demand for
eggs, and shifted the egg demand curve to the right.
5. Expectation
āExpectations and predictions on prices rising or falling will affect the consumerās
buying decisions.
Example:
ā If people expect their income to rise, their demand for meals at expensive
restaurants may increase now.
ā If the economy sours and people worry about their future job security, demand for
new autos may now fall.
Increase in Demand (curve shifts right) Decrease in demand (curve shifts left)
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Document Summary
Chapter 4 - the market forces of supply and demand. Market a group of buyers and sellers of a particular product. Competitive market a market with many buyers and sellers, and each has a negligible effect on price. There are so many buyers and sellers that no one can affect the market price. In this chapter we make the assumption that markets are perfectly competitive. Demand the quantity of a good or service that buyers will purchase at various prices during a given period of time. Law of demand the claim that the quantity demanded of a good falls when the price of the good rises, and rises when the price goes down. Quantity demanded the amount of the good that buyers are willing and able to purchase. Market demand the quantity demanded in the market is the sum of the quantities demanded by all buyers at each price.
