SUPPLY AND DEMAND
HOW MARKETS WORK
A market is a group of buyers and sellers. In a competitive market there are so many buyers and sellers that no one
has a significant impact on price. *Note the goods have to be identical
- Each person in a price taker
- Equilibrium is where supply = demand
- Surplus- excess supply, and markets have to lower prices until market reaches equilibrium
- Shortage- quantity demanded is higher than the quantity supplied and the market has to raise prices until
it reaches equilibrium
- Demand- a consumer’s desire and willingness to pay a price for a goods or service.
- Law of demand- quantity of a goods or service demanded falls as price raises
- Demand schedule- a table that shows the relation between price and the quantity demanded
- Quantity demanded- sum of all the quantities demanded per individual
(can be looked at for any time period)
Non-price factors shift the curve, but a change in price will only move along the graph.
i. Number of buyers
- Demand rises as number of buyers of buyers increase, and this will shift the curve right
- On the other hand a decrease in buyers will decrease demand and shift the curve left
- Demand will rise as income increase, because if you get more money, you’ll have more to spend. An
income increase will shift the curve right.
- The change in income can help classify the types of goods.
- Inferior goods- demand will decrease as income increases. Inferior goods are cheaper goods.
Ex. Fast foods vs fancier restaurants. When you have more money to spend you probably will treat
yourself to more fancier restaurants instead of going to eat fast foods.
- Normal goods- As income increases, demand will also increase.
iii. Related goods
- Substitute goods- if the price increases in one good causes an increase of demand for another
Ex. Pepsi and Coke are substitute goods because they are quite similar, therefore if the rise in price for
coke goes up, one might want to switch to pepsi - Compliment goods- rise of price in one good will decrease the demand in an