23115 Study Guide - Final Guide: Price Ceiling, Market Distortion, Price Floor
DEMAND AND SUPPLY
Supply and demand are the forces that make the economy work. The terms refer to the behaviour of people as
they interact with one another in competitive markets.
MARKET
A market is a group of buyers and seller of a particular good or service.
• The market determines the demand and thus the supply of the product.
• When they interact to trade it is called a market.
• Can be highly organised (fish market auction) or less organised (market for ice-cream).
COMPETITION
A market is extremely competitive, thus resulting in prices within a market to fluctuate based off buyers and
sellers within the market.
A competitive marketplace is 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 the price as other sellers are offering similar products.
In a perfectly competitive market:
1. Goods offered for sale are all exactly the same (homogeneous)
2. Buyers and sellers are so numerous that no single buyer/seller has any influences over market price.
- Buyers and sellers in this market are said to be called prie takers as they must accept the price the
market determines.
- When there is only one seller, and they set the price, it is called a monopoly (price setter), large
impacts on price.
• Most real world markets fall between the extremes monopoly and perfection competition.
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DEMAND
Quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.
- The quantity demanded falls as the prices rises, and rises as the price falls, we say the QD is negatively
related to the price. (willing = buyer wants to buy that amount, able = buyer has enough to pay)
The law of demand is the claim that other things being equal, the quantity demanded of a good falls when
the price of the good rises.
- When the price of a good rises, the quantity demand falls, when the price falls, the quantity demand
rises.
A demand schedule is a table that shows the relationship between the price of the good and the quantity
demanded.
A demand curve is a graph of the relationship between the price of a good and the quantity demanded.
The market demand is the sum of individual demands. The market demand curve shows how the total quantity
demanded of a good varies as the price of the good varies.
**When demand curves are drawn, other factors are not always included. This is known as eteris parius
taslated as othe thigs eig eual assuing all other variables besides the one being studied are kept
constant.
SHIFTS IN THE DEMAND CURVE – WHAT CHANGES DEMAND
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• If something happens to alter quantity demanded at any given price, the demand curve shifts.
Income : the relationship between income and demand depends on what type of good the product is.
- A shift in income could alter quantity demanded
- If demand falls when income falls, good is known as a normal good ( income rise, demand rise)
- If demand rises when income falls, known as inferior good (income rise, demand lower)
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 an increase in the
demand for the other good.
Tastes
- Based on historical and psychological forces
- Like something, buy more of it
Expectations
- Future expectations can affect your buying behaviour (expect prices to rise next month so save this
month).
Number of buyers
- More buyers, quantity demanded in the market rises at every price and the demand curve shifts to
the right (more expensive)
When one of these other variables change, the demand curve shifts.
• A change in the price of the good generates a movement along the demand curve (change in quantity
demanded).
• The quantity demanded of a good varies with the price of a good, holding all other factors constant
(ceteris paribus)
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Document Summary
Supply and demand are the forces that make the economy work. The terms refer to the behaviour of people as they interact with one another in competitive markets. A market is a group of buyers and seller of a particular good or service. The market determines the demand and thus the supply of the product: when they interact to trade it is called a market. Can be highly organised (fish market auction) or less organised (market for ice-cream). A market is extremely competitive, thus resulting in prices within a market to fluctuate based off buyers and sellers within the market. A competitive marketplace is 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 the price as other sellers are offering similar products.
