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ECON 1B03 (302)
Chapter 4

Chapter 4

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McMaster University
Usman Hannan

CHAPTER 4: THE MARKET FORCES OF SUPPLY AND DEMAND Markets and Competition What is a Market? - group of buyers (determine demand) and sellers (determine supply) of a particular good or service - usually less organized What is Competition? - competitive market: there are many buyers and many sellers so that each has a negligible impact on the market price - assume markets are perfectly competitive > the goods offered for sale are all exactly the same; buyers and sellers are so numerous that so single buyer or seller has any influence over the market price - buyers and sellers must accept what prices the market determines, they are price takers - some markets only have one seller in which they set the price, monopoly Demand The Demand Curve: The Relationship between Price and Quantity Demand - quantity demanded: amount of good that buyers are willing and able to purchase - quantity demanded in negatively related to the price (i.e. when one goes up the other goes down) - law of demand: the claim that, other things 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: a graph of the relationship between the price of a good and the quantity demanded Market Demand vs. Individual Demand - market demand: sum of all individual demands for a particular good or service - add the individual demand curves horizontally to obtain market demand curve Shifts in the Demand Curve - will shift if something happens to alter the quantity demanded Variables: Income - normal good: an decrease in income leads to an decrease in demand - inferior good: decrease in income leads to a increase in demand (i.e. bus rides) - impact of changes in wealth on both the amount and composition of goods that individuals consume = wealth effect > can shift demand curve Prices of Related Goods - substitutes: two goods for which an increase in the price of one leads to an increase in demand for the other - complements: two
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