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Chapter 4

Chapter 4 Summary.pdf

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Department
Economics
Course
ECON 1BB3
Professor
Bridget O' Shaughnessy
Semester
Winter

Description
Summary of Notes from Chapter 4 and Practice Questions KEY POINTS: 1. Economists use the model of supply and demand to analyze competitive markets. In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price. 2. The demand curve shows how the quantity of a good demanded depends on the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward. 3. In addition to price, other determinants of how much consumers want to buy include income, the prices of substitutes and complements, tastes, expectations, and the number of buyers. If one of these factors changes, the demand curve shifts. 4. The supply curve shows how the quantity of a good supplied depends on the price. According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward. 5. In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers. If one of these factors changes, the supply curve shifts. 6. The intersection of the supply and demand curves determines the market equilibrium. At the equilibrium price, the quantity demanded equals the quantity supplied. 7. The behaviour of buyers and sellers naturally drives markets toward their equilibrium. When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise. 8. To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects equilibrium price and quantity. To do this we follow three steps. First, we decide whether the event shifts the supply curve or the demand curve (or both). Second, we decide which direction the curve shifts. Third, we compare the new equilibrium with the initial equilibrium. 9. In market economies, prices are the signals that guide economic decisions and thereby allocate scarce resources. For every good in the economy, the price ensures that supply and demand are in balance. The equilibrium price then determines how much of the good buyers choose to purchase and how much sellers choose to produce. 1 2 ☞ Chapter 4/The Market Forces of Supply and Demand I. Markets and Competition A. Definition of market: a group of buyers and sellers of a particular good or service. B. Competitive Markets 1. Definition of competitive market : a market in which there are many buyers and many sellers so that each has a negligible impact on the market price. C. Competition: Perfect and Otherwise 1. Characteristics of a perfectly competitive market: a. The goods being offered for sale are all the same. b. The buyers and sellers are so numerous that no single buyer or seller can influence the market price. 2. Because buyers and sellers must accept the market price as given, they are often called "price takers." 3. Not all goods are sold in a perfectly competitive market. a. A market with only one seller is called a monopoly market. b. A market with only a few sellers is called an oligopoly. c. A market with a large number of sellers, each selling a product that is slightly different from its competitors’ products, is called monopolistic competition. II. Demand A. The Demand Curve: The Relationship between Price and Quantity Demanded 1. Definition of quantity demanded : the amount of a good that buyers are willing to purchase. 2. One important determinant of quantity demanded is the price of the product. a. Quantity demanded is negatively related to price. This implies that the demand curve is downward sloping. b. Definition of law of demand : the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises. 3. Definition of demand schedule: a table that shows the relationship between the price of a good and the quantity demanded. Chapter 4/The Market Forces of Supply and Demand ☞ 3 Price of Ice Cream Cone Quantity of Cones Demanded $0.00 12 0.50 10 1.00 8 1.50 6 2.00 4 2.50 2 3.00 0 4. Definition of demand curve : a graph of the relationship between the price of a good and the quantity demanded. a. Price is generally drawn on the vertical axis. b. Quantity demanded is represented on the horizontal axis. Figure 4.1 B. Market Demand Versus Individual Demand 1. The market demand is the sum of all of the individual demands for a particular good or service. 2. The demand curves are summed horizontally—meaning that the quantities demanded are added up for each level of price. 3. The market demand curve shows how the total quantity demanded of a good varies with the price of the good, holding constant all other factors that affect how much consumers want to buy. 4 ☞ Chapter 4/The Market Forces of Supply and Demand C. Shifts in the Demand Curve 1. The demand curve shows how much consumers want to buy at any price, holding constant the many other factors that influence buying decisions. 2. If any of these other factors change, the demand curve will shift. a. An increase in demand can be represented by a shift of the demand curve to the right. b. A decrease in demand can be represented by a shift of the demand curve to the left. 3. Income a. The relationship between income and quantity demanded depends on what type of good the product is. b. Definition of normal good : a good for which, other things
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