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Chapter 4

ECN 204 Chapter Notes - Chapter 4: Economic Equilibrium, Demand Curve, Shortage


Department
Economics
Course Code
ECN 204
Professor
Paul Missios
Chapter
4

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Chapter 4: The Market Forces of Supply and Demand
Market: is a group of buyers and sellers of a particular good or service. The buyers as a group determine
the demand for the product, and the sellers as a group determine the supply of the product
Competitive Market: a market in which there are many buyers and many sellers so that each has a
negligible impact on the market price.
Perfectly Competitive: highest form of competition. To reach this a market has to have two
characteristics: (1) the goods offered for sale are exactly the same (2) the buyers and sellers are
so numerous that no single buyers or sellers have any influence over the market price.
-Because buyers and sellers in perfectly competitive markets must accept the price that market
determines, they are said to be price takers.
Monopoly: when a market has only one seller and that seller sets the price
Demand
Quantity Demanded: the amount of a good that buyers are willing and able to purchase (price plays an
important role in determining demand = negatively related to the price)
Law of Demand: the claim that, other things equals, 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
-To find the total quantity demanded at any price, we add the individual quantities found on the
horizontal axis of the individual demand curves.
Shifts in the Demand Curve
Increase in Demand: any changes that increases the quantity demanded at every price shifts the
demand curve to the right
Decrease in Demand: any changes that reduces the quantity demanded at every price shifts the demand
curve to the left
Income
Normal Good: a good for which an increase in income leads to an increase in demand or if the
demand for a good falls when the income falls.
Inferior Good: a good for which an increase in income leads to a decrease in demand or if the
demand for a good rises when income falls. (Example bus rides)
Prices of Related Goods
Substitutes: when a fall in the price of one good reduces the demand for another good or when
an increase in the price of one leads to an increase in the demand for the other
Complements: two goods for which an increase in the price of one leads to a decrease in the
demand for the other and vice versa
Tastes, Expectations, Number of Buyers = Shifts the demand curve
Prices of the good itself = A movement along the demand curve

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Supply
Quantity Supplied: the amount of a good that sellers are willing and able to sell (because the quantity
supplied rises as the price rises and falls as the prices falls = positively related to the price of the good)
Law of Supply: the claim that the quantity supplied of a good rises when the price of the good rises and
when the price falls, the quantity supplied falls as well
Supply Schedule: a table that shows the relationship between the price of a good and the quantity
supplied
Supply Curve: a graph of the relationship between the price of a good and the quantity supplied. The
supply curve slopes upward because a higher price means a greater quantity supplied (sum the
individual supply curves horizontally to obtain the market supply curve)
Increase in Supply: any changes that raises quantity supplied at every prices such as fall in price of
sugar, shifts the supply curve to the right
Decrease in Supply: any changes that reduces the quantity supplied at every price shifts the supply
curve to the left
Input Prices: when the price of one or more input rises, producing ice cream is less profitable
and firms supply less ice cream. If input rises substantially, a firm may even shut down.
Therefore, the supply of a good is negatively related to the price of the inputs to make the good.
Technology, Expectations, Number of Sellers, Input Prices = Shifts the supply curve
Price of good itself = a movement along the supply curve
Note: A curve shifts only when there is a change in relevant variable that is not named on either axis.
The price is on the vertical axis, so a change in price represents a movement along the supply curve.
Supply & Demand
Equilibrium: a situation in which the price has reached the level where quantity supplied equals quantity
demanded (founded where the supply and demand curves intersect)
Equilibrium Price: the price that balances quantity supplied and quantity demanded
Equilibrium Quantity: the quantity supplied and the quantity demanded at the equilibrium price
Surplus (excess supply): a situation in which quantity supplied is greater than quantity demanded. They
respond to the surplus by cutting their prices. Falling prices, in turn, increase the quantity demanded
and decrease the quantity supplied. Prices continue to fall until the market reaches the equilibrium.
Shortage (excess demand): a situation in which quantity demanded is greater than quantity supplied.
Sellers can respond to the shortage by raising their prices. As the price rises, quantity demanded falls,
quantity supplied rises, and the market once again moves toward the equilibrium.
Law of Supply and Demand: the claim that the price of any good adjusts to bring the quantity supplied
and the quantity demanded for that good into balance.
Comparative Statics: analysis of change that involves comparing two unchanging situations an initial
equilibrium and a new equilibrium.
1) An Event Shifts the Supply/Demand/Both Curve
2) Decide Whether the curve shifts to the Left or the Right
3) Use the Supply and Demand Diagram to compare initial and new equilibrium.
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