Economics Chapter 4
The market forces of supply and demand
Market: is a group of buyers and sellers of a particular product
Competitive market: is one with many buyers and sellers, each has negligible effect on price
Quantity Demanded: The amount of good that buyers are willing and able to purchase
Law of demand: the claim that, the quantity demanded of a good falls when the price of good rises
other things equal,
Perfectly Competitive market: All goods are exactly the same, buyers and sellers so numerous that no
one can affect market price- each is a Price Taker
Demand Schedule: A table that shows the relationship between the price of a good and the quantity
Ex. Helen’s demand of lattes, notice that Helen’s
preferences obey the law of demand
Market demand Vs. Individual demand: The quantity demanded in the market is the sum of the
quantities demanded by all buyers at each price. Suppose Helen and Ken are the only two buyers in the
Latte market. (Q = quantity demanded) Demand Curve: A graph of the relationship between the price of a good and the quantity demanded.
The demand curve shows how price affects quantity demanded, other things being equal. These “other
things” are non-price determinants of demand (i.e., things that determine buyers’ demand for a good,
other than the good’s price). Changes in them shift the D curve…
Demand curve shifter: # of buyers
Increase in # of buyers increases quantity demanded
at each price, shifts D curve to the right.
Demand curve shifter: Income
Demand for a normal good is positively related to income. Increase in income causes
increase in quantity demanded at each price, shifts D curve to the right. (Demand for an inferior good is
negatively related to income. An increase in income shifts D curves for inferior goods to the left.)
Normal good: A good for which, other things equal, an increase in income leads to an increase in
Inferior Good: A good for which, other things equal, an increase in income leads to an decrease in
Demand curve Shifters: Prices of related goods
Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for
Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers,
shifting hamburger demand curve to the right.
Other examples: Coke and Pepsi, laptops and desktop computers, CDs and music downloads
Complements: two goods, for which an increase in the price of one leads to a decrease in the demand
for the other
Example: computers and software. If price of computers rises, people buy fewer computers, and
therefore less software. Software demand curve shifts left.
Other examples: college tuition and textbooks, bagels and cream cheese, eggs and bacon
Demand Curve Shifters: Tastes
Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D
curve to the right.
Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted
the egg demand curve to the right. Demand Curve Shifters: Expectations Summary: Variables the influence Buyers
Expectations affect consumers’ buying decisions.
Examples: If people expect their incomes to rise, their demand for
meals at expensive restaurants may increase now.
If the economy sours and people worry about their future job
security, demand for new autos may fall now.
Draw a demand curve for music downloads. What happens to it in each of the following scenarios?
Why? A.The price of iPods falls B.The price of music downloads falls C.The price of CDs falls
Quantity supplied: The amount of a good that sellers are willing and able to sell
Law of supply: The claim that, other things equal, the quantity supplied of good rises when the process
of the good rises
Supply schedule: A table that shows the relationship between the price of a good and the quantity
Ex. Starbucks supply of lattes, notice the Starbucks supply
schedule obeys the law of supply
Market Supply vs. individual supply
The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price.
Suppose Starbucks and Jitters are the only two sellers in this market. (Q = quantity supplied)
The market Supply Curve Supply curve Shifters:
Supply curve: a graph of the relationship between the price of a good and the quantity supplied.
The supply curve shows how price affects quantity supplied, other things being equal. These “other
things” are non-price determinants of supply. Changes in them shift the S curve…