CHAPTER 4 THE MARKET FORCES OF SUPPLY
MARKETS AND COMPETITION
A market is a group of buyers and sellers of a particular product.
A competitive market is one with many buyers and sellers, each has a negligible effect
In a perfectly competitive market:
o All goods exactly the same
o Buyers & sellers so numerous that no one can affect market price – each is a
For now, we look at supply and demand in perfectly competitive markets, for two
reasons: First, it’s easier to learn. Understanding perfectly competitive markets makes
it a lot easier to learn the more realistic but complicated analysis of imperfectly
competitive markets. Second, despite the lack of realism, the perfectly competitive
model can teach us a LOT about how the world works
comes from the behavior of buyers
The quantity demanded of any good is the amount of the good that buyers are willing
and able to purchase.
o it is a number – the amount buyers are willing to purchase
Law of demand: the claim that the quantity demanded of a good falls when the price of
the good rises, other things equal
o it is an amount of goods buy
Demand- is a law, relationship between price and quantity demanded
If you decrease the price, there's an increase in quality demanded
If you increase the price, there's an decrease in quality demanded ---negative/
inverse/ downward/ sloping relationship
Price of lattes
THE DEMAND SCHEDULE Demand schedule:
a table that shows the relationship between the price of a good and the quantity
Helen’s demand for lattes.
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
MARKET DEMAND CURVE FOR LATTES
Movement along the curve
o Only thing that can cause this a change in price
o A change in price is a change along the curve and the change in
Everything else is held constant
DEMAND CURVE SHIFTERS
ONLY A CHANGE IN PRICE CAN CAUSE A MOVEMENT ALONG THE DEMAND
Price is being held constant in this situation and cannot move
We are dealing with shifting in demand curve- change in DEMAND The demand curve shows how price affects quantity demanded, other things being
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 SHIFTERS: # OF BUYERS
Increase in # of buyers
increases quantity demanded at each price, shifts D curve to the right
Suppose the number
P of buyers increases.
Tden, at each P,
Q will increase
D1 – grey; D2 – red (by 5 in this example).
Increase in buyers shifted the curve to the right (grey
Decrease in buyers will be a decrease in demand
This process is called CHANGE IN DEMAND –
shifting the demand Q
DEMAND CURVE SHIFTERS: 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.
• Normal good – is a good that is positively related to income -things you like
• If INCOME goes up, DEMAND goes up
• If INCOME goes down, DEMAND goes down
(Demand for an inferior good is negatively related to income. An increase in income
shifts D curves for inferior goods to the left.)
• Inferior Good- negatively related to income
• If INCOME goes up, DEMAND goes down
• If INCOME goes down, DEMAND goes up
DEMAND CURVE SHIFTERS: PRICES OF RELATED GOODS
Two goods are substitutes if an increase in the price of one causes an increase in
demand for the other.
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
Two types of related goods – substitutes or compliments
A good is substitute if you never use them together (never eat pizza and hamburger)
Price of one goes up, demands for one goes up
Price of one goes down, demand for one goes down
Example: Price of pizza skyrockets, demand for hamburger goes up
Price of pizza decreases, demand for hamburger goes down
Two goods are complements if an increase in the price of one causes a fall in demand
for the other.
o goods that are used together (hockey stick and puck)
o Relationship of one good to another good
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
DEMAND CURVE SHIFTERS: TASTERS
Anything that causes a shift in tastes toward a good will increase demand for that good
and shift its D curve to the right.
The Atkins diet became popular in the ’90s, caused an increase in demand for eggs,
shifted the egg demand curve to the right.
o If tastes goes up, demands go up
o If tastes goes down, demands go down
o Example: Eggs and cancer
DEMAND CURVE SHIFTERS: EXPECTATIONS
Expectations affect consumers’ buying decisions.
o what happens in the future – anything happen in future will affect the choice
o Price of eggs in the future increases, demand of eggs in the future will increase
o Price of eggs in the future decreases, demand of eggs in the future will decrease
( wait a week and save money)
The quantity supplied of any good is the amount that sellers are willing and able to sell.
o physical number that you are willing to send to the market
Law of supply: the claim that the quantity supplied of a good rises when the price of
the good rises, other things equal
o upward sloping/positive/ direct relationship
o If price goes up, quantity supply goes up
o If price goes down, quantity supply goes down
THE SUPPLY SCHEDULE
A table that shows the relationship between the price of a good and the quantity