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Chapter 4

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Department
Economics
Course
ECN 104
Professor
Frank Trimnell
Semester
Fall

Description
ECN – Chapter 4 The Market Forces of Supply and Demand Markets and Competition What is a Market?  Market: a group of buyers and sellers of a particular good/service o Buyers (as a group) determine the demand for the product o Sellers as a group determine the supply of the product o Often, markets are less organized (market for ice-cream) and sometimes highly organized (agricultural commodities) What is Competition?  Competitive market: many buyers and many sellers, each has negligible (small) effect on price  We assume markets are perfectly competitive o Perfectly competitive market:  All goods exactly the same  Buyers & sellers so numerous that no one can affect market price (“price takers – must accept the price the market determines) Demand The Demand Curve: The Relationship b/w Price and Quantity Demand  Quantity demanded: amount of a 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 the good rises (other things equal)  Demand schedule: a table that shows the relationship b/w the price of a good and the quantity demanded  Demand curve: a graph of the relationship b/w the price of a good and the quantity demanded Market Demand versus Individual Demand  Market demand: sum of all individual demands for a particular good/service d  Quantity demand - Q Shifts in the Demand Curve  The demand curve shows how price affects quantity demand, other things equal o Other things – non-price determinants of demand (things that determine buyers’ demand for a good, other than the good’s price) o Changes in the change the D curve  Increase in # of buyers increases quantity demanded at each price (shifts D curve to the right and a decrease is to the left)  Variables that shift the demand curve – Income o Normal good: increase in income leaders to an increase in demand (positively related to income and shifts D curve to the right)  If the demand for a good falls when income falls, the good is normal good o Inferior good: an increase in income leads to decrease in demand (negatively related to income and shifts D curves to the left)  If the demand for a good rises when income falls, the good is inferior good  Prices of Related Goods o Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other  Ex. an increase in the price of pizza increases demand for hamburgers (shifting hamburger demand curve to the right) o Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other  If a price of computer rises, people buy few computers, and therefore less software (software demand curve shifts left)  Tastes o Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right  Expectations o Expectations affect consumers’ buying decisions  Ex. if people expect their incomes to rise, their demand for meals at expensive restaurants may increase now Supply The Supply Curve: The Relationship b/w Price and Quantity Supplied  Quantity supplied: amount of a good that sellers are willing a
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