Part 2: Supply and Demand 1: How Markets Work
-nature of competitive market -examine what determines demand/supply for good in a
competitive market -how supply and demand together set the price of a good and the quantity
sold - key role in prices in allocating scarce resources in a market economy
What happens in one country affects the other: work of supply and demand: forces that make
market economies work.
if you want to know how any event /policy will affect the economy, must think how it will affect
supply and demand.
Market: group of buyers and sellers of a particular good or service.
Buyers: demand of the product
Sellers: Supply of the Product
What is Competition
Price and quantity of ice cream sold are not determined by any single buyer or seller: Price and
quantity are determined by all buyers and sellers as they interact in the market-place.
Competitive Market: many buyers and sellers so that each has a negligible impact on the
market must have two forms of characteristics:
1. The goods offered for sales are all exactly the same. and
2. Buyers and Sellers are so numerous that no single buyer or seller has an influence over the
-Because buyers and seller are in perfect competitive markets (we assume in this
chapter), we must accept the price the market determines: they are said to be price takers: at
the market price buyers-buy all they want, sellers-sell all they want.
-example of perfectly competitive market: thousands of farmers who sell wheat
and millions of consumers who use wheat and wheat products. Because NO
SINGLE BUYER OR SELLER CAN INFLUENCE THE PRICE OF WHEAT,
EACH TAKES THE PRICE AS GIVEN.
ex: each seller of ice cream has limited control over the price because the sellers are
offering similar products.
A seller has little reason to charge less than the going price, and if he charge more,
buyers will find other purchases.
-Monopoly: some markets have one seller and this seller sets the price.
--Markets fall b/w these extremes:
Perfect competitionmonopoly. DEMAND -BEGIN BY EXAMING BEHAVIOUR OF BUYERS
The demand curve: the relationship between price and quantity demanded
Quantity demanded: the amount of good that buyers are willing and able to purchase
Quantity demand is negatively related to the price
-QD rises when prices fall and falls when prices rise.
We call this the LAW OF DEMAND: claim that when other things equal the QDed of
a good falls when the price of the good rises.
Demand Schedule: table that shows the relationship between the price of a good and the
quantity demanded (holding constant everything else that influences how much consumers of
the good want to buy.
VERTICALAXIS: PRICE HORIZONTALAXIS: QD.
Figure 4.1: Shows Catherine's Demand (individual demand)
Because the lower price increases the quantity demanded, the demand curve slopes
DOWNWARD ( AS PRICE GETS CLOSER AND CLOSER TO ZERO THE QUANTITY
Market Demand VS Individual Demand
Catherine's Demand + Nick's Demand= MARKET DEMAND.
Market Demand: The sum of all individual demands for a particular good or service.
Example: Catherine's demand and Nick's demand figure 4.2
Market demand curve is found by adding horizontally the individual demand
ex: at price of $2=4 ice creams for Catherine, nick demands 3. QD for
market is price 7 cones.
Shifts in Demand Curve
-The demand curve for ice cream shows how much ice cream people buy at any given price,
holding constant the many factors beyond price that influence consumer's buying decisions.
therefore, demand curve is not stable all the time, something can alter the Quantity Demanded
at any price: demand curve can shift.
ex: nutritionists discover eating a certain food can prolong life= raise the demand for the
at any given price, buyers will pay for the good, and demand curve would shift.
Figure 4.3: Shifts in demand:
-Increase in demand: Shift demand curve to right (increases quantity demanded)
-Decrease in Demand: Shift demand curve to left (decrease in quantity demanded) 6 Variables that Shift Demand Curve
-lower income=spend less
-A good for which, other things equal, an increase in come leads to an increase demand:
NORMAL GOOD. (If demand for good falls when income falls the good is called normal good.
-A good for which , other things in equal, an increase in income leads to a decrease in demand:
Inferior Good. (if demand for good rises when income falls).
EX: BUS RIDES. as your income falls, you are less likely to buy a car: take a bus
RECESSION 2008: VALUE OF HOME AND SAVINGS FELL IN CONJUNCTION WITH THE
RECESSION THAT SWEPT THE WORLD.
TORONTO STOCK EXCHANGE INDEX (tsx) FELL BY ALMOST 50%FROM PEAK IN
JANUARY OF 2008 T ITS LOW IN MARCH 2009.
The wealth effect: impact of changes in wealth on both the amount and composition of
goods that individuals consume.
-economists argue about size of wealth if it exists: wealth can effect shift.
2. Prices of Related Goods
Substitutes: 2 goods for which an increase in the price of one leads to an
increase in the demand for the other
Price of frozen yogurt falls=buy more frozen yogurt at the same time: buy less of ice cream
(same similar desires in the ingredients-often pairs of good used in place of another).
If Hot fudge prices fall= buy more of it and ice cream as well because ICE CREAM + HF go well
Complements: 2 goods for which an increase in the price of one leads to a
decrease in the demand for the other.
-economists try not to explain people's tastes b/c they are historical and psychologically based
forces beyond realm of our study.
- expectations for the future may affect your demand for a good or service today: expect a
higher income: you are more willing to spend some of your current savings buying ice cream.
Number of Buyers - Because market demand is derived from individual demands, it depends on all those factors
that depend on individual buyers (incomes, taxes etc) .
-depends on the number of buyers If peter (another consumer of ice cream) were to join
Catherine and Nicholas, the QD in the market would be higher at every price and the demand
curve would shift to the RIGHT.
-Lists all its variables that influence how much consumers choose to buy of a good.
A curve shits when there is a change in a relevant variable that is not measured on either axis.
Price is on vertical axis, a change in price represents a movement along the demand curve.
Income, the prices of related goods, tastes, expectations, and the number of buyers are not
measured on wither axis, so a change in one of these variables shifts the demand curve.
TABLE 4.1: variables that influence buyers
-table shows the variables that affect how much consumers choose to buy of any good
Special role that the price of the good plays: A change in the good's price represents a
movement along the demand curve, whereas a change in one of the other variables shifts the
Variable A change in