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Chapter 4

Chapter 4 The Market Forces of Supply and Demand

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Department
Economics
Course
EC120
Professor
petersinclair
Semester
Fall

Description
Keith Diaz Chapter 4: The Market Forces of Supply and Demand  A market is a group of buyers and sellers of a particular good or service  Competitive market is one where there are so many buyers and sellers that each has a negligible impact on the market price  Perfectly competitive market - All goods are the same - Buyers and sellers so numerous that nobody can affect the market price  each is a “price taker” - We usually assume that markets are perfectly competitive Demand  Comes from the behaviour of buyers  Quantity demanded of any good is the amount of the good that buyers are willing and able to purchase at any price  sum of the quantity demanded by all buyers at each price  Law of demand: (other things equal) quantity demanded of a good falls when price of the good rises  downward slope of the demand curve  Demand schedule: table that shows the relationship between the price& QD of a good  PRICE = quantity demanded, DETERMINANT = change in demand Shifts  Non-price determinants of demand determine buyers’ demand for a good  Changes in these determinants = change in demand = shift the curve  Different from changes in price, because price = movement along the curve, not a shift 1. Number of buyers: increase in the number of buyers causes an increase in quantity demanded at each price, which shifts the curve to the right 2. Income - Demand for a normal good is positively related to income: increase in income causes increase in QD at each price, shifting the demand curve to the right (faster for luxury than necessity) - Demand for an inferior good is negatively related to income: increase in income shifts the demand curve for inferior goods to the left more income means we switch to better goods 3. Prices of related goods - substitutes if an increase in the price of one causes increase in demand for the other - complements if an increase in the price of one leads to a fall in demand for the other (both) 4. tastes: anything that causes a shift in tastes toward a good will increase demand 5. expectations: affect consumers’ buying decisions - if people expect incomes to rise, their demand may increase due to positive outlook - if economy turns bad and people worry about their future job sec
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