ECON 201 Chapter Notes - Chapter 4: Demand Curve, Perfect Competition, Inferior Good

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8 Feb 2017
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Chapter 4: The Market Forces of Supply and Demand
4.1 Markets and Competition
What is a market?
Market: a group of buyers and sellers of a particular good or service
The buyers as a group determine the demand for the product, and the sellers as a group
determine the supply of the product
Markets can take many forms
What is a competition?
competitive market: a market in which there are many buyers and many sellers so that
each has a negligible impact on the market price
price and quantity are determined by all buyers and sellers as they interact in the
marketplace
To reach this highest form of competition, a market must have two characteristics:
The goods offered for sale are all exactly the same
the buyers and sellers are so numerous that no single buyer or seller has any
influence over the market price
Price takers: buyers and sellers must accept market price
Monopoly: occurs in a non perfectly competitive market, market with only one seller
Perfectly competitive markets are the easiest to analyze because everyone participating
in the market takes the price as given by market conditions
4.2 Demand
The Demand Curve: The Relationship between Price and Quantity Demanded
quantity demanded: the amount of a good that buyers are willing and able to purchase
law of demand: the claim that, other things being equal, the quantity demanded of a
good falls when the price of the good rises
demand schedule: a table that shows the relationship between the price of a good and
the quantity demanded
demand curve: a graph of the relationship between the price of a good and the quantity
demanded
Market Demand vs. Individual Demand
market demand: the sum of all the individual demands for a particular good or service
to find the total quantity demanded at any price, we add the individual quantities, which
are found on the horizontal axis of the individual demand curves
market demand curve shows how the total quantity demanded of a good varies as the
price of the good varies, while all other factors that affect how much consumers want to
Shifts in the Demand Curve
Increase in demand shifts curve right, decrease in demand shifts curve left
Income
normal good: a good for which, other things being equal, an increase in income
leads to an increase in demand
inferior good: a good for which, other things being equal, an increase in income
leads to a decrease in demand
Prices of Related Goods
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