Supply and Demand: A Model of a Competitive Market
- Market is when a group of producers and consumers who exchange a good or service
- Competitive market: is a market which there are many buyers and sellers of the same
good or services, no individual can influence the price at which the good or service is
o Supply and demand model: (behavior well described for competitive market)
The demand curve
The supply curve
The set of factors that cause the demand curve to shift and the set of
factors that cause the supply curve to shift
The market equilibrium which includes the equilibrium price,
The way the market equilibrium changes when the supply curve or
demand curve shifts.
1. The Demand curve:
a. The amount of something a consumer wants depends on the price of the item.
i. Demand schedule: a table showing how much of a good or service
consumer will want to buy at different prices.
1. With the demand schedule, we can draw the demand curve.
2. Quantity demand: is the actual amount of a good or service
consumers are willing to buy at some specific price.
3. Law of Demand: a higher price for good or service, other things
equal lead people to demand a smaller quantity of that good or
service. 4. Shift of Demand Curve: a change in the quantity demanded at
any given price represented by the change of the original demand
curve to a new position, denoted by a new demand curve.
5. Movement along the demand curve: (different from the shift) a
change in the quantity demanded of a good arising from a change
in the good’s price.
a. Make sure you have a clear distinction between the
change in demand (shifts of the demand curve) and
changes in the quantity of demand.
b. Increase of demand rightward shift of the original.
c. Five causes of the shift of demand curve:
i. Change in the price of related goods or services
1. Two goods are substitutes if a rise in the
price of one of the good leads to an
increase in the demand for the other good.
(coffee or tea, train or flight…etc)
2. Two goods are complements if a rise in the
price of one good leads to a decrease in the
demand for the other good. (computer and
software’s, cappuccino and cookies)
ii. Changes in income 1. Normal goods: when a rise in income
increases the demand for a good—the
normal case—is a normal good.
2. Inferior goods: when a rise in income
decreases the demand for a good becomes
an inferior good.
iii. Changes in tastes
iv. Changes in expectations
v. Change in number of consumer
1. Individual demand curve: illustrates the
relationship between quantity demanded
and price for an individual consumer.
2. Market demand curve shows how the
combined quantity demanded by all
consumers depends on the market price of
that good. Average of the individual demand
2. The Supply Curve
a. Quantity supplied: is the actual amount of a good or service people are willing
to sell at some specific price. b. Supply schedule: shows how much of a good or service would be supplied at
c. Supply curves: shows the relationship between quantity supplied and price.
i. Higher price= higher quantity supplied. Supply curve usually slope
upward unlike demand curves.
- Shift in the supply curve: is a change in the quantity supplied of a good or service at any
given price. It is represented by the change of the original supply curve to a new
position, denoted by a new supply curve.
o Shifting right= increase in supply.
- Movement along the supply curve: is a change in the quantity supplied of a good arising
from a change in the good’s price. Five causes in the shift of supply curve
- Changes in input prices
o To produce output, you need input is a good or service that is used to produce
another good or service.
- Changes in the prices related to the good or service
- Change in technology
- Change in expectation
- Change in the number of producers
o Individual supply curve: illustrates the relationship between quantity supplied
and price for an individual producer.
Market supply curve shows the combined total quantity supplied by all individual producers in
the market depending on the price of that good. Supply, Demand and Equilibrium: - A competitive market is in equilibrium when price has moved to a level at which the
quantity of a good or service demanded equals the quantity of that good or service