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Chapter 4

01:220:102 Chapter Notes - Chapter 4: Monster.Com, Demand Curve, Inferior Good


Department
Economic
Course Code
01:220:102
Professor
D.Okada
Chapter
4

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Chapter 4: Demand, Supply, and Equilibrium
Key Ideas
- In a perfectly competitive market, (1) sellers all sell an identical good or service, and (2) any individual
buyer or any individual seller isn’t powerful enough on his or her own to affect the market price of that
good or service
- The demand curve plots the relationship between the market price and the quantity of a good
demanded by buyers
- The supply curve plots the relationship between the market price and the quantity of a good supplied
by sellers
- The competitive equilibrium price equates the quantity demanded and the quantity supplied
- When prices are not free to fluctuate, markets fail to equate quantity demanded and quantity supplied
4.1 Markets
Prices act as a selection device that encourages trade between the sellers who can produce goods at low
cost and the buyers who place a high value on the goods
- There is always enough gas without having to tell them how many drivers there are and the market
makes enough for employees and expenses
- Market: a group of economic agents who are trading a good or service, and the rules and arrangements
for trading
- Gas stations, web based job market (monster.com), and dating websites
- Gas stations are ready to sell a quantity of gasoline that is equal to the quantity of gasoline that drivers
want to buy
Competitive Markets
- Gas station attendants don’t cut special deals with individual customers
- Drivers of Cadillacs and Kias pay the same price for gasoline
- Market price: all sellers and buyers face the same price
- In a perfectly competitive market, (1) sellers all sell an identical good or service, and (2) any individual
buyer or any individual seller isn’t powerful enough on his or her own to affect the market price

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- All buyers and sellers are price-takers, can’t bargain and ask for better price
- Very few perfectly competitive markets (isolated gas station)
4.2 How Do Buyers Behave?
- Quantity demanded: amount of a good that buyers are willing to purchase at a given price
- If price of gas increases, people use less gas and use public transport
- Demand schedule: quantity demanded at different prices
- Holding all else equal: everything other than the price is held constant or fixed (income, rent, and tolls)
Demand Curves
- Demand curve: plots the relationship between the prices and quantity demanded
- Quantity demanded on the horizontal axis and price on the vertical axis
- Negatively related: they move in opposite directions
- Law of Demand: the quantity demanded rises when the price falls
Willingness to Pay

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- Willingness to pay: highest price that a buyer is willing to pay for an extra unit of good
- Diminishing marginal benefit: as you consume more of a good, your willingness to pay for an
additional unit declines
- Donut in the morning worth more and willing to pay more than fourth donut in same sitting
From Individual Demand Curves to Aggregated Demand Curves
- Aggregation: adding up individual behaviors; sum all demand curves
- Adding up quantity demanded not prices
Building the Market Demand Curve
- Market demand curve: sum of the individual demand curves of all the potential buyers
- Relationship between the total quantity demanded and the market price
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