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Chapter 4

ECON 201 Chapter Notes - Chapter 4: Ice Cream, Demand Curve, Takers


Department
Economics
Course Code
ECON 201
Professor
Sarna
Chapter
4

Page:
of 3
Chapter 4: The Market Forces of Supply and Demand
Markets and Competition
○ Market- a group of buyers and sellers of a particular good or service
Buyers determine the demand for the product
Sellers determine the supply of the product
Take many forms
Highly organized
Ex. agricultural commodities
Buyers and sellers meet at a specific time and place where
an auctioneer helps set prices and arrange sales
Less organized
Ex. Ice cream
Each sellers posts a price for an ice-cream cone, and each
buyer decides how much ice cream to buy at each store
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
Perfectly competitive
(1) The goods offered for sale are all exactly the same
(2) 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 the price the
market determines
At the market price, buyers can buy all they want, and sellers can
sell all they want
Ex. Wheat market
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 than 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
Must be determined to analyze how markets works
Total quantity demanded at any price —> add the individual
quantities (found on the horizontal axis of the individual demand
curves)
Shows how the total quantity demanded of a good varies as the
price of the good varies, while all the other factors that affect how
much consumers want to buy are held constant
Variables That Affect Demand
■ Price
Change in price causes a movement along the demand curve
Shifts in the Demand Curve
Increase in demand
Shift to the right
Any change that raises the quantity that buyers wish to purchase
at any given price
Decrease in demand
Shift to the left
Any change that lowers the quantity that buyers wish to purchase
at any given price
Variables that shift the demand curve
● 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
Price of Related Goods
○ Substitutes- two goods for which an increase in the price
of one leads to an increase in the demand for the other
○ Complements- two goods for which an increase in the
price of one leads to a decrease in the demand for the
other
● Tastes
● Expectations
Ex. If people expect their incomes to rise, their demand for
meals at expensive restaurants may increase now
Number of Buyers
■ Summary
Supply
The Supply Curve: The Relationship between Price and Quantity Supplied
Quantity supplied- the amount of a good that sellers are willing and able
to sell
Law of supply- the claim that, other things being equal, the quantity
supplied of a good rises when the price of the good rises
Supply schedule- a table that shows the relationship between the price
of a good and the quantity supplied
Supply curve- a graph of the relationship between the price of a good
and the quantity supplied
Market Supply vs. Individual Supply
Shifts in the Supply Curve
Increase in supply
Decrease in supply
Variables that shift the supply curve
Input prices
Technology
● Expectations
Number of Sellers
■ Summary
Supply and Demand Together
Equilibrium- a situation in which the market price has reached the level at which
quantity supplied equals quantity demanded
Equilibrium price (market-clearing price)-
Equilibrium quantity-
Surplus (excess supply)- a situation in which quantity supplied is greater than
quantity demanded
○ Shortage (excess demand)- a situation in which quantity demanded is greater
than quantity supplied
Three Steps to Analyzing Changes in Equilibrium
(1) Decide whether the event shifts the supply curve, demand curve, or
both curves
(2) Decide whether the curve shifts to the right or to the left
(3) Use the supply-and-demand diagram to compare the initial and the
new equilibrium, which shows how the shift affects the equilibrium price
and quantity
How Prices Allocate Resources