Chapter+4+The+Market+Forces+of+Supply+of+Demand

=Definitions:=  1. Market: A group of buyers and sellers of a particular good or service 2. Competitive Market: A market in which there are many buyers and many sellers so that each has a negligible impact on the market price 3. Quantity demanded: The amount of a good that buyers are willing and able to purchase 4. Law of Demand: The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises 5. Demand schedule: A table that shows the relationship between the price of a good and the quantity demanded 6. Demand curve: A graph of the relationship between the price of a good and the quantity demanded 7. Normal Good: A good for which, other things equal, an increase in income leads to an increase in demand 8. Inferior good: A good for which, other things equal, an increase in income leads to a decrease in demand 9. Substitutes: Two goods for which an increase in the price of one leads to an increase in the demand for the other 10. Complements: Two good for which an increase in the price of one leads to a decrease in the demand for the other 11. Quantity Supplied: The amount of a good that sellers are willing and able to sell 12. Law of supply: The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises 13. Supply schedule: A table that shows the relationship between the price of a good and the quantity supplied 14. Supply Curve: A graph of the relationship between the price of a good and the quantity supplied. 15. Equilibrium: A situation in which the market price has reached the level at which quantity supplied equals quantity demanded 16. Equilibrium Price: The price that balances quantity supplied and quantity demanded 17. Equilibrium Quantity: The quantity supplied and the quantity demanded at the equilibrium price 18. Surplus: A situation in which quantity supplied is greater than quantity demanded 19. Shortage: A situation in which quantity demanded is greater than quantity supplied 20. Law of Supply and Demand: The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance. =LEARNING OBJECTIVES:=

By the end of this chapter, students should understand:

1. What a competitive market is. 2. What determines the demand for a good in a competitive market 3. What determines the supply of a good in a competitive market 4. How supply and demand together set the price of a good and the quantity sold. 5. The key role of prices in allocating scarce resources in market outcomes

=CONTEXT AND PURPOSE:=

Ah. The long and really important chapter. Everyone must have seen these curves when associating something with economics. To understand this curve means to get an A on the exam. If you don't get this chapter, you have to read it over and over again until you really get it. Otherwise, I can't guarantee whether you'll get higher than 3 on the AP Test. So, take out your highlighter and jot down or underline. The purpose of Chapter 4 is to establish the model of supply and demand. The model of supply ad demand is the foundation for the discussion for the remainder of this text. In this chapter, we will assume that markets are perfectly competitive:

1. Characteristics of a perfectly competitive market
a. The goods being offered for sale are exactly the same (homogeneous). b. The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price. Because buyers and sellers must accept the market price as given, they are often called “price takers.

Now, let's talk about the demand curve.

I. Demand
First. One important determinant of quantity demanded is the price of the product.

a. Quantity demanded is negatively related to price. This implies that the demand curve is downward sloping. Who wants to buy a lot of goods when the price is high? Rationally, people don't do that. So, it has a negative relationship.

Second. The market demand is the sum of all of the individual demands for a particular good or service

Third. Market demand curve shows how the total quantity demanded for a good varies with the price of the good, holding constant all other factors that affect how much consumers want to buy.

Fourth. **Factors that shifts the Demand Curve**

a. Income • Normal good: ex) cars, shoes. Normal goods are something that has increase in quantity demanded as the income rises. Obviously, people want to spend money that best reflects their interest, and when there's much money, people spend in things that are expensive. • Inferior good: ex) subway, ramyeon (라면), bus ride. This is the exact opposite.

b. Prices of Related Goods • Substitutes : ex) Tomato juice for Orange juice. Substitute means when the price of a good 1 rises, the quantity demanded for other (good 2) falls. If people want to buy tomato juice, they don't want to drink orange juice. • Complements : ex) Ketchup and Hotdog. Complement is the exact opposite of substitute, when the price of a good 1 rises, the quantity demand for other (good 2) rises. If people want to buy hotdogs, they will probably buy ketchup, too.

c. Expectations • Future income rises/falls-demand changes • Future prices rises/falls-demand changes

d. Number of Buyers-scarcity

II. Supply
First. Quantity supplied is positively related to price. This implies that the supply curve will be upward sloping

Second. The market supply curve shows how the total quantity supplied varies as the price of the good varies. Third. **Factors of shift of supply curve** http://www.argmax.com/mt_blog/archive/pokemonf2.gif

a. Input price: If input price rises, then obviously, supply curve will shift. b. Technology: Improvement in technology may mean producing goods at a lower cost, and this can trigger a change in the curve c. Expectations: If the firms expect the price of the good to rise, they might change the behavior. d. Number of Sellers: More sellers mean more products available, and this alters the decision.

These things all affect incentives.

III. How Demand And Supply Curve Come Together
The equilibrium price is often called the “market-clearing” price because both buyers and sellers are satisfied at this price. http://www.raybromley.com/notes/noteimages/equilibrium/incrdemsup1.gif

First. If the actual market price is higher than the equilibrium price, there will be a surplus of the good because consumers don't buy everything the producers produce. Second. If the actual price is lower than the equilibrium price, there will be a shortage of the good because producers can't produce enough to accommodate every need. Third. A shift in demand curve is called a “change in demand.” A shift in the supply curve is called a “change in supply.” Fourth. A movement along a fixed demand curve is called a “change in quantity demanded.” A movement along a fixed supply curve is called a “change in quantity supplied.

IV. Conclusion
Price is the key instrument the "invisible hand" uses to run the market. Everything can be done at efficiency because the price drives people to make decisions.

QUESTIONS:

1. An economy’s scarce resources are allocated by? 2. You lose your income and you decided not to buy Call of Duty 5. This makes Call of Duty 5 as? 3. If hot dogs and mustards are complements, an increase in price of hot dogs will trigger.. 4. If the number of buyers in the market decreases….? 5. There was an earthquake that destroyed numerous firms that used to produce same product. This will cause decrease/increase in supply in the market.

Answers

1. prices for resources- Please read the whole chapter if this was not obvious. 2. normal good- a definition 3. less of mustard sold because they are complements. 4. demand in the market will decrease since there are fewer consumers 5. decrease in supply