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

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Economists use the model of supply and demand to analyze competitive markets. The demand and supply curves contain abundant information about the market.

Before we take a look at this chapter, here is an overview. media type="youtube" key="GjMMSTF1-4U" height="340" width="560" align="center"

**Words to keep in mind:** 
 * Market:** A group of Buyers and sellers of a particular good or service.
 * Competitive Market:** A market in which there are many buyers and many sellers so that each has a negligible impact on the market price.
 * Quantity demanded:** The amount of a good that buyers are willing and able to purchase.
 * Law of Demand:** The claim that, other things 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.
 * Normal Good:** A good for which, other things equal, and increase in income leads to an increase in demand.
 * Inferior Good:** A good for which, other things equal, an increase in income leads to a decrease in demand.
 * 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.
 * Quantity Supplied:** The amount of a good that sellers are willing and able to sell.
 * Law of Supply**: The claim that, other things 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.
 * Equilibrium:** A situation in which the market price has reached the level at which quantity supplied equals quantity demanded.
 * Equilibrium Price:** The price that balances quantity supplied and quantity demanded.
 * Equilibrium Quantity:** The quantity supplied and the quantity demanded at the equilibrium price.
 * Surplus:** A situation in which quantity supplied is greater than quantity demanded.
 * Shortage:** A situation in which quantity demanded is greater than quantity supplied.
 * Law of supply and demand:** The claim that they rice of any good adjust to bring the quantity supplied and the quantity demanded for that good into balance.

- The terms supply and demand refer to the behavior of people as they interact with one another in competitive markets.  - Buyers determine the demand for the product + Sellers determine the supply of the product. - Sometimes the **markets** are highly organized, while sometimes they are less organized. - Highly organized market: buyers and sellers meet at a specific time and place, and the auctioneer helps set the price. - An Example is agricultural commodities. - Less organized market: Each seller posts the price, and the buyers decides how much they will buy from each seller. - An Example is ice-cream market. 
 * What is a Market?**

**What is Competition?**  - Price and Quantity are determined by buyers and sellers as they interact with each other in the marketplace. - A market that has many buyers and sellers so that each has a negligible impact on the market price is a **competitive market**.

- In order to reach the highest form of perfectly competitive market, it should have two characteristics. 1. Goods offered for sale are exactly the same. 2. Buyers and sellers are numerous (No single buyer or seller has huge influence on the market price). - **Price Takers** are buyers and sellers in perfectly competitive markets that accept the price the market determines. - A **Monopoly** is where market has only one seller, and this seller sets the price. - An example of a monopoly is a local cable television.

**DEMAND:** 

- **Law of Demand** is when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises. - When the **quantity demanded** is **negatively related** to the price, The quantity demanded falls as the price rises, and when quantity demanded rises as the price falls. - A demand schedule shows the relationship between the price of a good and the quantity demanded holding constant everything else that influences how much consumers of the good want to buy.

//Here is an example of a demand schedule://

In this demand schedule, as the quantity of cookies demanded decreases, the price increases. By looking at this chart, we can predict that the graph would look something like this:

- A **market demand** is the sum of all the individual demands for a particular good or service.

**SHIFTS IN DEMAND CURVE** 

- The demand curve will not be stable as time passes. - Anything that happens to alter the quantity demanded at any given price makes the demand curve shift.

- An **increase in demand** is when the demand curve shifts to the //right//.

- A **decrease in demand** is when the demand curve shifts to the l//eft//.

//What Influence the shift?// <span style="font-family: Verdana,Geneva,sans-serif;">

- A **normal good** is if the demand for a good falls when income falls. - An **inferior good** is if the demand for a good rises, when income falls. - A low income means that less money would be spent, so less would be demanded, shifting the demand curve to the left. - A high income means that more money could be spent, and thus the demand would increase, shifting the demand curve to the right.
 * Income**

- A **substitute** is two goods for which an increase in the price of one leads to an increase in the demand for the other. - Substitutes are pairs of goods that are used in place of each other. - A **complement** is two goods for which an increase in the price of one leads to a decrease in the demand for the other. - Complements are pairs of goods that are used together. - As the price of substitutes decrease, the demand would increase for the good that decreases the price. Thus, shifts the demand curve to the right. - As the price of substitutes increase, the demand would decrease for the good that increased the price. Thus, shifts the demand curve to the left. - As the price of complements increase, the demand would decrease for the one that increased their price. Thus, shifts the demand curve to the left. - As the price of complements decrease, the demand would increase for the one that lowered their price. Thus, shifts the demand curve to the right.
 * Price of Related Goods**

- If the customers like a product, they buy more of it. - For example, if you like ice cream, you would buy more of it.
 * Tastes**

- If the customers expect the price of a product to fall, they would not buy the product until the price falls.
 * Expectations**

- This depends on all of the factors that determine the demand of individual buyers, including buyers' incomes, tastes, expectations, and the prices of related goods. - As the number of buyers increase, the demand curve shifts to the right. - As the number of buyers decrease, the demand curve shifts to the left.
 * Number of Buyers**

<span style="color: #00ff00; font-family: Verdana,Geneva,sans-serif; font-size: 110%;">**SUPPLY:** <span style="font-family: Verdana,Geneva,sans-serif;"> - At low prices, sellers could choose to shut down, and their quantity supplied becomes zero. - We say that the quantity supplied is positively related to the price of the good when the quantity supplied rises as the price rises and falls as the price falls.

- The law of supply: When the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well. - A supply schedule shows the relationship between the price of a good and the quantity supplied.

//Here is an example of a supply schedule://

As the number of quantity supplied increases, the price also increases. By looking at this chart, we can predict that the supply graph would look like this:


 * Shifts in Supply curve:**

- An increase in supply is when the supply curve shifts to the right.

- A decrease in supply is when the supply curve shifts to the left.

__**What influences the shift?**__ - As input prices rise, producing that product is less profitable, thus supplying less items. - As input prices rise too much at once, the company might shut down. - The supply of a good is negatively related to the price of inputs.
 * Input Prices**

- As technology improves, it reduces firms' costs, and thus raising the supply. - For example, when producing chocolate, and technology improves, less workers are needed, lowering the firms' costs. - Thus, with lower costs, more chocolate would be produced.
 * Technology**

- If firms expect the price of an item to rise in the future, then the company will supply less. - These products would be stored until the price rises.
 * Expectations**

- The supply in a market always depends on the number of sellers. - If one company stops producing an item, there would be no items supplied for that exact product.
 * Number of Sellers**

<span style="color: #00ff00; font-family: Verdana,Geneva,sans-serif;">**EQUILIBRIUM:** <span style="font-family: Verdana,Geneva,sans-serif;">

- An **equilibrium** is the single point where the supply and demand curve intersect each other. - This point maximizes everything for the consumers and producers. - At the **equilibrium price**, the quantity of the good that buyers are willing and able to buy balances the quantity the sellers are willing and able to buy. - This equilibrium price is sometimes called the //market-clearing price//.



- We determine if it is a surplus or a shortage by looking at the market price on the graph. - If the market price is //above// the equilibrium price, then there is a surplus. - If the market price is //below// the equilibrium price, then there is a shortage.

- There is **surplus** if suppliers are unable to sell all they want at their wanting price. - Response: Companies responds by cutting the prices when there is surplus.

- There is **shortage** if demanders are unable to buy all they want at the going price. This also means that the suppliers aren't producing enough for the consumers. - Response: Suppliers raise their prices without losing sales.

<span style="font-family: Verdana,Geneva,sans-serif;">//Here is an example of today's shortage://

Since gasoline companies don't supply much gasoline to the public anymore, although demand is high, the amount supplied is low. This creates a shortage because there are more demand than the amount supplied.

<span style="display: block; font-family: Verdana,Geneva,sans-serif; text-align: center;">In order to understand this chapter clearly, we must first understand the supply and demand strategies (when it shifts to the left or right, and what factors make this happen). Thus, the producing firms and the consumers must take this into consideration when dealing with the economy.


 * <span style="color: #008000; font-family: Verdana,Geneva,sans-serif; font-size: 120%;">Bibliography 4 **<span style="font-family: Verdana,Geneva,sans-serif;">