Chapter+4+-+Micro

=The Market Forces of Supply and Demand =

MARKETS AND COMPETITION
What Is a Market?

In economics, the term supply and demand refers to people’s behavior as they interact in competitive market. But what exactly is a market? It is a group of suppliers and buyers of a particular good or service. Each market can vary in its form. For example, in the markets for many agricultural commodities, people (buyers and sellers) meet at a specific time, and an auctioneer arrange the sales. However, in the markets for ice cream, there is neither specific time people meet nor an auctioneer. Whether it is organized or not, it is a market as long as there is the group of buyers and sellers.

What Is Competition?

Most markets in the economy are highly competitive. This is because buyers can choose from several sellers, and seller knows that many other sellers produce similar goods or services as his. Therefore, the price and the quantity of the goods sold are determined by all buyers and sellers in the market, not any one buyer or seller. This quality basically describes the competitiveness in markets. When we study economics, we assume that markets are perfectly competitive. The perfectly competitive market must have two characteristics. 1) The goods sold are all exactly the same 2) No single buyer or seller can influence the market price. In the perfectly competitive market, buyers and sellers are said to be price takers, because they must accept the price the market determines. However, not all markets are perfectly competitive. For example, if there is only one seller in the market, the seller is called monopoly, and the market is not competitive.



DEMAND-the behavior of buyers
The Demand Curve: The Relationship Price and Quantity Demanded In any sort of markets, the quantity of demanded of good represents buyers’ willingness and ability to purchase. Many factors can determine the quantity demanded of any good although the price of the good is the major one. If a good becomes more expensive, you would buy less, and if it gets cheaper, you would buy more. The quantity demanded is negatively related to the price. This relationship describes the law of demand: Other things equal, the quantity demanded of a good falls when the price of the good rises.

Shifts in the Demand Curve

The demand curve can shift if something happens to change the quantity demanded at any given price. When demand increases, the demand curve shifts to the right, and when demand decreases, the demand curve shifts to the left. Some of the factors that can shift the demand curve include income, prices of related goods, tastes, expectations, and number of buyers.

1.Income- If the demand decreases when income falls, the good is called a normal good. If the demand increases when income falls, the good is called an inferior good. (ex. public transportation)

2.Prices of Related Goods- When a fall in the price of one good causes decrease in the demand for another good, the two goods are substitutes. (ex. hot dogs and hamburgers, sweaters and sweatshirts, movie tickets and video rentals) When a fall in the price of one good causes increase in the demand for another good, the two goods are complements. (ex. gasoline and automobile, computers and software, peanut butter and jelly)

3.Tastes- If you personally like a certain good, you buy more. If you don’t, you buy less.

4.Expectations- If you expect higher income next month, you can save less and spend more money now. You can also buy more goods now if you expect the price of the good to rise soon.

5.Number of Buyers- If the number of buyers increases, the quantity demanded in the market would increase at every price.

SUPPLY-the behavior of sellers
Supply Curve: The Relationship between Price and Quantity Supplied

In every market, the quantity supplied of good represents sellers’ willingness and ability to sell. Like the quantity demanded, many variables can determine the quantity supplied although price of the good is the major one. If a good becomes more expensive, you would sell more because it’s more profitable, and if it gets cheaper, you would sell less. The quantity supplied is positively related to the price. This relationship describes the law of supply: Other things equal, the quantity supplied of a good rises when the price of the good rises.

Shifts in the Supply Curve

The supply curve can shift if something happens to change the quantity supplied at any given price. When supply increases, the supply curve shifts to the right, and when supply decreases, the supply curve shifts to the left. Some of the factors that can shift the supply curve include input prices, technology, expectations, and number of sellers.

1.Input Prices- When the price of inputs increase, a seller supplies less good because producing the good is less profitable. The supply of a good and the price of the inputs have negative relationship.

2.Technology- Development in technology can reduce input prices to make certain good, making its price go down.

3.Expectations- If a seller expects price of his good to rise soon, he will put some of the goods into storage and supply less now.

4.Number of Sellers- If the number of sellers increases, the quantity supplied in the market would increase at every price.

SUPPLY AND DEMAND TOGETHER
Equilibrium

When the supply and demand curves intersect, the point of intersection is called the market’s equilibrium. The price at the equilibrium is called the equilibrium price, and the quantity at the equilibrium is called the equilibrium quantity. When the market is in equilibrium, the quantity demanded of the good exactly balances the quantity supplied of the good. The equilibrium price is also called as the market-clearing price because everyone (buyers and sellers) is satisfied at that price. Markets naturally move toward its equilibrium. Suppose that in certain market the quantity of the good supplied exceeds the quantity demanded. There is a surplus of the good, meaning that there is excess supply. As a result, sellers cut the price because they cannot sell the good as much as they would like to. Price keeps falling until it reaches the equilibrium price. Now suppose that in the same market the quantity of the good demanded exceeds the quantity supplied this time. Then, there is a shortage of the good, meaning that there is excess demand. As a result, sellers raise the price and increase the supply because many buyers who demand the good but cannot obtain. The price keeps rising until it reaches the equilibrium price. As described above, buyers and sellers’ actions naturally moves the market to the equilibrium. This phenomenon describes the law of supply and demand: The price of any good brings the quantity supplied and quantity demanded of that good into balance.  Three Steps to Analyzing Changes in Equilibrium

We usually follow three steps when we analyze how some events influence the equilibrium in a market. 1. We decide whether the event shift the supply or demand curve. 2. We decide whether the curve shifts to the right or to the left. 3. We use the supply-and-demand diagram to observe the changes in the equilibrium price and quantity.

Shifts in Curves versus Movements along Curves

There is a significant difference between shift in the curve and movements along the curve. For example, shifts in a supply curve represents the change in “supply”, while movements along the curve represents the change in “quantity supplied”. Supply refers to the position of the supply curve, and the quantity supplied refers to the amount sellers are willing to sell. This graph shows the change in the quantity supplied(movement along the curve), the change in the quantity demanded(movement along the curve, and the change in demand(shift).

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Key Terms
market- interaction of buyers and sellers of a certain good or service competitive market- a market in which each buyer or seller cannot influence the market price because there are so many of them quantity demanded- the quantity that buyers are willing and able to pay at specific price law of demand- the claim that the quantity demanded and the price of the good have negative relationship demand schedule- a table that shows the quantity demanded of a good at each price demand curve- a graph that shows the quantity demanded of a good at each price normal good- a good for which income and demand have positive relationship inferior good- a good for which income and demand have negative relationship substitutes- two goods for which the price of one and the demand for the other have the positive relationship complements- two goods for which the price of one and the demand for the other have the negative relationship quantity supplied- the quantity that sellers are willing and able to sell at specific price law of supply- the claim that the quantity supplied and the price of the good have positive relationship supply schedule- a table that shows the quantity supplied of a good at each price supply curve- a graph that shows the quantity supplied of a good at each price

<span style="font-family: Symbol; color: rgb(203, 6, 244)">Summary of the Chapter
-In a competitive market, no single buyer or seller can influence the market price. -The price of a good and the quantity demanded have negative relationship. -Determinants of demand or the quantity demanded include price, income, the prices of substitutes and complements, tastes, expectations, and the number of buyers. -The price of a good and the quantity supplied have positive relationship. -Determinants of supply or the quantity supplied include price, input prices, technology, expectations, and the number of sellers. -At equilibrium price, the quantity demanded and the quantity supplied is balanced. -The actions of buyers and sellers naturally move markets toward the equilibrium. -To analyze how some events affect a market, we decide whether the events shift the supply curve or the demand curve, decide which direction the curve shifts, and compare the new equilibrium with the original equilibrium.

<span style="font-family: 'Comic Sans MS',cursive; color: rgb(125, 255, 0)">Review Questions
1. What are the two conditions that describes a perfectly competitive market?

A: 1) Goods sold are all exactly the same 2) Single buyer or seller cannot affect the market price.

2. Does the graph below represent the change in supply or the change in the quantity supplied?

A: It shows the increase in supply.

3. What are the three steps to analyze how certain event affect the equilibrium price?

A: 1) Figure out whether the event shifts the supply curve or the demand curve. 2) Decide whether the curve shifts to the right or to the left. 3) Look at the new equilibrium and the original equilibrium, and compare the equilibrium price and the equilibrium quantity.