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 * CHAPTER 4: THE MARKET FORCES OF SUPPLY AND DEMAND**

LEARNING OBJECTIVES:

By the end of this chapter, students should understand:

1. What a competitive market is. 2. What determined the demand for a good in a competitive market 3. What determined 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:

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 a. The goods being offered for sale are exactly the same b. The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price 2. Because buyers and sellers must accept the market price as given, they are often called “price takers.” 3. Not all goods are sold in a perfectly competitive market. a. A market with only one seller is called a monopoly market b. Some markets fall between perfect competition and monopoly.

__//I have recorded all the important terms of this chapter so follow along. Listen to it several times and you'll MASTER IT!!//__

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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. b. Law of Demand c. Demand Schedule d. Demand Curve

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 • Inferior good: ex) subway, ramyeon (라면), bus ride b. Prices of Related Goods • Substitutes : ex) Tomato juice for Orange juice • Complements : ex) Ketchup and Hotdog c. Expectations • Future income • Future prices d. Number of Buyers

Fifth. Quantity supplied is positively related to price. This implies that the supply curve will be upward sloping a. Law of Supply b. Supply Schedule c. Supply curve

Sixth. The market supply curve shows how the total quantity suuplied varies as the price of the good varies. Seventh. **Factors of shift of supply curve** a. Input price b. Technology c. Expectations d. Number of Sellers

Eighth. The equilibrium price is often called the “market-clearing” price because both buyers and sellers are satisfied at this price. Ninth. If the actual market price is higher than the equilibrium price, there will be a surplus of the good Tenth. If the actual price is lower than the equilibrium price, there will be a shortage of the good. Eleventh. A shift in demand curve is called a “change in demand.” A shift in the supply curve is called a “change in supply.” Twelfth. 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.

Summary: When an event shifts the supply or demand curve, we can examine the effects on the equilibrium price and quantity The prices serve as signals that guide the allocation of the scarce resources in the economy Prices determine who produces each good and how much of each good is produced.

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QUESTIONS:

1. An economy’s scarce resources are allocated by? 2. You lose your job and as a result you buy fewer mystery books. This shows that you consider mystery books to be a 3. If goods A and B are complements, an increase in the price of A will result in? 4. If the number of buyers in the market decreases….? 5. A leftward shift in the supply is?

Answers

1. prices for resources 2. normal good 3. less of good B sold 4. demand in the market will decrease 5. decrease in supply