Demand And Supply

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.

Competition: Perfect and Otherwise:

Characteristics of a perfectly competitive market:

• The goods being offered for sale are all the same.
• The buyers and sellers are so numerous that none can influence the market price.
• Because buyers and sellers must accept the market price as given, they are often called “price takers.”
• Agricultural market provide good example of perfect competition.
• A market with only one seller is called a monopoly market.
• A market with only a few sellers is called an oligopoly.
• A market with a large number of sellers, each selling a product that is slightly different from its competitors’ products, is called monopolistic competition.

Demand:

• Quantity Demanded: the amount of a good that buyers are willing and able to purchase.
• Law of Demand: the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

Factors:

1. Price: Quantity demanded is negatively related to price. This implies that the demand curve is downward sloping.

2. Income: The relationship between income and quantity demanded depends on what type of good the product is.

• Normal Good: a good for which, other things equal, an increase in income leads to an increase in demand.
• Inferior Good: a good for which, other things equal, an increase in income leads to decrease in demand.

3. Prices of Related Goods

• Substitutes: two goods for which an increase in the price of one good leads to an increase in the demand for the other good.
• Complements: two goods for which an increase in the price of one good leads to a decrease in the demand for the other good.

4. Tastes and Preferences:

5. Expectations: This could include expectations of future income or expectations of future price changes.

The Demand Schedule and the Demand Curve:

• 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 Versus Individual Demand:

• The market demand is the sum of all of the individual demands for a particular good or service.
• The demand curves are summed horizontally — meaning that the quantities demanded are added up for each level of price.
• The market demand is the sum of all of the individual demands for a particular good or service.
• The demand curves are summed horizontally — meaning that the quantities demanded are added up for each level of price.
• The market demand curve shows how the total quantity demanded of a good varies with the price of the good.

Supply:

• Quantity Supplied: the amount of a good that sellers are willing and able to sell.

1. Price: Quantity supplied is positively related to price.

Law of Supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.

2. Input Prices

3. Technology

4. Expectations

Market Supply Versus Individual Supply:

• The market supply curve can be found by summing individual supply curves.
• Individual supply curves are summed horizontally at every price.
• The market supply curve shows how the total quantity supplied varies as the price of the good varies.

Shifts in the Supply Curve:

1. When any determinant of supply changes (other than price), the supply curve will shift.

2. An increase in supply can be represented by a shift of the supply curve to the right.

3. A decrease in supply can be represented by a shift of the supply curve to the left.

Equilibrium (Demand & Supply are equal): The point where the supply and demand curves intersect is called the market’s equilibrium.

• Equilibrium: a situation in which supply and demand has been brought into balance.
• Equilibrium Price: the price that balances supply and demand.
• The equilibrium price is often called the “market-clearing” price because both buyers and sellers are satisfied at this price.
• Equilibrium Quantity: the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand.
• If the actual market price is higher than the equilibrium price, there will be a surplus of the good.

Surplus: a situation in which quantity supplied is greater than quantity demanded.

• To eliminate the surplus, producers will lower the price until the market reaches equilibrium.
• If the actual price is lower than the equilibrium price, there will be a shortage of the good.
• Shortage: a situation in which quantity demanded is greater than quantity supplied.
• Sellers will respond to the shortage by raising the price of the good until the market reaches equilibrium.

Law of Supply and Demand: the claim that the price of any good adjusts to bring the supply and demand for that good into balance.