Paul Barnabic Microeconomics AP Mr.
Monahan September 30, 2013 Chapter 4: The Market Forces of Supply and Demand Supply and Demand are the forces that make market economies work. o Determine the quantity of each good produced and the price that it will be sold Market- a group of buyers and sellers of a particular good or service Buyers determine demand Sellers determine supply o Price and quantity is determined by all buyers and sellers in the market place Competitive Market- a market in which there are many buyers and many sellers so that each has a negligible impact on the market price. Perfectly competitive o The goods offered for sale are all exactly the same o The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price. Price Takers- buyers and sellers who in a perfectly competitive market must accept the price the market determines. Monopoly- a seller that is the only one of its kind in its area so it gets to set its price Quantity Demanded- the amount of a good that buyers are willing and able to purchase o Price plays a major role in determining peoples demands Law of Demand- the claim that when other things are equal the quantity demanded of a good falls when the price of the good rises Demand Schedule- a table that shows the relationships between the price of a good and the quantity demanded; everything else is held constant Demand Curve- a graph of the relationship between the price of a good and the quantity demanded Market Demand- the sum of all individuals demands for a particular good or service o Sum of individual demands Factors that Shift Demand: o Income 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 a decrease in demand o Prices of Related Goods
Substitutes- two goods for which an increase in the price of one leads to an increase in the demand for the other. Ex: ice cream and frozen yogurt Complements- two goods for which an increase in the price of one leads to a decrease in the demand for the other
o Tastes o Expectations Ex: If you think Ice Cream will be cheaper tomorrow, you may be more likely to buy more tomorrow o Number of Buyers If more people want a good, the demand increases for that good 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 holding everything else constant Supply Curve- a graph of the relationship between the price of a good and the quantity supplied Factors that Shift the Supply Curve: o Input prices The if the prices of the ingredients in ice cream increase, profits decrease, and less ice cream is made o Technology New tech. can reduce firms costs making ice cream more profitable and the supply increases o Expectations If a firm expects more money to be made in the future, less will be made today, reducing the supply o Number of Sellers More suppliers Larger Supply Equilibrium - a situation in which the market rice 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 the quantity supplied is greater than quantity demanded Shortage- a situation in which the quantity demanded Is greater than quantity supplied Law of Supply and Demand- the claim that the price of an good adjusts to bring the quantity supplied and the quantity demanded for that good into balance. Three steps to analyze how some event affects the equilibrium in the market: 1. Determine whether the event shifts the supply curve, demand curve, or both curves 2. Determine whether the curve shifts to the right or left
3. Use the supply-and-demand diagram to compare the equilibrium price and quanity
