CHAPTER 4

4-1 Markets and Competition

a. What is a market?
- A market: a group of buyers and sellers of a particular
good or service
b. What is competition?
- A competitive market: a market in which there are many
buyers and sellers so that each has a negligible (too
small/ slight) impact on the market price. (because the
market has many sellers owning the same good)
- A perfectly competitive market must have 2
characteristics:
+ the goods offered for sale are all exactly the same
(sugar, salt, rice,..)
+ the buyers and sellers are so numerous that no single
buyer or seller has any influence over the market price
(price taker: buyers and sellers in perfectly competitive
markets must accept the price the market determines)
- Not all goods and services, however, are sold in perfectly
competitive markets. Some markets have only one seller,
and this seller sets the price, such a seller is call
MONOPOLY.

4-2 Demand
a. The demand curve: the relationship between price and
quantity demand
- The quantity demanded of any good: the amount of the
good that buyers are willing and able to purchase.
- Quantity demand:
+ needs: willingness to buy/ want to buy
+ can afford to buy/ able to buy
- Law of demand: the claim that, other things being equal,
the quantity demanded of a good falls when the price of
the good rises (Qd and price is negative relationship)
- Demand schedule: a table that shows the relationship
between the price of a good and the quantity demanded.
- The demand curve slopes downward because, other
things being equal, a lower price means a greater quantity
demanded
- Price and the quantity demanded: negative relationship

b. Market demand vs Individual demand

- Market demand: the sum of all the individual demands for
a particular good or service.

c. Shifts in the demand curve

- The demand curve: a graph that shows the relationship
between the price and the quantity demanded.
- The price of a good makes the demand curve move along
the graph
- The “other things” are determinants of demand that can
shift the demand curve:
+ Income: A lower income means that you have less to
spend in total, so you would have to spend less on some—
and probably most—goods.
(If the demand of a good falls when income falls, the good
is called NORMAL GOOD. If the demand of a good rises
when income falls, the good is called INFERIOR GOOD).
+ Price of related good:
 When a fall in the price of one good reduces the
demand for another good, the two goods are called
SUBSTITUTES (hotdogs and hamburgers, sweaters
and sweatshirts, cinema tickets and film streaming
services)
 When a fall in the price of one good raises the
demand for another good, the two goods are called
COMPLMENTS (gasoline and automobiles, computers
and software, peanut butter and jelly)
+ Tastes: The most obvious determinant of your demand
is your tastes (if you like ice cream, you buy more of it
and you don’t care about the price)
+ Expectations: Your expectations about the future may
affect your demand for a good or service today (if you
expect to earn a higher income next month, you may
choose to save less now and spend more of your current
income buying ice cream; if you expect the price of ice
cream to fall tomorrow, you may be less willing to buy an
ice cream cone at today’s price)
+ # of buyers: the market demand depends on the
number of buyers. If the number of buyers increases, the
quantity demanded in the market would be higher at
every price and market demand would increase.

4-3 Supply
a. The supply curve: the relationship between price and
quantity supplied
- The quantity supplied: the amount of a good that sellers
are willing and able to sell
- Law of supply: the claim that, other things being 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
- Price and the quantity supplied: positive relationship

b. Market supply vs Individual supply

- Market supply: the sum of the supplies of all sellers.

c. Shifts in the supply curve

- The market supply curve shows how the total quantity
supplied varies as the price of the good varies, holding
constant all the factors that influence producers’ decisions
about how much to sell
- The supply curve slopes upward because, other things
being equal, a higher price means a greater quantity
supplied
- Price of the good itself -> represents a movement along
the supply curve
- The “other things” are factors that shift the supply curve:

+ Input prices: when the price of one or more of these

inputs rises (cream, sugar, workers,…), producing ice
cream is less profitable and firms supply less ice cream. If
input prices rise substantially, a firm might shut down and
supply no ice cream at all. => the supply of a good is
negatively related to the inputs used to make the good.
+ Technology: the advance in technology -> reducing the
firm’s cost for manufacturing -> raise the quantity
supplied
+ Expectations: if a firm expects the price of ice cream to
rise in the future, it will put some of its current production
into storage and supply less to the market today.
+ # of sellers: If the number of seller decrease, the supply
in the market would fall.

4-4 Supply and demand together

a. Equilibrium
- 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 (excess supply)

- Shortage: a situation in which quantity demanded is

greater than quantity supplied (excess demand)

- When facing a surplus or a shortage, we can adapt the law

of supply and demand: the claim that the price of any
good adjusts to bring the quantity supplied and the
quantity demanded for that good into balance
b. Three steps to analyzing changes in eq’m
- Decide whether the event shifts the supply or demand
curve (or perhaps both)
- Decide in which direction the curve shifts
- Use the supply and demand diagram to see how the shift
changes the equilibrium price and quantity
4-5 Conclusion: how prices allocate
resources