Market: a group of buyers and sellers of a particular good or service
Competitive Market: a market in which there has many buyers and many sellers so that each has a negligible impact on the market price
Quantity Demanded: the amount of goods 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
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
Normal Good: a good for which, other things being equal, an increase in income leads to an increase in demand
Inferior Good: a good for which, other things being equal, an increase in income leads to an decrease in demand
Substitutes: two goods for which an increase in the price of one leads to an increase in demand for the other
Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other
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 Sechdule: a table that shows the relationship between the price of a good and the quantity supplied
Supply Curve: a graph of the relationship between the price of a good and the quantity supplied
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
Shortage: a situation in which quantity demanded is greater than quantity supplied
Law of Supply and Demand: The price of any good adjusts to bring the quantity supplied and quantity demanded of that good into balance
Market and Competition
The terms supply and demand refer to the behavior of people as they interact with one another in competitive markets.
A market is a group of buyers and sellers of a particular good or service. The buyers as a group determine the demand for the product, and the sellers as a group determine the supply of the product.
The market is highly competitive. Price and quantity are determined by all buyers and sellers as they interact in the marketplace.
Economists use the term competitive market to describe a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price.
perfectly competitive:
- The goods offered to sale are exactly the same
- The buyers and sellers are so numerous that no single buyers or sellers has any influence over the market price
- buyers and sellers in perfectly competitive markets must accept the price the market determines, they are said to be price takers.
Demand
The Demand Curve: The Relationship between Price and Quantity Demanded
The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.
This relationship between price and quantity demanded is true for most goods in the economy and, in fact, is so pervasive that economists call it the law of demand: Other things being equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises.
The demand schedule is a table that shows the quantity demanded at each price. The demand curve, which graphs the demand schedule, illustrates how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward.
The market demand at each price is the sum of the other individual demands
If something happens to alter the quantity demanded at any given price, the demand curve shifts.
Changes in many variables 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 goods. If the demand for a good falls when income falls, the good is called a normal good.
- Prices of Related Goods: When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. When a fall in the price of one good raises the demand for another good, the two goods are called complements.
- Tastes
- 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.
- Number of Buyers
Supply
The Supply Curve: The Relationship between Price and Quantity Supplied
The quantity supplied of any good or service is the amount that sellers are willing and able to sell. This relationship between price and quantity supplied is called the law of supply: Other things being equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well
The supply schedule is a table that shows the quantity supplied at each price. This supply curve, which graphs the supply schedule, illustrates how the quantity supplied of the good changes as its price varies. Because a higher price increases the quantity supplied, the supply curve slopes upward.
Market supply is the sum of the supplies of all sellers.
There are many variables that can shift the supply curve.
- Input Prices: the supply of a good is negatively related to the prices of the inputs used to make the good.
- Technology: By reducing firms’ costs, the advance in technology raised the supply of a good.
- Expectations
- Number of Sellers
Supply and Demand Together
There is one point at which the supply and demand curves intersect. This point is called the market’s equilibrium. The price at this intersection is called the equilibrium price, and the quantity is called the equilibrium quantity.
At the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell. The equilibrium price is sometimes called the market-clearing price because, at this price, everyone in the market has been satisfied: Buyers have bought all they want to buy, and sellers have sold all they want to sell.
The actions of buyers and sellers naturally move markets toward the equilibrium of supply and demand.
- Surplus: Producers are unable to sell all they want at the going price. A surplus is sometimes called a situation of excess supply. They respond to the surplus by cutting their prices. Falling prices, in turn, increase the quantity demanded and decrease the quantity supplied. Prices continue to fall until the market reaches the equilibrium.
- Shortage: Consumers are unable to buy all they want at the going price. A shortage is sometimes called a situation of excess demand. Sellers can respond to the shortage by raising their prices without losing sales. These price increases cause the quantity demanded to fall and the quantity supplied to rise. Once again, these changes represent movements along the supply and demand curves, and they move the market toward the equilibrium.
Law of Supply and Demand
The equilibrium price and quantity depend on the positions of the supply and demand curves. When some event shifts one of these curves, the equilibrium in the market changes, resulting in a new price and a new quantity exchanged between buyers and sellers.
Three Steps for Analyzing Changes in Equilibrium
- 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.
How Prices Allocate Resources
In any economic system, scarce resources have to be allocated among competing uses. Market economies harness the forces of supply and demand to serve that end. Supply and demand together determine the prices of the economy’s many different goods and services; prices in turn are the signals that guide the allocation of resources.
If an invisible hand guides market economies, as Adam Smith famously suggested, the price system is the baton with which the invisible hand conducts the economic orchestra.
