KSU Econ 2100 Microeconomics – Chapter 4

The forces that make market economies work. They determine the quantity of each good produced and the price at which it is sold. The behavior of people as they interact with one another in competitive markets.

A group of buyers and sellers of a good or service. Buyers determine demand and sellers determine supply.

A market in which there are many buyers and many sellers so that each has a negligible impact on the market price.

Highest form of competition. A market must have 2 characteristics: 1. Goods offered for sale are all exactly the same. 2. Buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.

In a perfectly competitive market, buyers and sellers must accept the price the market determines.

One seller for a good who sets the price.

The ____ of any good is the amount of the good that buyers are willing and able to purchase.

If prices decrease, demand increases. If prices increase, demand decreases.

A table that shows the relationship between the price of a good and the quantity demanded, holding constant everything else that influences how much of the good consumers want to buy.

A graph of the relationship between the price of a good and the quantity demanded. Individual demand curves horizontally (individual quantities demanded). The market demand curve shows how the total quantity demanded of a good varies as the price of the good varies, while all the other factors that affect how much consumers want to buy are held constant. (Figure 2)

The demand curves to the right.

The demand curves to the left.

1. Income.
2. Prices of Related Goods.
3. Tastes.
4. Expectations.
5. Number of buyers.

A good for which, other things being equal, an increase in income leads to an increase in demand.

A good for which an increase in income leads to a decrease in demand. (example, you might have to take a bus instead of car if you lose your job)

Two goods for which an increase in the price of one leads to an increase in the demand for another. (example, buying yogurt instead of ice cream if yogurt is cheaper).

Two goods for which an increase in the price of one leads to a decrease in the demand for the other (example, if hot fudge increases, then the demand for ice cream will go down because the two go together).

Price is on the vertical axis of the demand curve. Price of the good itself represents movement along the demand curve.

Are not measured on either axis, so a change in any of these shifts the demand curve.

Figure 4 (a policy to discourage smoking shifts demand curve to left - smoke less cigarettes per day). (a tax that raises the price of cigarettes results in movement along the demand curve - smoke less cigarettes per day). Demand for cigarettes is still high with movement along the curve but people smoke less b/c they cost more.

Complements rather than substitutes.

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The amount of a good that sellers are willing and able to sell.

The claim that the quantity supplied of a good rises when the price of the good rises. (When the price of ice cream is high, it is profitable, so the quantity supplied increases). - Figure 5.

A table that shows the relationship between the price of a good and the quantity supplied.

A graph of the relationship between the price of a good and the quantity supplied. Supply curve slopes upward, because a higher price means a greater quantity supplied. The supply curve shows what happens to the quantity supplied of a good when its price varies.

Market supply is the sum of the supplies of all sellers. Ben's supply + Jerry's supply = Market supply

Horizontal.

1. Input prices. (the prices of the individual components of a good - such as sugar, cream, flavoring, ice cream machines).
2. Technology - advances in how to make ice cream make labor costs less.
3. Expectations - If more ice cream is needed in future, will make more now and store it, supplying less to market today.
4. Number of sellers - If Ben and Jerry retire, there are less sellers, so market supply would fall.

Represents a movement along the supply curve.
Shift supply curve.
Shifts supply curve.
Shifts supply curve.
Shifts supply curve.

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A situation in which the market price has reached the level at which quantity supplied equals quantity demanded.

The price that balances quantity supplied and quantity demanded.

The quantity supplied and the quantity demanded at the equilibrium price.

A situation in which quantity supplied is greater than quantity demanded. (also called excess supply).

The market-clearing price. Everyone in the market is satisfied at this price.

A situation in which quantity demanded is greater than quantity supplied. (also called excess demand).

The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

1. Decide whether the event shifts the supply or demand curve (or both).
2. Decide in which direction the curve shifts.
3. Use the supply and demand diagram to see how the shift changes equilibrium price and quantity.

Supply refers to the position of the supply curve. Quantity supplied refers to the amount suppliers wish to sell. Shift in supply curve is called change in supply. Shift in demand curve is called change in demand. Movement along a fixed supply curve is called a change in the quantity supplied. Movement along a fixed demand curve is called change in the quantity demanded.