Market forces of supply & demand Flashcards
Market
a group of buyers and sellers of a particular product.
competitive market
one with many buyers and sellers, each has a negligible effect on price
perfectly competitive market
All goods exactly the same – Buyers & sellers so numerous that no one can affect market price – each is a “price taker”
quantity demanded
the amount of the good that buyers are willing and able to purchase at a given price
Law of demand
the claim that the quantity demanded of a good falls when the price of the good rises, other things equal (Ceteris Paribus)
Demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
Market Demand versus Individual Demand
The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price.
Demand Curve Shifters
- # of buyers
- Income
- Prices of related goods
- tastes
- expectations
of buyers (DCS)
Increase in # of buyers increases quantity demanded at each price, shifts D curve to the right.
Income (DCS)
- Demand for a normal good is positively related to income.
- Increase in income causes an increase in quantity demanded at each price, shifts D curve to the right.
- (Demand for an inferior good is negatively related to income. An increase in income shifts D curves for inferior goods to the left.)
Prices of Related Goods (DCS)
- Two goods are substitutes if an increase in the price of one causes an increase in demand for the other.
- Two goods are complements if an increase in the price of one causes a fall in demand for the other.
Tastes (DCS)
Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.
Expectations (DCS)
Expectations affect consumers’ buying decisions.
Examples: – If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now. – If the economy sours and people worry about their future job security, demand for new autos may fall now.
quantity supplied
the amount that sellers are willing and able to sell at a given price
Law of supply
the claim that the quantity supplied of a good rises when the price of the good rises, other things equal
Supply schedule
A table that shows the relationship between the price of a good and the quantity supplied
Market Supply versus Individual Supply
The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price
Supply Curve Shifters
- Input Prices
- Technology
- # of sellers
- expectations
Input prices (SCS)
A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right.
Examples of input prices: wages, prices of raw materials.
Technology (SCS)
Technology determines how much inputs are required to produce a unit of output.
A cost-saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right.
of sellers (SCS)
An increase in the number of sellers increases the quantity supplied at each price, shifts S curve to the right
expectations (SCS)
In general, sellers may adjust supply* when their expectations of future prices change. ( * If good not perishable)
Example: – Events in the Middle East lead to expectations of higher oil prices. – In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price. – S curve shifts left.
