Economics Chapter 3 summary
‘The market forces of supply and demand’
Markets and competition
A market – is a group of buyers and sellers of a particular good or service.
• Buyers determine demand.
• Sellers determine supply.
Competitive market – a market in which there are many buyers and sellers so that each has a
negligible impact on the market price.
Price takers – buyers and sellers who have no influence on market prices
- Monopoly – one firm dominates the market (sets the price)
for example: local water company
-Oligopoly – has a few sellers that do not always compete aggressively
for example: steel, retailing (supermarkets), banking, telecommunications
- Monopolistically competitive – many sellers but each offers a slightly different product.
for example: magazines
- Perfect competition – many firms, freedom of entry, homogeneous product, normal profit.
for example: agricultural markets
Demand
Quantity demanded – the amount of a good that buyers are willing and able to purchase at different
prices.
Law of demand – other things equal (ceteris paribus), 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.
When we need to determine the market demand -> the sum of all the individual demands for a
particular good or service.
Shifts Versus Movements Along the Demand Curve
Assume the price of milk falls. (= movement along the curve)
• More will be demanded because of the income and substitution effects.
• The income effect: Consumers can now afford to buy more with their income.
• The substitution effect: Consumers will choose to substitute the more expensive drinks with the
now cheaper milk.
Shifts caused by factors other than price:
• Consumer income • Expectations of consumers
• Prices of related goods (substitutes and complements) • Number of buyers (population)
• Tastes and fashions
‘The market forces of supply and demand’
Markets and competition
A market – is a group of buyers and sellers of a particular good or service.
• Buyers determine demand.
• Sellers determine supply.
Competitive market – a market in which there are many buyers and sellers so that each has a
negligible impact on the market price.
Price takers – buyers and sellers who have no influence on market prices
- Monopoly – one firm dominates the market (sets the price)
for example: local water company
-Oligopoly – has a few sellers that do not always compete aggressively
for example: steel, retailing (supermarkets), banking, telecommunications
- Monopolistically competitive – many sellers but each offers a slightly different product.
for example: magazines
- Perfect competition – many firms, freedom of entry, homogeneous product, normal profit.
for example: agricultural markets
Demand
Quantity demanded – the amount of a good that buyers are willing and able to purchase at different
prices.
Law of demand – other things equal (ceteris paribus), 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.
When we need to determine the market demand -> the sum of all the individual demands for a
particular good or service.
Shifts Versus Movements Along the Demand Curve
Assume the price of milk falls. (= movement along the curve)
• More will be demanded because of the income and substitution effects.
• The income effect: Consumers can now afford to buy more with their income.
• The substitution effect: Consumers will choose to substitute the more expensive drinks with the
now cheaper milk.
Shifts caused by factors other than price:
• Consumer income • Expectations of consumers
• Prices of related goods (substitutes and complements) • Number of buyers (population)
• Tastes and fashions
