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What Is a Market?
A market is a group of buyers and sellers of a
particular good or service.
What Is a Market?
Buyers determine demand.
What Is Competition?
A competitive market is a market in which
there are many buyers and sellers so that each
has a negligible impact on the market price.
What Is Competition?
Competition: Perfect and Otherwise
Perfect Competition
Products are the same
Numerous buyers and sellers so that each has no
influence over price
Buyers and Sellers are price takers
Example:
Thousand of farmers who sell wheat and millions of consumers
who buy wheat and wheat products.
So no single buyer or seller can influence the price of wheat,
each takes the price as given.
What Is Competition?
Monopoly
One seller, and seller controls price
Example:
Residents of a certain town have only one cable television
company.
Oligopoly
Few sellers
Not always aggressive competition
Monopolistic Competition
Many sellers
Slightly differentiated products
Each seller may set price for its own product
DEMAND
Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
Law of Demand
The law of demand states that, other things equal,
the quantity demanded of a good falls when the
price of the good rises.
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
2007 Thomson South-Western
Catherines Demand
Price of IceCream Cone
Nicholass Demand
2.00
2.00
1.00
1.00
1.00
cones.
Market Demand
2.00
13
$2.0
0
1.00
D
0
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand curve, D3
0
Demand
curve, D1
Demand
curve, D2
Quantity of
Ice-Cream Cones
2007 Thomson South-Western
$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
An increase
in income...
Increase
in demand
D1
0 1
D2
Quantity
of Ice2 3 4 5 6 7 8 9 10 11 12
Cream
Cones
2007 Thomson South-Western
$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
An increase
in income...
Decrease
in demand
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream
Cones
SUPPLY
Quantity supplied is the amount of a good that
sellers are willing and able to sell.
Law of Supply
The law of supply states that, other things equal,
the quantity supplied of a good rises when the
price of the good rises.
1. An
increase
in price ...
2.50
2.00
1.50
1.00
0.50
1 2
9 10 11 12 Quantity of
Ice-Cream Cones
Input prices
Technology
Expectations
Number of sellers
S
C
$3.0
0
1.00
Quantity of
Ice-Cream
Cones
2007 Thomson South-Western
Price of
Ice-Cream
Cone
Supply curve, S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
Quantity of
Ice-Cream Cones
2007 Thomson South-Western
Equilibrium Quantity
The quantity supplied and the quantity demanded at the
equilibrium price.
On a graph it is the quantity at which the supply and
demand curves intersect.
2007 Thomson South-Western
Supply
Schedule
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
2007 Thomson South-Western
Equilibrium
Surplus
When price > equilibrium price, then quantity
supplied > quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
Price of
Ice-Cream
Cone
Supply
Surplus
$2.50
2.00
Demand
4
Quantity
demanded
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
2007 Thomson South-Western
Equilibrium
Shortage
When price < equilibrium price, then quantity
demanded > the quantity supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.
Price of
Ice-Cream
Cone
Supply
$2.00
1.50
Shortage
Demand
4
Quantity
supplied
10
Quantity of
Quantity
Ice-Cream
demanded
Cones
2007 Thomson South-Western
Equilibrium
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.
Supply
New equilibrium
$2.50
2.00
2. . . . resulting
in a higher
price . . .
Initial
equilibrium
D
D
0
7
3. . . . and a higher
quantity sold.
10
Quantity of
Ice-Cream Cones
2007 Thomson South-Western
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
S1
New
equilibrium
$2.50
Initial equilibrium
2.00
2. . . . resulting
in a higher
price of ice
cream . . .
Demand
7
3. . . . and a lower
quantity sold.
Quantity of
Ice-Cream Cones
2007 Thomson South-Western
SUMMARY
Economists use the model of supply and
demand to analyze competitive markets.
In a competitive market, there are many buyers
and sellers, each of whom has little or no
influence on the market price.