23115 Lecture Notes - Lecture 2: Comparative Statics, Takers, Perfect Competition
1. Lecture 2 - Demand and Supply
‐ THE MARKET FORCES OF SUPPLY AND DEMAND (CHAPTER 4)
o ▪ The theory of supply and demand considers how buyers and sellers behave and
how they interact with one another.
o ▪ It illustrates how the interaction between buyers and sellers determines the
quantity of each good or service produced and the price at which it is sold in a
market economy.
o ▪ A market is a group of buyers and sellers of a particular good or service.
o ▪ A competitive market is a market in which there are many buyers and many
sellers so that
each has a negligible impact on the market price.
This means that the smaller the ability of each buyer or seller to affect the market
price, the more competitive the market.
o ▪ Throughout this subject, we assume that markets are perfectly competitive (PC).
Perfectly competitive markets are defined by 2 primary characteristics – (1) the
goods being offered for sale are all the same (homogenous) and (2) the buyers and
sellers are so numerous that no single buyer or seller can influence the market price.
Since buyers/sellers in PC markets must accept the maket pie, the ae price
takers.
o ▪ Agricultural market is example in which assumption of perfect competition
applies perfectly.
o ▪ Some markets have only one seller and this seller sets the price – known as a
monopoly.
o ▪ Some markets fall between the extremes of perfect competition and monopoly.
One such market, called an oligopoly, has a few sellers that do not always compete
aggressively. Airline routes are an example – e.g. consider a route serviced by only 2
carriers. Another type of market is monopolistically competitive; it contains many
sellers, each offering a slightly different product. Because the products are not
exactly the same, each seller has some ability to set the price for its own product. An
example is the software industry. Many word processing programs compete with
one another for users, but every program is different from every other and has its
own price.
DEMAND
• ▪ Quantity demanded is the amount of a good that buyers are willing and able to
purchase.
• ▪ What determines the quantity an individual demands?
PRICE – this is illustrated by the law of demand which is a claim that, other things being
equal, the quantity demanded of a good falls when the price of the good rises.
INCOME – consider the following... Normal good is a good for which, other things being
equal, an increase in income leads to an increase in demand. Inferior good is a good for
which, other things being equal, an increase in income leads to a decrease in demand.
find more resources at oneclass.com
find more resources at oneclass.com
PRICE RELATED GOODS – these are... substitutes are two goods for which an increase in the
price of one leads to an increase in the demand for the other. Complements are two goods
for which an increase in the price of one leads to a decrease in the demand for the other.
TASTES – mail pshologial fatos ehid the hoies of idiidual.
EXPECTATIONS ‐ You epetatios aout the futue a affet ou dead fo a good o
service today. For example, if you expect to earn a higher income next month, you may be
more willing to spend some of your current savings buying ice cream.
• ▪ The demand schedule is a table that shows the relationship between the price of a good
and the quantity demanded. While, the demand curve is a graph of the relationship
between the price of a good and the quantity demanded.
• Plotting this on demand curve – By convention, the price of ice cream is on the vertical axis,
and the quantity of ice cream demanded is on the horizontal axis.
• ▪ Ceteris paribus is a Lati phase, taslated as othe thigs eig eual, used as a
reminder that all variables other than the ones being studied are assumed to be constant.
• ▪ Market demand is the sum of all the individual demands for a particular good or service.
Graphically, individual demand curves summed horizontally to obtain market demand curve.
Below is an illustration with TWO buyers in the market...
•
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
This means that the smaller the ability of each buyer or seller to affect the market price, the more competitive the market: throughout this subject, we assume that markets are perfectly competitive (pc). One such market, called an oligopoly, has a few sellers that do not always compete aggressively. Airline routes are an example e. g. consider a route serviced by only 2 carriers. Another type of market is monopolistically competitive; it contains many sellers, each offering a slightly different product. Because the products are not exactly the same, each seller has some ability to set the price for its own product. Many word processing programs compete with one another for users, but every program is different from every other and has its own price. Price this is illustrated by the law of demand which is a claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.
