Markets and Buyer behavior

Markets

• A market consists of economic agents trading goods/services alongside the rules and arrangements that facilitate trading.
• Economic agents include consumers, firms, governments, and landlords.
• Rules and arrangements involve social rules, institutions, and infrastructures.
• The market price is the price at which transactions occur between buyers and sellers.
• In a perfectly competitive market, all sellers offer identical goods/services.
• Participants in perfectly competitive markets are price-takers, with no single buyer or seller able to influence the market price.
• The market establishes the prices of goods and services through supply and demand interactions.

Buyer Behavior

• The principal goal for a consumer is maximum satisfaction.
• Demand is defined as the relationship between quantity demanded and price, assuming all other factors remain constant (ceteris paribus).
• Quantity demanded refers to the specific amount of a good buyers are willing to purchase at a particular price.
• A demand schedule is a table showing the quantity demanded at different prices, holding all else equal.
• A demand curve is a graph plotting the quantity demanded at various prices, all else being equal.
• The law of demand states that as the price increases, the quantity demanded decreases, and vice versa, assuming all other factors are constant (ceteris paribus).
• Changes in quantity demanded reflect variations in consumption due to price changes, keeping everything else constant.
• Changes in demand relate to fundamental shifts affecting how much of a good people demand at a given price, irrespective of price changes.
• The market demand curve represents the sum of individual demand curves of all potential buyers, illustrating the relationship between total quantity demanded and market price, all else being equal.

Causes of Demand Curve Shifts

• Tastes and preferences of buyers.
• Income and wealth of buyers which affect normal and inferior goods.
• Availability and prices of related (substitute and complement) goods.
• The number and scale of buyers.
• Buyers’ expectations about the future.
• Normal goods see increased demand with higher income (e.g., seafood, taxis).
• Inferior goods experience decreased demand with higher income (e.g., potatoes, bus rides).
• Substitute goods are alternatives (e.g., gin and vodka, coffee and tea).
• Complement goods are consumed together (e.g., gin and tonic).
• If people expect unemployment to rise, they save more and reduce spending on luxury items.

Seller Behavior

• Quantity supplied is the amount of a good that sellers are willing to sell at a certain price.
• A supply schedule is a table that reports the quantity supplied at different prices.
• A supply curve is a graph that plots the quantity supplied at different prices.
• The quantity provided usually increases as the price rises, resulting in an upward-sloping supply curve.

Causes of Supply Curve Shifts

• Input prices.
• Technology.
• Number and scale of sellers.
• Sellers' expectations about the future.

Equilibrium

• Competitive equilibrium is the point where the market agrees on price (competitive equilibrium price) and quantity exchanged (competitive equilibrium quantity).
• Excess demand occurs when consumers want more than suppliers provide at a certain price, leading to a shortage.
• Excess supply occurs when suppliers provide more than consumers want at a given price, resulting in a surplus.
• In a competitive equilibrium, the price is determined where supply and demand intersect.
• If a producer's cost is lower than the competitive price, they won't sell lower; if higher, they can't sell at that cost.
• If a consumer's willingness to pay is higher than the competitive price, they don't gain from paying more; if lower, they won't buy.
• Prices above the competitive price lead to excess supply, pushing producers to lower prices to attract customers.
• Prices below the competitive price cause excess demand, encouraging customers willing to pay more to raise prices.
• Changes in supply and demand result in shifts of the respective curves.
• Demand and supply curves may shift right, left, or both depending on the changes.

Price Ceiling

• A price ceiling, set below the competitive price, leads to excess demand.

Explore markets, economic agents, and rules facilitating trade. Understand perfectly competitive markets where participants are price-takers. Learn that consumer's principal goal is maximum satisfaction. Demand is the link between quantity demanded and price.