Markets and Demand

Markets

• A market involves buyers and sellers trading goods or services and can be local, global, or virtual.
• A competitive market has specific characteristics like standardized goods, full information, no transaction costs, and price-taking participants.
• Focus is given to perfectly competitive markets moving forward.

Demand

• Consumers collectively determine the demand for a product.
• Quantity demanded refers to how much of a good or service buyers are willing and able to purchase at a specific price.
• The law of demand states that the quantity demanded increases as the price decreases, assuming all other factors remain constant.
• A demand schedule shows the quantities demanded at different prices.

Demand Curve

• A demand curve illustrates the relationship between quantity demanded and price, under the assumption that other determinants remain the same.
• The five most important non-price determinants of demand are:
  • Preferences
  • Incomes
  • Number of buyers
  • Expectations
  • Prices of related goods
• Demand increases with a positive influence, otherwise it decreases.
• Increased demand shifts the demand curve to the right, while decreased demand shifts it to the left.
• A shift in the demand curve differs from a movement along the curve.
  • Changes in quantity at every price point cause shifts when a non-price determinant varies.
  • Price decreases lead to increased demanded quantities and can be graphed as movement within the demand curve.

Supply

• Producers as a group determine the supply of a product.
• Quantity supplied refers to the amount of a good that producers are willing to sell at a given price.
• The law of supply says how the higher the price, the greater the quantity supplied if all factors are constant (ceteris paribus).
• A supply schedule displays the quantities supplied at various prices
• A supply curve illustrates the relationship between quantity supplied and price.
• The five key non-price determinants of supply include:
  • Technology
  • Price of inputs
  • Numbers of producers
  • Expectations
  • Price of related goods
• The determinant has a positive influence if supply increases, or supply decreases otherwise.
• If supply increases, the supply curve shifts to the right; if supply decreases, the supply curve shifts to the left.

Shifts vs Movements

• Shifts refer to changes in supply that occur when at least one non-price determinant varies and changes overall quantity at every price.
• Movements refer to changes in supply that occur as a result of changes in price whereby increased or decreased price moves values along the supply curve.

Market Equilibrium

• Equilibrium occurs where the supply curve and the demand curves intersect.
  • Consumers are willing to buy exactly what producers are willing to sell at this point.
• Equilibrium price is the price at the intersection of supply and demand curves.
• Equilibrium quantity is the quantity at the intersection of supply and demand curves.
• A market isn't in equilibrium when the price doesn't equal the equilibrium price.
  • The quantity demanded and quantity supplied are unequal in this scenario.
• Excess supply/surplus: when price is too high
  • A lower price alleviates the surplus.
• Excess demand/shortage: when price is too low.
  • A higher price alleviates the shortage.
• A surplus incentivizes price to decrease as the quantity supplied decreases and the quantity demanded increases.
  • The price continues to decrease until the quantity supplied equals to the quantity demanded
• A shortage creates incentives for prices to increase as the quantity supplied increases and the quantity demanded decreases.
  • The quantity supplied and quantity demanded are equal as price increases.

Changes In Market Equilibrium

• Equilibrium price and quantity are found where demand and supply curves intersect.
• Shifts in non-price factors will affect market equilibrium.
  • To determine the effect, consider whether the change affects supply or demand.
• Price increases with more expensive substitutes, causing the demand to increase.
• With a breakthrough in battery technology, market cellphones are in equilibrium
  • the technology increases causing an increase
  • the supply curve shifts right
  • The market equilibrium changes: equilibrium price decreases while equilibrium quantity increases.

Shifts In Demand And Supply

• When either demand or supply changes, there is an unambiguous effect on equilibrium price and quantity.
• Non-price factors influence both supply and demand
• The new equilibrium occurs at their new intersection when shifts occur in both supply and demand.
• It is dependant on whether the demand or supply curve shifts out more.
• The Quantity increases, but the Price may increase or decrease (ambiguous).

Explore the fundamentals of markets, focusing on competitive structures and the dynamics of supply and demand. Understand the characteristics of competitive markets and the factors influencing consumer demand. Learn about demand schedules and demand curves, and how they relate to market equilibrium.