Understanding Markets: Competitive & Buyer Behavior

Markets Defined

• Markets consist of economic agents trading goods or services along with the rules and arrangements for trading.
• Economic agents include consumers, firms, governments, and landlords.
• Rules and arrangements encompass social rules, institutions, and infrastructures.
• The market price is the price at which buyers and sellers conduct their transactions.

Perfectly Competitive Market

• All sellers offer identical goods or services.
• Participants are price-takers, meaning no single buyer or seller can influence the market price.
• The market establishes the prices of goods and services.

Buyer Behavior

• The consumer's objective is to maximize satisfaction.
• Demand is the relationship between quantity demanded and price, all else being equal.
• Demand reflects how consumers behave at different prices in a market. It is not a specific quantity.
• Quantity demanded is the amount of a good buyers are willing to purchase at a specific price.

Demand Curve Dynamics

• A demand schedule is a table reporting the quantity demanded at different prices.
• A demand curve is a graph plotting the quantity demanded at different prices.
• The law of demand states that as price increases, quantity demanded decreases, and vice versa, all else being equal (ceteris paribus).
• Changes in quantity demanded relate to price changes, while changes in demand relate to changes in underlying factors.

Demand Curve Shifts

• The market demand curve represents the sum of individual demand curves.
• It plots the relationship between total quantity demanded and market price, all else being equal.
• Shifts in the demand curve are caused by:
  • Tastes and preferences
  • Income and wealth (normal vs. inferior goods)
  • Availability and prices of related goods (substitutes and complements)
  • Number and scale of buyer
  • Buyers’ expectations about the future

Seller Behavior

• Quantity supplied is the amount of a good sellers are willing to sell at a certain price.
• A supply schedule is a table reporting the quantity supplied at different prices.
• A supply curve is a graph that plots the quantity supplied at different prices.

Supply Curve Shifts

• For a higher price, the quantity provided increases.
• Shifts of the supply curve are caused by:
  • Input prices
  • Technology
  • Number and scale of sellers
  • Sellers expectations

Market Equilibrium

• Competitive equilibrium is the point where the market agrees on the price (equilibrium price) and quantity (equilibrium quantity).
• Excess demand occurs when consumers want more than suppliers provide, leading to a shortage.
• Excess supply occurs when suppliers provide more than consumers want, resulting in a surplus.
• Equilibrium exists where supply and demand intersect.

Disequilibrium

• If the market price is higher than the equilibrium price, there is excess supply.
• Producers may lower prices to attract more customers.
• If the market price is lower than the equilibrium price, there is excess demand.
• Customers may be willing to pay more, leading to price increases.

Shifts in Supply and Demand Curves

• Demand and supply curves can shift right or left, independently or simultaneously, affecting equilibrium price and quantity.

Price Ceilings

• With prices set below the competitive price, it can result in excess demand.

Explore market definitions including economic agents and trading rules. Learn about perfectly competitive markets where participants are price-takers. Understand buyer behavior, demand relationships and how consumers maximize satisfaction.