ECON 2000: Supply and Demand Model - Markets and Competition

Market and Competition

• A market is a group of buyers and sellers of a particular good or service.
• Competition occurs in a market where there are many buyers and many sellers, so that each has a negligible impact on the market price.

Characteristics of Perfectly Competitive Markets

• Goods offered for sale are all exactly the same.
• Buyers and sellers are numerous, and no single buyer or seller has any influence over the market price.

Types of Markets

• Monopoly: a market with a single seller.
• Monopsony: a market with a single buyer.

Demand

• Demand curve: shows the relationship between price and quantity demanded.
• Quantity demanded: the amount of a good that buyers are willing and able to purchase.
• Law of demand: the quantity demanded of a good falls when the price of the good rises, ceteris paribus.
• Types of goods:
  • Normal goods: quantity demanded increases when income rises.
  • Inferior goods: quantity demanded decreases when income rises.
  • Giffen goods: quantity demanded increases when price rises.
  • Veblen goods: quantity demanded increases when price rises due to prestige or status.
• Market demand vs. individual demand: the demand of all buyers in the market vs. the demand of a single buyer.
• Factors affecting demand: income, price of related goods, taste, expectations, etc.
• Endogenous and exogenous variables: variables that are affected by changes in the economy (endogenous) vs. variables that are independent of changes in the economy (exogenous).

Supply

• Supply curve: shows the relationship between price and quantity supplied.
• Quantity supplied: the amount of a good that sellers are willing and able to sell.
• Law of supply: when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls, ceteris paribus.