• Assumes a perfectly competitive market

- Many buyers and sellers

- All firms sell identical products

- No barriers to new firms entering the market

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1. Demand

• Concerned with buyers or consumers of a product

• Quantity demanded - amount of a good or service that a consumer is willing and able to purchase at a given price

• Market demand - demand by all the consumers of a given good or service

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a.  Demand schedule

• Table showing the relationship between the price of a product and the quantity of the product demanded

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b.  Demand curve

• A curve showing the relationship between the price of a product and the quantity of the product demanded

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c. Law of Demand

• Price and quantity demanded are inversely (negatively) related, holding everything else constant (ceteris paribus)

• Due to:

(1)  Substitution effect - change in price makes good more or less expensive relative to other goods

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(2)  Income effect - change in price affects consumers' purchasing power

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d.  Factors that shift market demand

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(1) Income

(a) Normal good - more of the good is demanded as income increases

Ex. -

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(b) Inferior good - less of the good is demanded as income increases

Ex. -

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(2) Prices of related goods

(a) Substitutes - use one good instead of another

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(b) Complements - use goods together

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(3) Tastes

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(4) Population and demographics

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(5) Expected future prices

Ex. - 

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e.  Change in demand vs. change in quantity demanded

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2.  Supply

• Concerned with sellers or the producers of a product

• Quantity supplied - amount of a good or service that a producer is willing and able to produce and sell at a given price

• Market supply - supply by all the producers of a given good or service

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a.  Supply schedule

• Table showing the relationship between the price of a product and the quantity of the product supplied

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b.  Supply curve

• A curve showing the relationship between the price of a product and the quantity of the product supplied

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c. Law of Supply

• Price and quantity supplied are directly (positively) related, holding everything else constant

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d.  Factors that shift market supply

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(1) Prices of inputs

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(2)  Technological change - change in the ability of a firm to produce a given level of output with a given level of input

Ex. -

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(3) Price of related goods

(a) Substitutes in production

• Alternative products can be produced

Ex. - 

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(b)  Complements in production

• Production results in another product being produced

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(4) Number of firms in the market

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(5) Expected future prices

Ex. - 

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4. Market equilibrium

• Quantity demanded = quantity supplied

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• Disequilibrium - market forces move market towards equilibrium

a. Surplus

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b. Shortage

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5. Market changes

a. Changes in supply

(1) Increase in supply

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(2) Decrease in supply

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b. Changes in demand

(1) Increase in demand

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(2) Decrease in demand

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c. Changes in demand and supply

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