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lOMoARcPSD|17384794Microeconomics
Economía (IE Universidad)
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Microeconomics
1.1 Competitive markets: Demand and supply
Markets
Traditionally a market was literally a place where you went to buy and sell. Nowadays this definition is
mechanism where buyers meet
out-of-date as there are many types of markets. We can define it as: A
sellers to exchange money for goods and services.
Any market has the following three elements:
1. Buyers are the economic agents who wish to purchase products. Also known as demanders.
2. Sellers are the economic agents who wish to sell their products. Also known as suppliers.
3. Prices allow exchange as they give a value to the wants of the demanders and suppliers in a market.
The value put on a commodity at the point of exchange.
The successes and failures of a market dominate modern economics.
1.11a. Firms, industries and market structures
A firm (business) is an organization that employs factors of production to produce and sell a good or
service.
A group of one or more firms producing identical or similar products (goods or services) is called an
industry, e.g. the car industry consists of a number of firms that are car manufacturers (Ford, Honda,
Mercedes etc.)
A market structure describes characteristics of a market organization that determines the behavior of
firms within an industry. There are four market structures identified by economists:
● perfect competition
● monopoly
● monopolistic competition
● oligopoly
Competition occurs when there are many buyers and sellers acting independently, so that no one else
has the ability to influence the price at which the product is sold in the market.
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Microeconomics
1.1 Competitive markets: Demand and supply
Demand
Buyers use a market because they wish to acquire goods and services. The wish to buy is called
demand.
Demand is the quantity of a good or service that consumers are willing and able to purchase at a
given price in a given time period.
Demand of an individual consumer indicates the various quantities of a good (or service) the consumer
is willing and able to buy at different possible prices during a particular time period, ceteris paribus (all
other things equal). Market demand is the sum of all individual demands for a good.
1.12a. The Law of demand
The Law of demand states that a higher quantity will be demanded at a lower price assuming all
other factors remain constant. According to the Law of demand, there is an inverse relationship
between the quantity of a good demanded over a particular time period and its price, ceteris paribus.
● As price increases quantity demanded falls.
● As price falls quantity demanded rises.
This is illustrated in the demand schedule below:
Price of a cupcake ($) Quantity demanded of
a cupcake
(millions per week)
5 2
4 4
3 6
2 8
1 10
When the price of a cupcake is $5, consumers are willing and able to buy 2 million cupcakes per week.
When the price falls to $4, the quantity of cupcakes that consumers are willing and able to buy has risen
to 4 million.
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We can plot a demand curve to illustrate this:
1.12b. The inverse relationship
We can say that there is an inverse relationship between price and quantity demanded. There are two
major reasons for the inverse relationship:
i) The income effect – with a fall in the price level consumers can now purchase a greater
quantity of the good with no change in income.
ii) The substitution effect – if the price of a good falls, it is now relatively cheaper than an
alternative item and some consumers may switch their spending from the alternative good
or service. Thus demand increases.
Activity 1
Draw a demand curve from the following data (use graph paper):
Price of footballs Quantity
($) demanded of
footballs
20 1
15 3
10 5
5 7
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