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Notes: Introduction to Economics (A6)
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U2: SUPPLY AND DEMANDCompetitive Market
A competitive market is:
- Has many buyers and sellers
- Offers same good or service
- No individual’s actions have a noticeable effect on the price at which the good
or service is sold.
- In other words: no one party can influence price
Behavior of this type of market is well described by Supply and Demand
Supply and Demand Model
The supply and demand model is a model of how a competitive market works.
It has five key elements:
1) Demand curve
2) Changes in the market equilibrium
Demand Curve
- A demand curve is the graphical representation of the demand schedule;
- it shows how much of a good or service consumers want to buy at any given
price.
- Law of Demand: A higher a price for a good, other things equal, leads people
to demand smaller quantities of that good.
Demand Schedule
A demand schedule shows how much of a good or service consumers will want to buy
at different prices.
1
, Demand Curve
A demand curve is the graphical representation of the demand schedule it shows how
much of a good or service consumers want to buy at any given price.
Pay More, Pump Less
- Because of high taxes, gasoline and diesel fuel are more than twice as
expensive in most European countries as in the United States.
- According to the law of demand, Europeans should buy less gasoline than
Americans, and they do: Europeans consume less than half as much fuel as
Americans, mainly because they drive smaller cars with better mileage.
An Increase in Demand
An increase in the population and other factors generate an increase in demand –
- a rise in the quantity demanded at any given price.
This is represented by the two demand schedules - one showing demand in 2002, before
the rise in population, the other showing demand in 2009, after the rise in population.
A shift of the demand curve is a change in the quantity demanded at any given price,
represented by the change of the original demand curve to a new position, denoted by a
new demand curve.
Movement Along the Demand Curve
A movement along the demand curve is a change in the quantity demanded of a good
that is the result of a change in that good’s price.
Shifts of the Demand Curve
A “decrease in demand”, means a leftward shift of the demand curve: at any given price,
consumers demand a smaller quantity than before.
An “increase indemand” means a rightward shift of the demand curve: at any given
price, consumers demand a larger quantity than before.
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