This chapter introduces the theory of supply and demand. It considers how buyers and sellers behave and how they interact with one another. It shows how supply and demand determine prices in a market economy and how prices, in turn, allocate the economy’s scarce resources. | 2 SUPPLY AND DEMAND I: HOW MARKETS WORK 4 The Market Forces of Supply and Demand Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium. 2 A market is a group of buyers and sellers of a particular good or service. The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets. MARKETS AND COMPETITION 4 MARKETS AND COMPETITION Buyers determine demand. Sellers determine supply 4 Competitive Markets A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price. 5 Perfect Competition Products are the same Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers Monopoly One seller, and seller controls price Competition: Perfect and Otherwise 6 Oligopoly Few sellers Not always . | 2 SUPPLY AND DEMAND I: HOW MARKETS WORK 4 The Market Forces of Supply and Demand Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium. 2 A market is a group of buyers and sellers of a particular good or service. The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets. MARKETS AND COMPETITION 4 MARKETS AND COMPETITION Buyers determine demand. Sellers determine supply 4 Competitive Markets A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price. 5 Perfect Competition Products are the same Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers Monopoly One seller, and seller controls price Competition: Perfect and Otherwise 6 Oligopoly Few sellers Not always aggressive competition Monopolistic Competition Many sellers Slightly differentiated products Each seller may set price for its own product Competition: Perfect and Otherwise 6 DEMAND Quantity demanded is the amount of a good that buyers are willing and able to purchase. Law of Demand The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises. 8 The Demand Curve: The Relationship between Price and Quantity Demanded Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. 17 Catherine’s Demand Schedule 17 The Demand Curve: The Relationship between Price and Quantity Demanded Demand Curve The demand curve is a graph of the relationship between the price of a good and the quantity demanded. 17 Figure 1 Catherine’s Demand Schedule and Demand Curve Copyright © 2004 South-Western Price of Ice-Cream Cone 0 1 2 3 4 5 6 7 8 9 10 11 .
