Transcript Supply, Demand and Market Equilibrium – Chap 4

Chaps 4: Competitive markets- how they
work
• characteristics of competitive markets
• demand
• supply
• market equilibrium and how to compute it
• welfare properties of competitive equilibrium (Chap 7)
1
Main lessons
• Observed market price of a good is determined by
_______________________________________
• Determinants of aggregate demand are
_____________________________________________
• Aggregate supply is determined by _________________
__________________________________
• Competitive market equilibrium is __________________
_____________________________________________
• No other price-quantity combination _____
2
Competitive markets- how they work
1. Characteristics of a Perfectly Competitive market
•
•
•
•
2. A1- A4 implies, firms and consumers are _______________
Price taking behavior implies __________________________
__________________________________________________
3
Determinants of demand
demand for a good is ________ related to its ______
positively related to ________ if goods are _________, negatively
related if goods are __________
examples of
positively related to price of substitute goods, negatively related
to price of complementary goods
examples of substitute goods:
examples of complementary goods:
other factors which affect demand for a good: taste, expectations,
number of buyers (size of market)
4
Law of Demand:
The graph of this relationship is called the _________and is a _______ .
At each Q on the demand curve the p represents the buyers __________
As p rises Q diminishes – a movement described as a ______________.
Geometrically _____________________________________________.
As income, price of a substitute item or price of a complementary item
changes ____________________________________ depending on
___________________________________________. This is described
as a ____________________________.
decrease (increase) in demand = decrease (increase) in the quantity
demanded for any price
5
An individual demand curve
Price of the good =
•Do the axes labels look strange?
a
b
Quantity of the good = Q
6
Individual and market demand curves
Price of the good
•Individual demand curves are added
horizontally, to get the market demand
curves
total or market
demand
A’s demand
B’s demand
Quantity of the good
7
The individual and market Supply curves
Quantity supplied by individual firm
- is ________ related to the price of the good. Why?
- is related to prices of inputs. How?
other factors?
Law of supply:
When p increases Q ________ (described as _______________)
geometrically supply curve is ______________________; when
price of inputs change _________________________________;
For a given Q on the supply curve, the corresponding supply price p
reflects __________________________________________
Market supply = _____________ of individual supply
8
Market Equilibrium:
p
p1
a
p2
c
b
d
demand
Q
9
How to find equilibrium p and Q, given a demand and a supply
curve?
Q = 2619 – 0.5p,
Q = 10p,
demand curve
supply curve
10
How do Q* and p* change because of changes in various parameters?
Figure out which curve or curves shift. Draw the picture and conclude
about the new equilibrium.
•
As average y (or ps) goes up, the demand curve shifts _________
Supply __________. Equilibrium p* and Q* ___________.
•
A rise in any input price _________ the cost of production and
________ profits. Hence the supply curve shifts _________
Supply goes _______. Demand _________. Equilibrium p* goes
______, equilibrium Q* goes _____.
•
Improvement in technology _________ supply, ______ p* and
________ Q*.
11