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MARKETS AND COMPETITION

• 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.

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What Is a Market?

• 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.

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What Is a Market?

• Buyers determine demand.

• Sellers determine supply.

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What Is Competition?

• 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.

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What Is Competition?

• Competition: Perfect and Otherwise

• 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

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What Is Competition?

• Competition: Perfect and Otherwise

• Oligopoly
• Few sellers
• Not always aggressive competition
• Monopolistic Competition
• Many sellers
• Slightly differentiated products
• Each seller may set price for its own product

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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.

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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.

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Catherine’s Demand Schedule

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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.

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Figure 1 Catherine’s Demand Schedule and Demand Curve

Price of
Ice-Cream Cone
$3.00

2.50

1. A decrease
2.00
in price ...

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
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Market Demand versus Individual Demand

• Market demand refers to the sum of all

individual demands for a particular good or
service.
• Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.

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 The Market Demand Curve
When the price is $2.00, When the price is $2.00, The market demand at
Catherine will demand 4 Nicholas will demand 3 $2.00 will be 7 ice-cream
ice-cream cones. ice-cream cones. cones.
Catherine’s Demand + Nicholas’s Demand = Market Demand

Price of Ice- Price of Ice- Price of Ice-

Cream Cone Cream Cone Cream Cone

2.00 2.00 2.00

1.00 1.00 1.00

7 13
4 8 3 5

Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

When the price is $1.00, When the price is $1.00, The market demand at
Catherine will demand 8 Nicholas will demand 5 $1.00, will be 13 ice-
ice-cream cones. ice-cream cones. cream cones.

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Shifts in the Demand Curve

• Change in Quantity Demanded

• Movement along the demand curve.
• Caused by a change in the price of the product.

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Changes in Quantity Demanded
A tax on sellers of ice-
Price of Ice-
Cream cream cones raises the
Cones
price of ice-cream
B cones and results in a
$2.00
movement along the
demand curve.

1.00 A

D
0 4 8 Quantity of Ice-Cream Cones
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Shifts in the Demand Curve

• Consumer income
• Prices of related goods
• Tastes
• Expectations
• Number of buyers

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Shifts in the Demand Curve

• Change in Demand
• A shift in the demand curve, either to the left or
right.
• Caused by any change that alters the quantity
demanded at every price.

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 Figure 3 Shifts in the Demand Curve

Price of
Ice-Cream
Cone

Increase
in demand

Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of
Ice-Cream Cones
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Shifts in the Demand Curve

• Consumer Income
– As income increases the demand for a
normal good will increase.
– As income increases the demand for an
inferior good will decrease.

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Consumer Income Normal Good

Price of Ice-
Cream Cone
$3.00 An increase
2.50 in income...
Increase
2.00 in demand

1.50

1.00

0.50
D2
D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 Cones
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Consumer Income Inferior Good

Price of Ice-
Cream Cone
$3.00

2.50 An increase
2.00
in income...
Decrease
1.50 in demand
1.00

0.50

D2 D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 Cones
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Shifts in the Demand Curve

• Prices of Related Goods

– When a fall in the price of one good
reduces the demand for another good, the
two goods are called substitutes.
– When a fall in the price of one good
increases the demand for another good, the
two goods are called complements.

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Table 1 Variables That Influence Buyers

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