1 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)

2 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 _____

3 Competitive markets- how they work 1. Characteristics of a Perfectly Competitive market 2.A1- A4 implies, firms and consumers are _______________ Price taking behavior implies __________________________ __________________________________________________

4 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)

5 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

6 Price of the good = Quantity of the good = Q Do the axes labels look strange? An individual demand curve a b

7 Price of the good Quantity of the good A’s demand B’s demand total or market demand Individual demand curves are added horizontally, to get the market demand curves Individual and market demand curves

8 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

9 Market Equilibrium: p Q demand p1p1 p2p2 ab c d

10 How to find equilibrium p and Q, given a demand and a supply curve? Q = 2619 – 0.5p, demand curve Q = 10p, supply curve

11 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 p s ) 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*.