1. A market is a group of buyers and sellers of a particular good or service. A market need not be a physical location. 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 The term demand refers to the behavior of people (consumers, buyers) in markets. The term supply refers to the behavior of people (producers, sellers) in markets.

2. Perfect Competition (Perfectly competitive markets)
Numerous buyers and sellers so that each has no influence over price Products are the same (Many firms sell identical products to many consumers.) As a result, all Buyers and Sellers are (behave as) price takers Other market structures: Monopoly : One seller, and seller controls price Oligopoly : Few sellers, and not always aggressive competition Monopolistic Competition : Many sellers, Slightly differentiated products, Each seller may set price for its own product

3. Prices Communicate
When the price of a good is rising, buyers will reduce their quantity demanded and substitute other goods.
They economize on the use of scarce goods or resources. Therefore, scarce goods are used most efficiently.
No announcement on radio or TV has to be made.
Buyers find out about the relative scarcity of a good through its price.
Each Buyer then decides what to do him/herself; decision making is decentralized.
Similarly, when the price of a good is rising, sellers will increase their quantity supplied of that good. Sellers learn the relative desirability (consumption value, benefit to consumers etc) of the good through its price.

4. Efficiency
The equilibrium of the competitive market is efficient. (Roughly speaking this means that scarce resources are not wasted.)
More precisely, it means
(i) The sum of seller profits and buyer profits are maximized. or
(ii) It is not possible to produce more of one good without producing less of another good. It is not possible to make one person better off without making someone else worse off.
This second definition is known as Pareto efficiency 

5. SUPPLY AND DEMAND TOGETHER
Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded. 36

6. SUPPLY AND DEMAND TOGETHER
Equilibrium Price
The price at which quantity supplied equals quantity demanded.
On a graph, it is the price at which the supply and demand curves intersect.
Equilibrium Quantity
The quantity supplied and the quantity demanded at the equilibrium price. 36

7. SUPPLY AND DEMAND TOGETHER
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded is equal to the quantity supplied! 36

8. Quantity of Ice-Cream Cones
Price of
Ice-Cream
Cone
Supply
Demand
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

9. (a) Excess Supply Price of Ice-Cream Supply Cone Surplus Demand $2.5010 4
2.00 7
Quantity of
Quantity
demanded
Quantity
supplied
Ice-Cream
Cones
Copyright©2003 Southwestern/Thomson Learning

10. Equilibrium
Surplus
When price > equilibrium price, then quantity supplied > quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

11. Equilibrium
Shortage
When price < equilibrium price, then quantity demanded > the quantity supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

12. Figure 9 Markets Not in Equilibrium
(b) Excess Demand
Price of
Ice-Cream
Supply
Cone
Demand
$2.00 7
1.50 10 4
Shortage
Quantity of
Quantity
supplied
Quantity
demanded
Ice-Cream
Cones
Copyright©2003 Southwestern/Thomson Learning

13. The price mechanism at work
Equilibrium
The price mechanism at work
The price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

14. Three Steps to Analyzing Changes in Equilibrium
Decide whether the event shifts the supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to the right.
Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity. 45

15. Figure 10 How an Increase in Demand Affects the Equilibrium
Price of
Ice-Cream
1. Hot weather increases
the demand for ice cream . . .
Cone D D
Supply
Figure 10 How an Increase in Demand Affects the Equilibrium
New equilibrium
$2.50 10
resulting
in a higher
price . . .
2.00 7
Initial
equilibrium 12
Quantity of 3.
. . .
and a higher
quantity sold.
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

16. Three Steps to Analyzing Changes in Equilibrium
Shifts in Curves versus Movements along Curves
A shift in the supply curve is called a change in supply.
A movement along a fixed supply curve is called a change in quantity supplied.
A shift in the demand curve is called a change in demand.
A movement along a fixed demand curve is called a change in quantity demanded.

17. Figure 11 How a Decrease in Supply Affects the Equilibrium
Price of
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
Ice-Cream
Cone S2 S1
Demand
New
equilibrium
$2.50 4
resulting
in a higher
price of ice
cream . . .
Initial equilibrium
2.00 7
Quantity of 3.
. . .
and a lower
quantity sold.
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

18. Table 4 What Happens to Price and Quantity When Supply or Demand Shifts?
Copyright©2004 South-Western

19. Summary
Economists use the model of supply and demand to analyze competitive markets.
In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.

20. Summary
The demand curve shows how the quantity of a good depends upon the price.
According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward.
In addition to price, other determinants of how much consumers want to buy include income, the prices of complements and substitutes, tastes, expectations, and the number of buyers.
If one of these factors changes, the demand curve shifts.

21. Summary
The supply curve shows how the quantity of a good supplied depends upon the price.
According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward.
In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers.
If one of these factors changes, the supply curve shifts.

22. Summary
Market equilibrium is determined by the intersection of the supply and demand curves.
At the equilibrium price, the quantity demanded equals the quantity supplied.
The behavior of buyers and sellers naturally drives markets toward their equilibrium.

23. Summary
To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the even affects the equilibrium price and quantity.
In market economies, prices are the signals that guide economic decisions and thereby allocate resources.

24. From 1970 to 1995, The price of eggs fell from $. 6 to $
From 1970 to 1995, The price of eggs fell from $.6 to $.24 The quantity of eggs sold also fell from 5,300 mill. dozens to 5,100 mill. dozens. In the same period, Annual college tuition rate increased from $2,530 to $4,250, and the number of students in college also increased from 8.6 mill. to 14.9 mill. This shows that law of demand doesn’t hold. Discuss.

25. The price of coal fell and the quantity sold also fell
The price of coal fell and the quantity sold also fell. Everything else being equal, which of the following three events could be the reason: (A.) Decrease in the price of oil (assume that oil and coal are substitute goods), (B.) Large increase in the wages of coal miners, (C). Installation of more efficient coal mining equipment. [Draw one well-labeled demand supply diagram for each event to check.] 

26. In a discussion of tuition rates, a university official argues that the demand for admission is completely price inelastic. As evidence she notes that while the university has doubled its tuition (in real terms) over the past 15 years, neither the number, nor quality of students applying has decreased. Would you accept this argument? (hint: The official makes an assertion about the demand for admission, but does she actually observe a demand curve? What else could be going on?)

27. Food Price Increases
The FAO food price index which covers the prices of the most important food commodities showed a price increase of 71% during the 15 months between the end of 2006 and March 2008.
The increase was particularly dramatic for rice and cereals where the prices sky-rocketed to a peak of 126% in this time period.

28. Food Price Increases Commodity Price increase from
start 2006 to mid-2008
Maize
180 %
Wheat
110 %
Oil
Cocoa
90 %
Coffee
70 %
Cotton
30 %
Sugar
10 %

29. Food Price Increases
The proportion of expenditure for food in a typical household budget:
10%-20% in the industrial countries,
60%-80% in the LDC’s (FAO 2008).
It is estimated that the food price spike increased the number living in poverty by between 100 and 200 million.

30. Food Price Increases
High food prices led to the number of chronically malnourished people increasing by 75 million in and a further 40 million in 2008.
The latest estimate by the Food and Agriculture Organisation (FAO) in June 2009 was that over 1 billion people are now chronically malnourished due to “global economic slowdown combined with stubbornly high food prices”

31. Food Price Increases
Food price increases also have negative macroeconomic effects:
A 50% price increase on basic food leads to a mere 6% rise in expenditure for a high income country, but it amounts to 21% for a food importing country of low income (U.S. Department for Agriculture. Economic Research Service. 2008: p. 25).
The balance of payments of food importers deteriorates causing the danger of debt.
The food price increases stimulate inflation. According to UN estimates, they account for up to a third to more than one half of the nominal rate of inflation in developing countries, particularly in Asia.

32. Food Price Increases Why did the food prices increase dramatically?
Increasing demand (e.g. Chinese people demand more and more dairy products)
Agricultural productivity
Production of agro-fuels (ethanol and biodiesel)
The reduction of food stocks (particularly in the EU)
The increase in the oil prices
Weather (La Nina-cooling of equatorial Pacific, flood in Australia, etc.)
Export restrictions on food by governments
Speculation