1. AAEC 2305 Fundamentals of Ag Economics Chapter 5 Theory of Markets

2. Objectives: b To learn: b How Supply & Demand curves interact to determine the prices & quantities of goods & services produced & consumed b About markets in time, space, & form b Characteristics of a competitive market b Determination of Output in a competitive market

3. Market Supply b In chapter 4, we discussed that the individual firm’s supply curve was the firms MC curve above AVC b The total offered by all firms in the market is the aggregate or market supply.

4. Market Supply b Market Supply - is the various amounts of a good that producers are willing & able to produce and make available at each of a series of prices during a specified period in a given market. b Supply curve for a good in the market is the horizontal sum of all individual firm’s supply curves.

5. Market Demand b In chapter 2, we derived the demand curve for an individual consumer that will maximize their utility based upon their preferences and budget constraint. b In other words, we indicated how the consumer, with a limited budget, makes choices among available goods to maximize utility.

6. Market Demand b As with Supply, the aggregate or market demand is obtained by the horizontal summation of all individual consumer’s demand curves. b Market Demand - a schedule showing the amounts of a good consumers are willing and able to purchase in the market for a series of prices during a specified period in a given market.

7. Markets b A Market is an institution or an arrangement that brings buyers and sellers together. b Market Price - is the mutually agreeable price at which willing buyers and willing sellers exchange a good.

8. Market Equilibrium b Market equilibrium occurs when the quantity of a good offered by a sellers at a given price equals the quantity buyers are willing and able to purchase at that same price.