1. Perfectly Competitive Market
Chapter 4: The Market Forces of Supply and Demand

2. Characteristics
A perfectly competitive market has the following characteristics:
There are many buyers and sellers in the market
The goods offered by the various sellers are largely the same.
Firms can freely enter or exit the market.

3. Outcomes
As a result of its characteristics, the perfectly competitive market has the following outcomes:
No single buyer or seller in the market has a impact on the market price.
Each buyer and seller takes the market price as given.

4. Price Takers
A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker.
Buyers and sellers must accept the price determined by the market (must take the price given)
Most markets fall between perfect competition and monopoly
Not all goods are sold in a perfectly competitive market:
A market with only one seller is a monopoly
A market with only a few sellers is an oligopoly

5. Demand The relationship between price and quantity demanded:
Quantity demanded is the exact amount of a good that buyers are willing and able to purchase at a certain price point.
Law of Demand: the claim that, other things being equal, the quantity demanded of a good falls when the price of a good rises

6. Movement on the Demand Curve
The only thing that will cause a movement along the demand curve is
A CHANGE IN PRICE
This is referred to a change in quantity demanded (movement along the curve) – which is different than a change in demand (total shift in curve)!

7. Demand v. Quantity Demanded
BASIS FOR COMPARISON
DEMAND
QUANTITY DEMANDED
Meaning
Demand is defined as the willingness of buyer and his affordability to pay the price for the economic good or service.
Quantity Demanded represents exact quantity (how much) of a good or service is demanded by consumers at a particular price.
What is it?
It lists out quantities that would be purchased at various prices.
It is the actual amount of goods desired at a certain price.
Change
Increase or decrease in demand
Expansion or contraction in demand.
Reasons
Factors other than price
Price
Measurement of change
Shift in demand curve
Movement along demand curve
Consequences of change in actual price
No change in demand.
Change in quantity demanded

8. Price is drawn on the vertical axis, quantity demanded on the horizontal.
Demand Curve
Demand curve: a graph of the relationship between the price of a good and quantity demanded
Demand schedule: a table that shows the relationship between the price of a good and quantity demanded

9. Shift in Demand
Because the market demand curve holds other things constant, it isn’t necessarily stable over time. If any of these factors change, the demand curve will shift:
Income
Prices of Related Goods
Consumer tastes
Expectations (future income, future prices)
Number of Buyers

10. Income
The relationship between income and quantity demanded depends on the type of good
Normal Good
An increase in income leads to an increase in demand
Inferior Good
An increase in income leads to a decrease in demand
Giffen Good
Defies the law of demand - an increase in price leads to an increase in demand (type of inferior good)

11. Substitution and Income Effect
When the price of a good decreases, it has two effects.
1. the consumer would now purchase more of the good whose price has fallen (the substitution effect)
2. the consumer now has increased real income and increased purchasing power because they are paying less for the good (income effect)

12. Price of Related Goods
Substitutes: two goods for which an increase in the price of one good leads to an increase in the other
Complements: two goods for which an increase in the price of one goods leads to a decrease in the demand for the other
Examples (not “perfect substitutes” or “perfect complements”!)
Substitutes: Coke/Pepsi, tea/coffee, bike/bus
Complements: car/gas, printer/ink, peanut butter/jelly