4 - Ch. 4 Market Forces of Supply & Demand Copyright 2006...

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1 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Ch. 4 Market Forces of Copyright © 2006 Nelson, a division of Thomson Canada Ltd. s A market is a group of buyers and sellers of a particular good or service. s The terms supply and demand refer to the behavior of people as they interact with one another in markets. Markets Copyright © 2006 Nelson, a division of Thomson Canada Ltd. s Buyers (consumers) determine demand . s Sellers (firms, producers, suppliers) determine supply .
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2 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. s Market demand refers to the sum of all individual demands for a particular good or service. s Market supply refers to the sum of all individual supplies of a particular good or service. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Demand s Quantity demanded , Qd is the amount of a good or service that consumers are willing and able to buy at a given price, P. s When the price of a good increases, you buy less of that good. s We say price and Qd are negatively related. s As P b , Qd B Copyright © 2006 Nelson, a division of Thomson Canada Ltd. The Law of Demand Other things being equal ( ceteris paribus) , when the price of a good rises, the quantity demanded of that good falls.
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3 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Other Determinants of Demand Income 1. When income increases and you buy more of a good, this good is a normal good (or if income falls and you buy less). 2. When income increases and you buy less of a good, this good is an inferior good (or if income falls and you buy more). Copyright © 2006 Nelson, a division of Thomson Canada Ltd. s Most goods are normal goods. Examples of inferior goods include Kraft Dinner (as your income increases, you don’t have to eat KD anymore- you can afford steak) and bus rides (as income increases, you can take a cab or buy a car). Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Prices of related goods 1. If an increase in the price of one good leads to an increase in demand for another good (or vice versa), these goods are substitutes . s Examples: Coke and Pepsi, satellite dishes and cable TV, new cars and used cars.
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4 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 2. If an increase in the price of a good leads to a decrease in demand for another good (or vice versa), these goods are complements . s Examples: TVs and DVD players, automobiles and gasoline, shoes and shoelaces. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Tastes s If peoples’ preferences change towards a good, demand for that good will increase. s Things like advertising, government policy etc. can change preferences. Copyright © 2006
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This note was uploaded on 04/13/2010 for the course CIVIL 2oi4 taught by Professor Lamiar during the Fall '10 term at McMaster University.

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4 - Ch. 4 Market Forces of Supply & Demand Copyright 2006...

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