Chapter%204 - ECON1200 Principles of Microeconomics Fall...

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Instructor: Ramsey Abu-Absi Fall 2009 Notes: Mankiw 5e Chapter 4 [email protected] Chapter 4 – Page 1 CHAPTER 4: The Market Forces of Supply and Demand (p. 65) Supply and demand are the forces that make market economies work. This chapter introduces the theory of supply and demand: how buyers and sellers behave and how they interact with one another, and how market prices, which are determined by supply and demand, allocate the economy’s of the scarce resources. Markets and Competition Supply and demand refer to the behavior of people as they interact with each other in markets. A market is a group of buyers and sellers of a particular good or service. Buyers as a group determine the demand for that product. Sellers as a group determine the supply of that product. What Is a Market? Markets may be highly organized, such as the markets for many agricultural commodities - buyers and sellers meet at a pre -determined time and place, where an auctioneer helps set prices and arrange sales. More often markets are less organized, like the market for ice cream in a given town. There are no predetermined meeting places and times, and there is no auctioneer to set price or arrange sales. Even though it is not organized, the buyers and sellers of ice cream form a market. There are many buyers and sellers, so no single buyer or seller has influence over the price and quantity of ice cream sold in the market. Price and quantity are determined by the interaction of all buyers and sellers in the market. A competitive market is one in which there are many buyers and many sellers so that each has a negligible impact on the market price. A seller has no reason to charge less than the price determined by the market, and if the seller charges more, buyers will buy at other sellers who are selling at market price. Single buyers don’t have influence over price because each buyer buys only a small fraction of the total quantity sold in the market. This chapter looks at how buyers and sellers interact in competitive markets. We see how supply and demand determine both the price and quantity of the good sold in the market. What Is Competition? In this chapter, we assume that markets are perfectly competitive . There are two primary characteristics of perfectly competitive markets : The products offered in the market are all identical. Buyers and sellers are so numerous that no single buyer or seller can influence market price. Because buyers and sellers must accept market price, they are said to be price takers . Some markets can be though of as being nearly perfectly competitive. These are generally markets for agricultural commodities, such as wheat. The product is basically identical, and there is such a large number of buyers and sellers that no one market participant can influence price. The extreme opposite of a perfectly competitive market is called a
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Chapter%204 - ECON1200 Principles of Microeconomics Fall...

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