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CHAPTER 4
MARKET
• A market is a group of buyers and sellers of a
particular good or service.
• A market may be highly organised, such as
the Sydney Fish Market, or less organised,
such as the market for ice-cream in your
town.
PERFECTLY COMPETITIVE
MARKETS
• Perfectly competitive markets are
characterised by two features:
– The goods offered for sale are all exactly the
same.
– The buyers and sellers are so numerous that no
single buyer or seller has any influence over the
market price.
The market forces of
supply and demand
COMPETITIVE 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.
• In a competitive market the price of a good
and the quantity that is sold are not
determined by any single buyer or seller.
PERFECTLY COMPETITIVE
MARKETS
• Because buyers and sellers in a perfectly
competitive market must accept the price the
market determines, they are said to be price
takers.
• At the market price, buyers can buy all they
want and sellers can sell all they want.
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QUANTITY DEMANDED CATHERINE’S DEMAND SCHEDULE

• Quantity demanded is the amount of a good

that buyers are willing and able to purchase.
• The law of demand states that, other things
being equal, the quantity demanded of a
good falls when the price of the good rises.

CATHERINE’S DEMAND CURVE INDIVIDUAL DEMAND AND MARKET

DEMAND

INDIVIDUAL DEMAND AND MARKET INDIVIDUAL DEMAND AND MARKET

DEMAND DEMAND

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CETERIS PARIBUS
• This Latin phrase, translated as ‘other things
being equal’, is used as a reminder that all
variables other than the ones being studied are
assumed to be constant.
• For example, increasing the number of firms in
a market will, ceteris paribus, reduce the
market price.
INFERIOR GOOD
• An inferior good is a good for which, ceteris
paribus, an increase in income leads to a
decrease in quantity demanded.
• For example, once Charlie joined the workforce
he could afford steak and no longer ate instant
noodles – an inferior good.
COMPLEMENTS
• Complements refer to two goods where a
decrease in the price of one good leads to an
increase in the demand for the other good.
• For example, Ahmed was annoyed when his
parents bought him an X-Box but failed to
provide the complementary product – games.
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NORMAL GOOD
• A normal good is a good for which, ceteris
paribus, an increase in income leads to an
increase in quantity demanded.
• For example, after her promotion Alison went
skiing every year. This suggests that, for
Alison, skiing is a normal good.
SUBSTITUTES
• Substitutes refer to two goods where a
decrease in the price of one good leads to a
decrease in the demand for the other good.
• For example, as the price of bananas
increased many consumers switched to
consuming apples, a relatively cheaper
substitute.
SHIFTS IN THE DEMAND CURVE
• The most obvious determinant of your
demand is your tastes. If you like ice-cream,
you buy more of it.
• Your expectations about the future may affect
your demand for a good or service today. If
you expect the price of ice-cream to fall
tomorrow, you may be less willing to buy an
ice-cream at today’s price.
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SHIFTS IN THE DEMAND CURVE SHIFTS IN THE DEMAND CURVE

• Market demand depends on the number of

buyers. Increasing the number of buyers
increases the quantity demanded in the
market at every price, shifting the demand
curve to the right.

SHIFTS IN THE DEMAND CURVE

SHIFTS IN THE DEMAND CURVE VERSUS MOVEMENTS ALONG THE
DEMAND CURVE
• The market demand curve is drawn holding
other things constant.
• Any change that raises the quantity that
buyers wish to purchase at a given price
shifts the demand curve to the right.
• Any change that lowers the quantity that
buyers wish to purchase at a given price
shifts the demand curve to the left.

QUANTITY SUPPLIED TONY’S SUPPLY

• Quantity supplied is the amount of a good

that sellers are willing and able to sell.
• The law of supply states that, ceteris paribus,
the quantity supplied of a good rises when
the price of the good rises.

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FIRM SUPPLY VERSUS MARKET FIRM SUPPLY VERSUS MARKET

SUPPLY SUPPLY

FIRM SUPPLY VERSUS MARKET SHIFTS IN THE SUPPLY CURVE

SUPPLY
• Sellers use a variety of inputs to produce
the goods that they sell in the market.
When the price of inputs rises, producing
ice-cream is less profitable and sellers supply
less ice-cream.
• The technology for turning the inputs into
finished goods is another determinant of the
quantity supplied. By reducing sellers’ costs,
advances in technology raise the quantity of
ice-cream supplied.

SHIFTS IN THE SUPPLY CURVE SHIFTS IN THE SUPPLY CURVE

• The quantity of ice-cream a seller supplies

today may depend on its expectations about
the future. For example, if a seller expects
the price of ice-cream to rise in the future, it
may put some of its current production into
storage and supply less to the market today.

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SHIFTS IN THE SUPPLY CURVE EQUILIBRIUM

• The market supply curve is drawn holding
other things constant.
• Any change that raises the quantity that
sellers wish to sell at a given price shifts the
supply curve to the right.
• Any change that lowers the quantity that
sellers wish to sell at a given price shifts the
supply curve to the left.
• Equilibrium is a situation in which supply and
demand have been brought into balance.
• The equilibrium price balances the quantity
supplied and the quantity demanded.
• The equilibrium quantity is the quantity
supplied and the quantity demanded at the
equilibrium price.

EQUILIBRIUM IN THE MARKET FOR

EQUILIBRIUM IN THE MARKET FOR
ICE-CREAMS
ICE-CREAMS
• The equilibrium is found where the supply and
demand curves intersect.
• At the equilibrium price, the quantity supplied
equals the quantity demanded.
• In this example the equilibrium price is $2.
• At this price, seven ice-creams are supplied
and seven ice-creams are demanded.

SURPLUSES AND SHORTAGES IN A SURPLUS IN THE MARKET FOR

THE MARKET FOR ICE-CREAMS ICE-CREAMS
• A surplus occurs when, at the market price,
the quantity supplied is greater than the
quantity demanded.
• In this case there is an excess supply of six
ice-creams.
• Suppliers will try to increase sales by cutting
the price of an ice-cream, moving the price
towards the equilibrium level.

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A SHORTAGE IN THE MARKET FOR

LAW OF SUPPLY AND DEMAND
ICE-CREAMS
• A shortage occurs when, at the market price, • The law of supply and demand is the claim that
the quantity demanded is greater than the the price of any good adjusts to bring the
quantity supplied. supply and demand for that good into balance.
• In this case there is an excess demand of six
ice-creams.
• Because too many buyers are chasing too few
goods, suppliers can take advantage of the
shortage by raising the price of an ice-cream.

COMPARATIVE STATICS COMPARATIVE STATICS

• The equilibrium price and quantity depend on
the position of the supply and demand curves.
• When some event shifts one of these curves,
the equilibrium in the market changes, resulting
in a new price and a new quantity exchanged
between buyers and sellers.
• The analysis of such a change is called
comparative statics because it involves
comparing an old equilibrium and a new
equilibrium.

THREE STEPS FOR ANALYSING AN UNUSUALLY HOT SUMMER

CHANGES IN EQUILIBRIUM
When analysing how some event affects a
market, we proceed in three steps:

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HOT WEATHER AND A

AN UNUSUALLY HOT SUMMER FACTORY FIRE

• The hot weather affects the demand curve by

changing people’s taste for ice-cream.
• Because hot weather makes people want to
eat more ice-cream, the demand curve shifts to
the right.
• At the initial price of $2, there is now an excess
demand for ice-cream. This shortage induces
sellers to raise the price.

FIRE DESTROYS AN
ICE-CREAM FACTORY
• The fire affects the supply curve by reducing
the number of sellers.
• The supply curve shifts to the left because, at
every price, the quantity of ice-cream that firms
are willing and able to sell is reduced.
• At the old price of $2.00, there is now an
excess demand for ice-cream. This shortage
causes ice-cream sellers to raise the price.