Chapter 4 began introducing in more detail the idea of markets, which the textbook defined as the group of buyers and sellers of a particular good or service. The textbook noted that markets can either be organized (like markets for agricultural products) or less organized but still function similarly. The chapter then introduced the idea of a competitive market; that is, a market where no one has an influence on the price. Assuming this (or considering the common cases where it is true) allows for simpler models.
The behavior of buyers together constitutes demand. The quantity demanded (that is, how much buyers are willing and able to buy) is negatively related to price by the law of demand--that is, as price increases, quantity demanded decreases. The market demand curve changes only when something causes the quantity demanded to change at EVERY price. These factors include income, the price of substitutes or complements, and expectations.
The behavior of sellers constitutes supply. The quantity supplied (that is, how much sellers are willing and able to sell) is positively related to price by the law of supply--that is, as price increases, quantity supplied increases. The market supply curve changes only when something causes the quantity supplied to change at EVERY price. These factors include technology, input prices, and expectations.
As a whole, markets will tend towards equilibrium--the point where the supply and demand curves intersect. At this point, every good produced is bought. If there is either a surplus (supply>demand) or a shortage, (supply<demand), market forces will drive the market towards equilibrium.
I have no questions regarding this chapter.
Difficulty: 1/3
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