be ansWered 1M a

C. Chapter Review

4-1Markets and Competition whoare different

buyers,
behavior of sellersand interact in
in markets
to the incentives, as they
Supply and demand referdifferent economic global, contrary
groups of people responding to national, or even
services. Markets can be local,regional, Markets can take many forms,
8o00s and physicallocation.
to the traditional notion of a market asasaa sellers. Atone extreme, a pertectly
competition among influence price. At the
dpenaing8 upon the degree of Or seller can
Competitive market is one in which no single buyer seller.
contains a single
Other extreme,a monopolistic market
4-2 Demand
buyers are willing and able
Demand refers to the amounts of a good or service that
factors that affect how much
tobuy at various prices, holding constant all of the other and the
consumers are willing to buy. That is, demand is the relationship between price
quantity that people will buy. Consumers respond to economic incentives: They tend to
buy less of agood or service as the price rises. This negative relationship between price
and quantity demanded is known as the Law of Demand. When shown graphically, this
relationship becomes the demand curve. The other factors that we hold constant in
deriving a demand curve include the following:
Income
" Prices of related goods
" Tastes
" Expectations
" Number of buyers

A
change in any of these factors is likely to cause
he whole demand curve to the right demand to
or the left. Notice that the one change, that is, shift
this list is the price of the good itself. Even factor not included in
though change in price causes a
a
change in
Harcourt Brace &
quantity demanded, it does not change the entire relationsbip between price and
as represented by a demand curve. quantity.
4-3 Supply

Supply refers to the amounts of a good or service that sellers are willing and able
to sell at Various prices, holding all other factors constant. It is the relationship
between
price and the quantity supplied. Sellers respond to economic incentives. They
inercas
their willingness to sell as the price rises., This direct relationship between price anod
quantity supplied is known as the law of supply. The supply curve is the graphical
representation of this relationship, representing willingness to sell(not physical
inventories that are available). The other factors that we hold constant in deriVing a
supply curve include the following:
"Input prices
" Technology
Expectations
" Number of sellers

Essentially, the supply curve holds constant any of the factors that affect the cost
of producing and selling another unit of output. If those costs increase, the willingness to
sell at any given price decreases, so the supply curve shifts to the left. If costs decrease,
then the supply curve shifts to the right.

4-4 Supply and Demand Together

Neither supply nor demand by itself can determine the price or the quantity of a
scissors;
good or service in a market. Supply and demand are like two blades of a pair of
demand
both are required to make the system work. When shown graphically, supply and
and
curves intersect at a unique price and quantity known as the equilibrium price
equilibrium quantity. The equilibrium (or market-clearing)price is the only price at
to buy. If the
which the sellers' willingness to sell exactly equals the buyers' willingness
market price is above the equilibrium price, quantity supplied will exceed quantity
same thing as a surplus. If
demanded by an amount known as excess supply, which is the
demanded will exceed quantity
the market price is below the equlibrium price, quantity
or a shortage.
supplied by an amount known as excess demand,
demanded due toa change in
change in demand (unlike a change in quantity
A
due to a change in one of the underlying
price) means that the demand curve has shifted,
this tends to increase equilibrium
factors. If demand increases (shifts to the right),
quantity and price,causing sellers to increase their quantity supplied as they move along
(unchanging) supply curve. If demand decreases (shifts to the left), the reverse
the
decrease, and quantity supplied decreases.
occurs: quilibrium quantity and price both
curve has shifted, so that
Similarly, a change in supply means that the supply
If supply increases (shifts to the
sellers' willingness to sellhas changed at every price.
Harcourt Brace &Company
4-3
 to
causing buyers Ifincrease their
price willdrop, demandcurve. supply
riseand (unchanging)
nght), cquilibrium quantity will alongthe price increases, and
decreases, but
quantity demanded as they move equilibriumquantity
decreases (shifts to the left),
quantity demanded decreases. which
outcome depends on curve
direction, the increase, we know that
If both curves shift in the
same demand
supply and
if both
shifts relatively more. For example, price could go either uprelativelyor down,depending
more than
on
but
equilibrium quantity must alsorise,demand. If supplyincreases
increases more than supply, the
the relative changes in supply and but if demand
demand, this will tendto drive price down,
additional willingness to buy will drive price up.

4-5 Conclusion: How Prices Allocate Resources

allocatediamong competing
resources have to be
In any economic system, Scarce
services to produce, howto produce them, and
uses. Society must decide what goods and
prices are the signals that guide
for whomthey are to be produced. In a market economy,
serve both to ration
Lne allocation ofresources among competing uses, Rising prices when desired by
to stimulate additional production
increasingly scarce resources and
namely that it may be appropriate to shift
sOGey. Fall1ng prices indicate the reverse, Prices allow decentralized decisionmaking
Tesources to a higher valued use elsewhere.
central planning.
by thousands of buyers and sellers acting independently without any
D. Helpful Hints

1. Supply means willingness to sel. In everyday usage, supply often refers to physical
stocks of a product or resource, in the form of inventories available for sale, In
economics, however, supply means willingness to sell. For example, the
newspapers often report changes in global petroleum supplies, when really they
mean inventories or petroleum reserves. The supply of petroleum is the willingness
to sellthose reserves, not the petroleum itself.
2. Demnand means willingness to buy. Demand is not
simply consumer wants.
Demand represents wants backed up by dollars and our willingness to spend them.
3. A market is acollection of buyers and
sellers. Markets are not physical locations;
rather they are the interaction of buyers and sellers.
Such interaction can occur at a
physical location: for example, an auction may
represent a separate market.
However, buyers and sellers can interact on a national
Darticularly as electronic communications grow. Moneyor even global level,
involve buyers and sellers around the world. markets, for example,
.Demand"is the entire schedule or
curve.
schedule or demand curve, not just apoint Demand refers to the whole demand
on the curve. It
nrice-quantity combinations that are acceptable to represents all of the
consumers, Because of this, we
Harcourt Brace &
4-4 Company
 o not refer to increased sales due to a nrice cut ae an increase in demand. Inere
of course, an increase in the quantity demanded. but this is not an incrcase (Of S
to the right) in demand itself.

5. Duantity Demanded "is a point on the demand curve. When there is a Chais
price, quantity demanded changes,but demand itself does not change. Quantity
demanded is synonomous with consumption, or sales, or quantiy sod
6. "Supply "is the entire schedule or curve., Supply refers to the whole supply Seneuu
Or Supply curve, not just a point on the curve. For supply to shift, the underlying
Tactors that we hold constant in plotting a supply curve must change. Changing tne
pice simply means that we plot a new point on the existing supply curve,
supplierS tO
representing a new quantity. Of course an increase in price encourages
sell more; however, we call this response to higher price an increase in quaiy
supplied, rather than an increase (or shift) in supply.
change in price.
the supply curve. When there is adoes
I. Luantity Supplied "is a point on not shift.
the supply curve itself
the quantity supplied changes, even though the amount that sellers are willing to
particular price is
Ine quantity supplied at a
sell at that price.

E. Terms and Definitions

Choose adefinition for each key term.

Key Terms:
Law of Demand
Demand
Quantity demanded
Excess demand
Law ofSupply
Supply
Quantity supplied
Excess supply
Market
Equilibrium price
Equilibriumquantity
Competitivemarket
Monopolisticcompetition
Oligopoly