# Document

```The Market Structure



Markets are any place where transactions take
place.
It is an arrangement between buyers and
sellers in order to exchange.
Millions of people participate directly or
indirectly in the U.S. economy.




Consistent with rational decision making, the
following assumptions apply to market
participants.
Consumers try to maximize their utility
(satisfaction) given limited resources.
Businesses try to maximize profits by using
resources efficiently in producing goods.
Government try to maximizes general
welfare of society.


Demand represents the behavior of utility
maximizing consumers.
Supply represents the behavior of profit
maximizing producers.



Demand is the amount of a good that
consumers are able and willing to buy at
alternative prices in a given time period,
holding all else constant.
It is the relationship between the possible
prices of a good and the amount consumers
decisions, for example income and prices of
related goods, are held constant.


To simplify their models, economists focus
on only one force at a time and assume all
else is constant.
Ceteris paribus is the assumption of nothing
else changing.



According to law of demand, there is an
inverse relationship between prices and the
amount of the good consumers are willing to
As price increases, people buy less.
When a good’s price rises, people tend to
substitute less expensive goods, the principle
of substitution.


A demand curve is a curve describing the
quantities of a good a consumer is willing
and able to buy at alternative prices in a given
time period, ceteris paribus.
The law of demand is represented by the
downward slope of the curve. At lower
prices, higher quantities are demanded.
Price \$/q
\$5
\$3
Demand
10
15
Quantity units





At a price of \$5 per unit, the consumer is
willing to purchase 10 units.
As price changes, we move along the demand
curve.
A decrease in price to \$3 per unit leads to
and increase in consumer purchases to 15
units.
This change in price led to a change in
quantity demanded.
There has not been a change in demand, the
curve did not change.



Other factors other than price that influence buying
decisions are the determinants of demand.
These are the variables being held constant in the
ceteris paribus assumption.
Determinants of market demand include:
◦ Income — of the consumer.
◦ Price of related goods — substitutes &amp;
complements.
◦ Expectations — future prices, in particular.
◦ Number of buyers – market size.
◦ Tastes — desire for this and other goods.



Demand can either increase or decrease with
a determinant change.
An increase in demand means that
consumers are willing to buy more than
before at a specific price. Demand shifts to
the right.
A decrease in demand is the opposite,
consumers purchase less than before at a
specific price. Demand shifts to the left.
Demand increases from D1 to D2. Demand shifts
to the right.

Price \$/q
\$5
D2
D1
10

17
Quantity units
The quantity increases, 10 to 17, at the price of \$5
per unit.



Income – an increase in income usually increases
demand. These goods are called normal goods. For
some goods, inferior goods, an increase in income
causes a decrease in demand, e.g., store brand can
vegetables.
Related goods – either substitutes or complements. As
the price of a substitute increases, demand will increase.
As the price of Coke increases, the demand for Pepsi
increases. Complementary goods, such as peanut butter
and jelly, go together. As the price of peanut butter
increases, the quantity demanded for peanut butter falls,
causing a decrease in the demand for jelly.
Expectations – if consumers believe the price of a good is
going to increase, demand will rise beforehand. For
example, if gasoline prices are expected to increase
tomorrow, people fill up their cars today.

Changes in quantity demanded are portrayed

Changes in demand are portrayed as shifts
as movements along a demand curve which
result from a price change of a good, ceteris
paribus.
of the demand curve due to changes in
demand determinants, such as tastes,
income, other goods’ prices, or expectations,
violating the ceteris paribus assumption.
PRICE
\$45
40
35
30
25
20
15
10
5
0
Shift in
demand
d2
d1
Movement
along curve
g1
D2 increased
demand
D1
initial demand
2
4
6
8
10
12
14
16
18
20
22 Quantity

Market demand is the total quantities of a

It is the sum of individual demands.
good or service people are willing and able to
buy at alternative prices in a given time
period.



Supply is the amount of a good sellers are
able and willing to sell at alternative prices in
a given time period, ceteris paribus.
Notice that the definition of supply parallels
the one for demand.
The distinction between changes in quantity
supplied and changes in supply are similar.


According to the law of supply, the quantity
of a good supplied in a given time period
increases as its price increases, ceteris
paribus.
Supply curves are upward sloping.
Price \$/q
Supply
\$7
\$5
10 12
Quantity units





At a price of \$5 per unit, the seller is willing
to sell 10 units.
As price changes, we move along the supply
curve.
A increase in price to \$7 per unit leads to and
increase in seller sales to 12 units.
This change in price led to a change in
quantity supplied.
There has not been a change in supply, the
curve did not change.



Other factors other than price that influence selling
decisions are the determinants of supply.
These are the variables being held constant in the
ceteris paribus assumption.
Determinants of market supply include:
◦ Price of inputs – changes costs of production
◦ Technology– changes costs of production
◦ Taxes– changes costs
◦ Expectations- future prices
◦ Number of sellers – market size



Supply can either increase or decrease with a
determinant change.
An increase in supply means that sellers are
willing to sell more than before at a specific
price. Supply shifts to the right.
A decrease in supply is the opposite, sellers
sell less than before at a specific price.
Supply shifts to the left.

As supply increases from S1 to S2 the quantity
increases from 10 to 13 at the price of \$5.
S1
Price \$/q
S2
\$5
10 13

Quantity units
A decrease in supply would be a shift from S2 to
S1.


Increases in the cost of production, either
due to increase prices of inputs, decrease in
technology, or taxes, decreases supply.
Expectations of future price changes also
effects sellers, but in the opposite direction.
If price is expected to go up tomorrow,
supply decreases today in order to sell more
tomorrow.


Changes in the quantity supplied —
movements along the supply curve resulting
from price changes.
Changes in supply — shifts in the supply
curve resulting from changing determinants.





Buyers and sellers are brought together in order to
exchange
Market price adjusts to bring the market into an
equilibrium
If price is too high, sellers will want to sell more
than sellers want to sell.
Exchange requires both buyers and sellers, the
lesser of quantity demanded or supplied will
determine the amount transacted between the two.



The equilibrium price is the price at which
the quantity of a good demanded in a given
time period equals the quantity supplied.
This represents the point where demand
and supply are the same, leaving no excess
want or production.
The equilibrium price is not determined by
any single individual.
Price
\$50
45
40
35
30
25
20
15
10
5
0
Market demand
Market supply
At equilibrium price, quantity demanded
equals quantity supplied
Equilibrium price
25
39
50
75
100
125 Quantity


A market surplus is the amount by which the
quantity supplied exceeds the quantity
demanded at a given price – excess supply.
A market surplus is created when the seller’s


A market shortage is the amount by which
the quantity demanded exceeds the quantity
supplied at a given price – excess demand.
A market shortage is created when the
seller’s asking prices are too low.
Price
\$50
45
40
35
30
25
20
15
10
5
0
Market demand
Market supply
Surplus
x
y
Shortage
25
39
50
75
100
125 Quantity


To overcome a surplus or shortage, buyers
and sellers will change their behavior.
Only at the equilibrium price will no further
Price
\$50
Market supply
40
E2
30
New demand
E1
20
10
0
Initial demand
25
50
75
100
Quantity
Price
\$50
Market supply
40
E3
30
E1
20
10
0
Initial demand
25
50
75
100
Quantity

WHAT we produce is determined by the
equilibrium quantities of various markets.

HOW we produce is determined by profit
seeking behavior and using resources efficiently.

FOR WHOM we produce is determined by those
willing and able to pay the equilibrium price.


Although the outcomes of the marketplace
are not perfect, they are often optimal.
Everyone has done the best possible given
their incomes and talents.
```