The definition of the good is a matter of judgment: Should different locations entail different goods (and different markets)? What about quality, time, or other characteristics? A perfectly competitive market is one in which the goods offered for sale are identical, and there are so many buyers and sellers that no one can influence the market price.
* All buyers and sellers are price takers. * Our market experiment comes pretty close. * Corrugated cardboard, gasoline, soybeans. * This is the model of supply and demand, so perfect competition is important even if few markets exactly match the assumptions.
Demand for Ice Cream
The quantity demanded depends on:
Price - the higher the price, the less you buy.
Income - for normal goods, the higher your income, the more you buy. For inferior goods, the higher your income, the less you buy.
Prices of related goods - frozen yogurt are a Substitute or ice cream, so when its price goes up, more ice cream is demanded. Hot fudge is a complement for ice cream, so when its price goes up, less ice cream is demanded.
Tastes - when tastes change, the quantity demanded changes. For example, our taste for ice cream might depend on the weather.
Expectations - expectations about future income or prices affect the quantity demanded today.
The demand schedule (a table) and the demand curve (a graph) show the relationship between the price of a good and quantity demanded of that good.
Ceteris Paribus means “other things being equal”. All variables affecting demand other than price are assumed to be held fixed when we are talking about a particular demand curve.
• A change in the price changes the quantity demanded, so we move along the demand curve.
• A change in income, prices of other goods, etc. increases or decreases demand, so the demand curve shifts.
The market demand curve is the sum of the demand curves of all the buyers. Horizontally add the quantities demanded at any price.
Supply of Ice Cream
The quantity supplied depends on:
Price - the higher the price, the more firms want to supply. [Sometimes called the Law of Supply]
Input prices - less ice cream is supplied when workers must be paid more, ice cream machines cost more, or ingredients like cream and sugar become more expensive.
Technology - the invention of better ice cream machines or an idea to make better use of counter space can lower a firm’s costs and raise the quantity of ice cream it supplies.
Expectations expectations about future prices of ice cream and inputs can affect the quantity