Microeconomics Study Notes: Demand in Competitive Markets

Competitive Markets

Introduction to Competitive Markets

A competitive market is an arrangement where many buyers and sellers interact to trade goods and services. In such markets, no single buyer or seller can influence the price, which is determined by the collective actions of all participants.

• Buyers demand goods and services.

• Sellers supply goods and services.

• Examples include markets for food, clothing, electronics, and financial securities.

Competitive markets are characterized by a large number of buyers and sellers, ensuring that individual actions do not affect market prices.

Demand

Quantity Demanded

The quantity demanded of a good or service is the amount that consumers are willing and able to buy during a specific period at a particular price.

• Measured as an amount per unit of time (e.g., bottles per week).

• Example: If water costs $1 a bottle, and you buy 2 bottles a day, your quantity demanded is 2 bottles per day.

The Law of Demand

The law of demand states that, all other things being equal, as the price of a good rises, the quantity demanded falls; as the price falls, the quantity demanded rises.

• Expressed as: Price and quantity demanded are inversely related.

• Example: If the price of a baseball ticket falls, more people will buy tickets.

Equation:

• $Q_d = f(P)$ — where $Q_d$ is quantity demanded and $P$ is price.

Demand Schedule and Demand Curve

A demand schedule lists the quantity demanded at each price for a good, holding other factors constant. A demand curve is a graphical representation of the demand schedule, showing the relationship between price and quantity demanded.

Price (dollars per bottle)	Quantity demanded (bottles per day)
2.50	0
2.00	1
1.50	2
1.00	3

The demand curve slopes downward, reflecting the law of demand.

Individual Demand and Market Demand

Individual demand refers to the demand of a single consumer, while market demand is the sum of all individual demands in the market.

• Market demand at each price is the horizontal sum of individual quantities demanded.

• Example: If Tim demands 2 bottles and Tina demands 1 bottle at $1.50, market demand is 3 bottles.

Changes in Demand

A change in demand occurs when a factor other than the price of the good itself changes, causing the demand curve to shift.

• If demand increases, the curve shifts rightward.

• If demand decreases, the curve shifts leftward.

Factors that shift demand:

• Prices of related goods (substitutes and complements)

• Expected future prices

• Income

• Expected future income and credit

• Number of buyers

• Preferences

Prices of Related Goods

Substitutes are goods that can replace each other. An increase in the price of a substitute increases demand for the good. Complements are goods used together; an increase in the price of a complement decreases demand for the good.

• Example: If the price of tea rises, demand for coffee (a substitute) increases.

• Example: If the price of printers rises, demand for ink cartridges (a complement) decreases.

Expected Future Prices

If consumers expect prices to rise in the future, current demand increases. If they expect prices to fall, current demand decreases.

• Example: If you expect the price of noodles to rise next week, you may buy more today.

Income

A rise in income increases demand for normal goods and decreases demand for inferior goods.

• Normal good: Demand increases as income rises (e.g., chicken).

• Inferior good: Demand decreases as income rises (e.g., pasta, in the example).

Expected Future Income and Credit

If future income or credit availability is expected to rise, demand for goods may increase now. If future income or credit is expected to fall, demand may decrease.

• Example: If credit becomes easier to obtain, demand for cars may increase.

Number of Buyers

An increase in the number of buyers in a market increases demand; a decrease reduces demand.

• Example: More buyers in New York increase demand for parking spaces.

Preferences

Changes in consumer tastes and preferences can increase or decrease demand for specific goods.

• Example: A new health study may increase demand for bottled water.

Summary Table: Factors Affecting Demand

Factor	Effect on Demand	Example
Price of Substitute	Increase in substitute price increases demand	Tea and coffee
Price of Complement	Increase in complement price decreases demand	Printers and ink cartridges
Expected Future Price	Expected increase raises current demand	Noodles
Income	Increase raises demand for normal goods, lowers for inferior goods	Chicken (normal), pasta (inferior)
Number of Buyers	Increase raises demand	Parking spaces in New York
Preferences	Change can raise or lower demand	Bottled water after health study

Key Terms

• Competitive market

• Quantity demanded

• Law of demand

• Demand schedule

• Demand curve

• Market demand

• Substitute

• Complement

• Normal good

• Inferior good

Additional info: These notes expand on the provided textbook images, clarifying definitions, examples, and the graphical representation of demand. All equations and tables are formatted for clarity and academic completeness.