Bringing Demand and Supply Together notes

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Charlotte Coleman
Economics ­ Notes on Chapter 5
Bringing demand and supply together in a Competitive Market
Goods Markets and Factor Markets
Both market and mixed economies contain a large number of markets and they can be
grouped under two headings; goods markets (market for outputs or final goods and
services - consumer) or factor markets (inputs ­ factors of production). Households and
firms operate in both markets:
Goods Markets ­ households exercise demand for consumer goods and services
produced and supplied by firms. For household demand in the goods market to be
an effective demand, households must sell their labour or the services of any
capital or land they own.
Factor Markets ­ the firms exercise the demand for the factor services sold by the
households as inputs into the production process.
Competitive markets and uncompetitive markets
A competitive market is a market in which the large number of buyers and sellers possess good
market information and easily enter or leave the market. A market is highly competitive when
the very large number of firms in the market produce uniform products, incur similar
costs of production and have no ability to influence the equilibrium. Highly competitive
markets lack entry barriers which means new firms can enter the market. Equally, firms in
the market can leave if they want to, and the high degree of transparency means firms can
find out what their competitors are doing.
A market monopoly is the opposite when there is no competition. Monopolies can exploit
customers, and have lots of control on the market.
Real-world markets usually lie between these two extremes.
Bringing demand and supply curves together in a competitive market
We can see how Supply and Demand come together, and the equilibrium price where
supply = demand. It is impossible at most prices for both households and firms to fulfil
their market plans.
Disequilibrium causes either excess demand or excess supply. At a high price and low
quantity there is excess supply and at a low price and low quantity there is excess demand.

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Charlotte Coleman
When there is excess supply producers often lower price to move the line towards the
equilibrium and vice versa. Markets try to rearrange themselves to reach equilibrium at
all times.
A shift in supply can disturb market equilibrium. For example, a shift to the left would
cause excess supply and the producers would be forced to lower their price this causes a
movement along the demand and supply curve, as the price changes. Excess demand
responds similarly.…read more


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