48 section 2 Supply and Demand
- What a competitive market is
and how it is described by
the supply and demand
model - What the demand curve is
- The difference between
movements along the
demand curve and changes
in demand - The factors that shift the
demand curve
What you will learn
in this Module:
Module 5
Supply and Demand:
Introduction
and Demand
Supply and Demand: A Model of a
Competitive Market
Coffee bean sellers and coffee bean buyers constitute a market—a group of producers
and consumers who exchange a good or service for payment. In this section, we’ll
focus on a particular type of market known as a competitive market. Roughly, a com-
petitive marketis a market in which there are many buyers and sellers of the same
good or service. More precisely, the key feature of a competitive market is that no in-
dividual’s actions have a noticeable effect on the price at which the good or service is
sold. It’s important to understand, however, that this is not an accurate description
of every market. For example, it’s not an accurate description of the market for cola
beverages.That’s because in the market for cola beverages, Coca-Cola and Pepsi ac-
count for such a large proportion of total sales that they are able to influence the
price at which cola beverages are bought and sold. But it isan accurate description of
the market for coffee beans. The global marketplace for coffee beans is so huge that
even a coffee retailer as large as Starbucks accounts for only a tiny fraction of trans-
actions, making it unable to influence the price at which coffee beans are bought
and sold.
It’s a little hard to explain why competitive markets are different from other markets
until we’ve seen how a competitive market works. For now, let’s just say that it’s easier
to model competitive markets than other markets. When taking an exam, it’s always a
good strategy to begin by answering the easier questions. In this book, we’re going to
do the same thing. So we will start with competitive markets.
When a market is competitive, its behavior is well described by the supply and de-
mand model.Because many markets arecompetitive, the supply and demand model is
a very useful one indeed.Acompetitive marketis a market in which
there are many buyers and sellers of the
same good or service, none of whom can
influence the price at which the good or
service is sold.
Thesupply and demand modelis a model
of how a competitive market works.