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AAEC 2305
Fundamentals of Ag Economics
Chapter 5
Theory of Markets
 To learn:
 How Supply & Demand curves interact to
determine the prices & quantities of goods
& services produced & consumed
 About markets in time, space, & form
 Characteristics of a competitive market
 Determination of Output in a competitive
Market Supply
 In chapter 4, we discussed that the
individual firm’s supply curve was the firms
MC curve above AVC
 The total offered by all firms in the market
is the aggregate or market supply.
Market Supply
 Market Supply - is the various amounts of a
good that producers are willing & able to
produce and make available at each of a
series of prices during a specified period
in a given market.
 Supply curve for a good in the market is the
horizontal sum of all individual firm’s
supply curves.
Market Demand
 In chapter 2, we derived the demand curve
for an individual consumer that will
maximize their utility based upon their
preferences and budget constraint.
 In other words, we indicated how the
consumer, with a limited budget, makes
choices among available goods to
maximize utility.
Market Demand
 As with Supply, the aggregate or market
demand is obtained by the horizontal
summation of all individual consumer’s
demand curves.
 Market Demand - a schedule showing the
amounts of a good consumers are willing
and able to purchase in the market for a
series of prices during a specified period
in a given market.
 A Market is an institution or an
arrangement that brings buyers and
sellers together.
 Market Price - is the mutually agreeable
price at which willing buyers and willing
sellers exchange a good.
Market Equilibrium
 Market equilibrium occurs when the
quantity of a good offered by a sellers at a
given price equals the quantity buyers are
willing and able to purchase at that same