Economics, 3rd Edition

SELF TEST 

What constitutes a market? List the main characteristics of a competitive market.

DEMAND

We begin our study of markets by examining the behaviour of buyers. To focus our thinking, let’s keep in 

mind a particular good – milk. The market for milk fulfils many of the characteristics of a perfectly compet-

itive market; milk is fairly homogenous, there are about half a million dairy farms across the EU and there 

are millions of buyers of milk across the EU.

The Demand Curve: The Relationship Between Price and Quantity Demanded

The 

quantity demanded

 of any good is the amount of the good that buyers are willing and able to pur-

chase at different prices. Many things determine the quantity demanded of any good, but when analysing 

how markets work, one determinant plays a central role – the price of the good. If the price of milk rose 

from 

€0.25 per litre to €0.35 per litre, less milk would be bought. If the price of milk fell to €0.20 per litre 

more milk would be bought. Because the quantity demanded falls as the price rises and rises as the price 

falls, we say that the quantity demanded is negatively or inversely related to the price. This relationship 

between price and quantity demanded is true for most goods in the economy and, in fact, is so pervasive 

that economists call it the 

law of demand

: other things equal, when the price of a good rises, the quantity 

demanded of the good falls, and when the price falls, the quantity demanded rises.