2Examining a MarketThe market for any good or service consists of all buyers and sellers of that good. As economists, typically represent a basic market in the form of supply and demand.
3Assumptions.The model of Demand and Supply assumes that we are analyzing a perfectly competitive market.Perfectly Competitive Market.A market that meets the conditions ofMany buyers and sellersAll firms sell identical products andNo barriers to new firms entering the market.
4DemandDemand Schedule — a table showing the total quantity of a goof(or service) that buyers wish to buy at each price Demand curve—a graph showing the total quantity of a good (or service) that buyers wish to buy at each price.
5Quantity demanded — The amount of a good or service that a consumer is willing and able to purchase at a given price.Market demand — The demand by all the consumers of a given good or service
6The Law of Demand.States that “all else equal” (ceteris paribus), when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.
7The ceteris paribus Condition Ceteris paribus (“all else equal”) condition.Ceteris paribus is the Latin word for all else equal.It is the requirement that when analyzing the relationship between two variables- such as price and qty demanded – other variables be held constant.
9A demand curve is downward sloping from left to right because of the inverse relationship b/w price and quantity demanded.This is why consumers consume more of a commodity at lower price. Other reasons include the income and Substitution effects.
10A Change in Demand Vs a Change in Quantity Demanded. A change in quantity demanded is a movement along the demand curve that occurs in response to a change in the price of the product in question ONLY.A change in demand is a shift of the entire demand curve.
11A shift occurs if there is a change in one of the shifter variables, other than the price of the product, that affects the willingness of consumers to buy the product.
12Shifts in Demand Curves: 1. Change in the price of a complement. 2. Change in the price of a substitute. 3. Change in consumer income. 4. Change in preferences of demanders of the good. 5. Change in the population of potential buyers. 6. An expectation of future prices.
131. Change in the Price of a Complement Complements—Goods and services that are used together. Eg. Cars and gas, coffee and sugar, shoe and socks.two goods are complements in consumption if an increase in the price of one causes a leftward (inward) shift in the demand curve for the other.
172. Change in the Price of a Substitute Substitutes— Goods and services that can be used for the same purpose. Eg. Coke and Pepsi,..two goods are substitutes in consumption if an increase in the price of one causes a rightward (outward) shift in the demand curve for the other.
213. Change in Consumer Income Normal good—a normal good is a good for which the demand increases as income rises and decreases as income falls. For a normal good, the demand curve shifts rightward (outward) when the incomes’ of buyers increase.
23Inferior good—an inferior good is a good for which the demand increases as income falls and decreases as income rises. For an inferior good, the demand curve shifts leftward (inward) when the incomes’ of buyers increase.
30SupplySupply curve—a graph showing the total quantity of a good (or service) that sellers wish to sell at each price. Why is the supply curve upward sloping?
31This shape of the supply curve reflects the reality that the number of firms willing to supply that commodity increases as the market price increases.
32The only thing we allow to change along a given supply curve is the price of the good itself. If anything else changes, the entire supply curve shifts.
33The law of SupplyIt states that, holding all else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.
34Quantity Supplied: The amount of a good or service that a firm is willing and able to supply at a given price.
35A change in quantity supplied is a movement along the supply curve that occurs in response to a change in price.
36A change in supply is a shift of the entire supply curve. A change in supply has taken place if, at the same price, a different quantity is supplied.
37Shifts in Supply Curves: 1) Changes in the cost of materials, labor, or other inputs used in the production of the good or service.2) An improvement in technology that reduces the cost of production of the good or service.3) A change in the weather (especially for agricultural products).4) A change in the number of producers (suppliers).5) An expectation of lower future prices.
381. Changes in Input CostsChanges in the cost of materials, labor, or other inputs used in the production of the good or service.
50Excess SupplyA situation where QS > QD. Surplus: A situation in which the quantity supplied is greater than the quantity demanded.
51Excess DemandA situation where QD > QS. Shortage: A situation in which the quantity demanded is greater than the quantity supplied.
52Demand and Supply both Count: A Tale of Two letters. Which letter is likely to be worth more: one written by Abraham Lincoln or one written by his assassin, John Booth ? Lincoln is one of the greatest presidents, and many people collect anything written by him. The demand for letters written by Lincoln would be much greater than letters by Booth.Booth letters sold for $31,050 and Lincoln sold for only $21,850.
53Shifts in Supply and Demand Curves: 1. D 2. D 3. S 4. S 5. D and S 6. D and S 7. D and S 8. D and S
58The effect of shift in Demand and Supply over time. Whenever only demand or only supply shifts, we can easily predict the effect on equilibrium price and quantity. But what happens if both shift ?Eg. In many markets demand curve shifts to the right over time as population increases. The supply curve also often shifts to the right as new firms enter the market.
59Whether the equilibrium price in a market rises or falls over time depends on whether demand shifts to the right more than does supply.
64Summary No Change in S An Increase in S A Decrease in S No Change in D P same, Q sameP down, Q upP up, Q downAn Increase in DP up, Q upP ambiguous, Q upP up, Q ambiguousA Decrease in DP down, Q downP down, Q ambiguousP ambiguous, Q down
65Market Friction 1: Price Floor Price floor—A price floor specifics a minimum legal price below which goods cannot be sold.
74Credit CrunchFewer loans are granted at a higher interest rate.
75Practice QuestionSuppose the supply of a good is given by the equation P = QS and the demand for the good is given by the equation P = QD/2, where quantity is measured in millions of units and P is measured in dollars per unit. What is the equilibrium quantity in this market?What is the equilibrium price in this market?Graph?