Ch. 3: Demand and Supply Objectives Determinants of demand and supply
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1 Ch. 3: Demand and Supply Objectives Determinants of demand and supply Use demand and supply to understand how markets determine prices and quantitiesUse demand and supply to make predictions about changes in prices and quantities
2 Markets and Prices Market Competitive market Money price of a good any arrangement that enables buyers and sellers to get information and do business with each other.Competitive marketa market that has many buyers and many sellersno single buyer or seller can influence the price.Money price of a goodthe amount of money needed to buy it.Relative price of a goodratio of its money price to the money price of the next best alternative goodthe opportunity cost of the good expressed in units of the other good.
3 Demand Quantity demanded of a good or service The Law of Demand the amount that consumers plan to buy during a particular time period at a particular price.The Law of DemandOther things remaining the same, the higher the price of a good, the smaller is the quantity demanded.The law of demand results froma substitution effectan income effectNormal versus inferior good
4 DemandDemandthe entire relationship between the price of the good and quantity demanded of the good.Demand curveshows the relationship between the QD of a good and its price, ceteris parabus
5 Demand This figure shows a demand curve for gasoline A rise in the price, ceteris paribus, brings a decrease in the QD and a movement along the demand curve.PriceD# gallons per week
6 Demand A D-curve is also Willingness-to-pay curve. Willingness to pay measures marginal benefit.PriceD# gallons per week
7 Demand A Change in Demand Quantity of the good that people plan to buy changes at each and every priceShift of demand curve.When demand increases,QD increases at each and every pricethe demand curve shifts rightward.When demand decreases,QD decreases at each and every pricethe demand curve shifts leftward.
8 DemandChange in Demand vs. Change in Quantity Demanded
9 Factors that change demand Prices of related goodssubstitute in consumptioncomplement in consumptionIncomeNormal goodInferior goodLuxury goodExpected future pricesPopulationTaxes on buyersConsumer preferences
10 Supply The Law of Supply Quantity supplied (QS) of a good or service the amount that producers plan to sell during a given time period at a particular price.The Law of SupplyOther things remaining the same, the higher the price of a good, the greater is the quantity supplied.results from tendency for the marginal cost of producing a good or service to increase as the quantity produced increases (more later)Producers are willing to supply only if they at least cover their marginal cost of production.
11 Supply Supply Supply curve the entire relationship between the quantity supplied and the price of a good.Supply curveshows relationship between QS and price of a good, ceteris paribus.
12 Supply Curve S A supply curve for gasoline. $ per gallonA supply curve for gasoline.A rise in the price, ceteris paribus, brings an increase in QS and a movement along the supply curve.SGallons per day
13 Supply S A supply curve is also a minimum-supply-price curve. The greater the quantity produced, the higher is the price that producers must be offered to be willing to produce that quantity.SGallons per day
14 Supply A Change in Supply QS increases at each and every price occurs when the quantity of the good that producers plan to sell changes at each and every price, so there is a new supply curve.When supply increases,QS increases at each and every pricesupply curve shifts rightward.When supply decreases,QS decreases at each and every pricesupply curve shifts leftward.
15 SupplyChange in supply vs. change in quantity supplied
16 Factors that change supply. Prices of inputsPrices of related goods producedSubstitutes in productionComplements in productionExpected future pricesNumber of sellersTaxes on SellersTechnology
17 Market Equilibrium Equilibrium situation in which opposing forces balance each other.occurs when the price balances the plans of buyers and sellers.Equilibrium priceprice at which the quantity demanded equals the quantity supplied.Equilibrium quantityquantity bought and sold at the equilibrium price.
18 Market Equilibrium S Price Adjustments If P>Pequil: a surplus forces the price down.If P<Pequil:a shortage forces the price up.At the equilibrium price,QS=QDand the price doesn’t change.SD
19 Predicting Changes in Price and Quantity Illustrate Effect on Equilibrium Price and Quantity if:Demand increasesSupply increasesDemand and supply simultaneously increase.Practice with Supply/Demand to:Predict effect of “shock” to market.Understand the type of “shock” that might have caused an observed change in P & Q.
20 Price controls A price ceiling is a maximum allowable price. Results in a continuing shortage if ceiling is BELOW equilibrium price.A price floor is a minimum allowable price.Results in a continuing surplus if floor is ABOVE equilibrium price.