1. All Rights ReservedDr. David P Echevarria1 LECTURE #3: MICROECONOMICS CHAPTER 4 Markets Demand Supply Equilibrium

2. All Rights ReservedDr. David P Echevarria2 Markets and Competition Market: buyers and sellers for a particular good or service Competition: several sellers of a good or service Perfect competition = all goods same, no single buyer or seller can dominate price. Must accept the price determined in the market Price takers At the market price Buyers - buy all they want Sellers - sell all they want Monopoly = one seller who sets the price

3. All Rights ReservedDr. David P Echevarria3 Demand (the Buyers) Demand: the quantity of goods buyers are willing and able to buy Law of Demand The quantity demanded is a function of price The lower the price, the greater the demand for a good Demand Schedule: the combinations of price and quantity demanded – downward sloping to right.

4. G. Mankiw4 Demand curve Catherine’s Demand Schedule and Demand Curve The demand curve illustrates how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward. Price of Ice-cream cone Q D Cones demanded $0.00 0.50 1.00 1.50 2.00 2.50 3.00 12 10 8 6 4 2 0 0121011912345678 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice-Cream Cones 1. A decrease in price... 2.... increases quantity of cones demanded.

5. All Rights ReservedDr. David P Echevarria5 Demand (the Buyers) Market vs. Individual Demand Individual demand is a function of income, prices of related goods, expectations and tastes Market demand is the sum of individual demands Increases (decreases) in aggregate demand move the demand curve to the right (left)

6. G. Mankiw6 Market Demand as the Sum of Individual Demands (Demand Schedule) 6 Price of ice-cream cone CatherineNicholasMarket $0.00 0.50 1.00 1.50 2.00 2.50 3.00 12 10 8 6 4 2 0 +76543217654321 =19 16 13 10 7 4 1 The quantity demanded in a market is the sum of the quantities demanded by all the buyers at each price: e.g., If price = $2.00, then Catherine demands 4 ice-cream cones, and Nicholas demands 3 ice-cream cones. The total quantity demanded in the market at this price is 7 cones.

7. G. Mankiw7 Market Demand as the Sum of Individual Demands 7 D Catherine 0121011912345678 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Catherine’s demand D Nicholas 01234567 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Nicholas’s demand += D Market 018246810121416 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Market demand

8. All Rights ReservedDr. David P Echevarria8 Demand (the Buyers) Prices of Related Goods Substitutes - two goods An increase in the price of one leads to an increase in the demand for the other Complements – two goods An increase in the price of one leads to a decrease in the demand for the other

9. All Rights ReservedDr. David P Echevarria9 BREAK TIME

10. All Rights ReservedDr. David P Echevarria10 Supply (the Sellers) Supply: the quantity of goods offered for sale Law of Supply The quantity supplied is a function of price The greater the price, the more quantity is offered for sale Supply Schedule: the combinations of price and quantity supplied – upward sloping to right.

11. G. Mankiw11 Ben’s Supply Schedule and Supply Curve Supply curve The supply schedule is a table that shows the quantity supplied at each price. Because a higher price increases the quantity supplied, the supply curve slopes upward. Price of Ice-cream cone Quantity of Cones supplied $0.00 0.50 1.00 1.50 2.00 2.50 3.00 0 cones 0 1 2 3 4 5 0121011912345678 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice-Cream Cones 1. An increase in price... 2.... increases quantity of cones supplied.

12. All Rights ReservedDr. David P Echevarria12 Supply (the Sellers) Market vs. Individual Supply Individual supply is a function of input costs, productive capacity, market prices, technology, expectations, competition Market supply is the sum of individual supplies Increases (decreases) in aggregate supply move the supply curve to the right (left)

13. G. Mankiw13 Market Supply as the Sum of Individual Supplies (Supply Schedule) Price of ice-cream cone BenJerryMarket $0.00 0.50 1.00 1.50 2.00 2.50 3.00 00123450012345 +00024680002468 =0 1 4 7 10 13 The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. If price = $2.00, then Ben supplies 3 ice-cream cones, and Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this price is 7 cones

14. G. Mankiw14 Market Supply as the Sum of Individual Supplies 14 S Ben 0121011912345678 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Ben’s supply S Jerry 01234567 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Jerry’s supply += S Market 018246810121416 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Market supply

15. All Rights ReservedDr. David P Echevarria15 Matching Demand and Supply Equilibrium (): when the quantity demanded is equal to the quantity supplied No excess supply and no excess demand The markets clear at equilibrium.

16. G. Mankiw16 The Equilibrium of Supply and Demand Supply 0121011912345678 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice-Cream Cones Equilibrium Demand Equilibrium price Equilibrium quantity Equilibrium = where the supply and demand curves intersect. Here the equilibrium price is $2.00: At this price, 7 cones supplied, and 7 cones are demanded.

17. All Rights ReservedDr. David P Echevarria17 Changes in Demand and Supply What happens when there is a change in Demand? An increase in demand moves the demand curve to the right – price increases A decrease in demand moves the demand curve to the left – price decrease

18. All Rights ReservedDr. David P Echevarria18 Changes in Demand and Supply What happens when there is a change in Supply? An increase in supply moves the supply curve to the right – price decreases A decrease in supply moves the demand curve to the left – price increases

19. All Rights ReservedDr. David P Echevarria19 Changes in Demand and Supply What happens when supply exceeds demand? Surplus condition exists. In order to clear the markets, price must be reduced The opposite is true if demand exceeds supply (shortage) – prices must rise. Allocation of Resources and Price Resources will be allocated to goods obtaining the best prices for producers Consumers will allocate resources (time and labor or income) for the best outcome

20. All Rights ReservedDr. David P Echevarria20 HOMEWORK: Chapter 4 Questions for Review: 1, 2, 3 (2 nd part), 5 Problems and Applications: 1 (a, b), 2, 10, 13