Chapter 3 DEMAND & SUPPLY

Markets and Exchange A market is a place or service that enables buyers and sellers to exchange goods and services. What is a market? A market is a place or service that enables buyers and sellers to exchange goods and services. Barter is the exchange of goods and services directly, without the involvement of money. Monetary exchanges involve exchanging money for goods and services.

Barter—considerations Barter requires a double coincidence of wants— each party to the exchange must want what the other has to trade. – –This is often difficult to achieve, and decreases the easy and efficiency of exchanges. – –Therefore the transactions costs—the costs of making an exchange—are high in barter exchanges. – –Money reduces the transactions costs because it does not require a double coincidence of wants. In barter, the price of one good in terms of the other is called the relative price. It is the rate of exchange between the two goods.

Demand vs. Quantity Demanded Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time, everything else (but price) held constant. – –It is a relationship between prices and quantities. The quantity demand is the amount of a product that people are willing and able to purchase at one, specific price. – –It is a quantity.

Law of Demand Law of Demand: There is an inverse relationship between the price of a good and the quantity consumers are willing and able to purchase during a particular period of time. ––A––As price of a good rises, consumers buy less. ––D––Depicts the quantity-price relationship with all else assumed to be constant. The determinants of demand are factors other than price that influence demand: income, tastes, prices of related goods, expectations, and numbers of buyers.

Demand Schedule and Demand Curve for Videos PriceQuantity $510 $420 $330 $240 $150

Changes in Demand and Quantity Demanded Change in Quantity Demanded - movement along the same demand curve in response to a price change. Change in Quantity Demanded - movement along the same demand curve in response to a price change. –Results from a price change Change in Demand - shift in entire demand curve. Change in Demand - shift in entire demand curve. –Results from a change in a determinant of demand (a ceteris paribus variable)

Change in Demand vs. Change in the Quantity Demanded

Factors that Shift Demand Changes in Consumer Income Changes in Consumer Income –Normal goods: goods for which demand increases as income increases. –Inferior goods: goods for which demand decreases as income increases. Change in the Number of Buyers Change in the Number of Buyers Change in Price of Related Goods Change in Price of Related Goods –Substitute goods: goods that can be used in place of each other. –Complementary goods: goods that are used together. Changes in Expectations Changes in Expectations Demographic Changes Demographic Changes Changes in Consumer Tastes and Preferences Changes in Consumer Tastes and Preferences

Supply and Quantity Supplied Supply is the amount of a good or service that producers are willing and able to offer for sale at each possible price during a period of time, all else constant. Supply is the amount of a good or service that producers are willing and able to offer for sale at each possible price during a period of time, all else constant. –It is a price-quantity relationship. The quantity supplied is the amount sellers are willing and able to offer for sale during a period of time at a specific price, all else constant. The quantity supplied is the amount sellers are willing and able to offer for sale during a period of time at a specific price, all else constant.

Law of Supply Law of Supply - there is a positive relationship between the price of a product and the amount of it that will be supplied. Law of Supply - there is a positive relationship between the price of a product and the amount of it that will be supplied. –As the price of a product rises, producers will be willing to supply more. –The height of the supply curve at any quantity shows the minimum price necessary to induce producers to supply that next unit to market. –The height of the supply curve at any quantity also shows the opportunity cost of producing the next unit of the good.

Supply Curve for Videos

Changes in Supply Change in Quantity Supplied - movement along the same supply curve in response to a price change. Change in Quantity Supplied - movement along the same supply curve in response to a price change. –Results from a change in price Change in Supply - shift in entire supply curve. Change in Supply - shift in entire supply curve. –Results from a change in some other variables besides price, results from a change in a cet. par. variable

Change in Supply vs. a Change in the Quantity Supplied

Factors that Shift Supply Changes in Resource Prices Changes in Resource Prices Change in Technology and Productivity Change in Technology and Productivity Expectations of Producers Expectations of Producers Number of Producers Number of Producers Prices of Related Goods or Services Prices of Related Goods or Services

Decrease in Supply

Increase in Supply

Equilibrium Equilibrium is the price and quantity at which the quantity supplied and the quantity demanded are equal. Equilibrium is the price and quantity at which the quantity supplied and the quantity demanded are equal. A market is said to be in disequilibrium at all points at which the quantities demanded and supplied are not equal. A market is said to be in disequilibrium at all points at which the quantities demanded and supplied are not equal. –A surplus occurs whenever S>D. –A shortage occurs whenever D>S. –Surpluses and shortages can be resolved with price changes.

Equilibrium (Table) Price Per Video Quantity Demanded Quantity Supplied Status Price Change $530102Surplus Price Falls $44884Surplus $36666EQUILIBRIUM No Change $28448Shortage Price Rises $110230Shortage

Equilibrium (Graph)

The Effects of a Shift of the Demand Curve

The Effects of a Shift of the Supply Curve

Price Floors and Ceilings Price Floor: price is not allowed to decrease below a certain level. Examples: minimum wage, agricultural price supports. Price Floor: price is not allowed to decrease below a certain level. Examples: minimum wage, agricultural price supports. –If the floor is above the equilibrium price, then it results in a surplus. –In the labor market, a “surplus” means unemployment. But how much? Price Ceiling: price is not allowed to increase above a certain level. Example: rent controls. Price Ceiling: price is not allowed to increase above a certain level. Example: rent controls. –If the ceiling is below the equilibrium price, then it results in a shortage.

A Price Floor

Figure 12: Rent Controls