Chapter 4 Demand, supply and market equilibrium

Let’s remember Colleen and Bill Colleen’s firm supplied logs Bill’s firm supplied food Colleen DEMANDED food Bill DEMAND logs

At some point, Colleen and Bill will establish: –How many logs will trade for how much food. This will provide: –Market prices!! –Market quantities!!

What will we do here? INDIVIDUAL Demand and Supply Leading to MARKET Demand and Supply

Firm, Entrepreneur, and Households Firm: An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy. Entrepreneur: A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business. Households: the consuming units in an economy.

Labor market, Capital market and Land market Labor market: The input market in which households supply work for wages to firms that demand labor. Capital market: The input market in which households supply their savings, for interest or for claims to future profits, to firs that demand funds in order to buy capital goods. Land market: The input market in which households supply land or other real property in exchange for rent.

The circular flow A circular flow diagram describes the interaction of firms and households in markets for outputs and inputs. Page 69, figure 4.1

To understand how markets work to determine prices: We will build a theory of demand which describes a relationship between the quantity of a product demeaned at alternative market prices and… We will build a theory of supply which describes a relationship between the quantity of a product supplied at alternative market prices.

Demand in output markets A household’s decision about what quantity of a product to demand depends on a number of factors

Demand curve There are lots of things that determine demand. We choose to graph one… the relationship between price and quantity. We call this the DEMAND CURVE

Quantity demand The number of units of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

The law of demand There is a negative, or inverse, relationship between the quantity of a good demanded and it’s price. This means that demand curves typically have negative slope.

Anna’s demand schedule and curve for telephone calls Schedule: page 71, table 4.1 Curve: page 72, figure 4.2 Property of demand curve: –Downward sloping: the negative relationship between price and quantity demand –Intersects with x (quantity) axis, a result of time limitations and diminishing marginal utility. –Intersects with y (price) axis, a result of limited income and wealth.

Changes in quantity demand VS. changes in demand Example of Anna –Page 76, table 4.2 –Page 77, Figure 4.3 Change in quantity demanded imply movement along a demand curve. Changes in demand imply a shift in the entire demand curve.

Changes in quantity demand VS. changes in demand Change in price of a good or service leads to change in quantity demanded (movement along the demand curve). Change in income, preferences, or prices of other goods or services leads to change in demand (shift of demand curve).

Review questions What are the properties of demand curve and why? Changes in demand vs. quantity demand.