© 2007 Thomson South-Western A market is a group of buyers and sellers of a particular good or service. The terms supply and demand refer to the behavior of people... as they interact with one another in markets. What Is a Market?

© 2007 Thomson South-Western What Is a Market? Buyers determine demand. Sellers determine supply.

© 2007 Thomson South-Western What Is Competition? Competitive market is a market in which … there are many buyers and sellers each has a negligible impact on the market price

© 2007 Thomson South-Western DEMAND Law of Demand –the quantity demanded of a good falls when the price of the good rises. Quantity demanded is the amount of a good that buyers are willing and able to purchase.

© 2007 Thomson South-Western The Demand Curve: The Relationship between Price and Quantity Demanded Demand Schedule is … a table showing the relationship between the price of the good the quantity demanded

© 2007 Thomson South-Western Catherine’s Demand Schedule

© 2007 Thomson South-Western The Demand Curve: The Relationship between Price and Quantity Demanded Demand Curve is … A graph showing the relationship between the price of the good the quantity demanded

© 2007 Thomson South-Western Catherine’s Demand Schedule and Demand Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones $ A decrease in price increases quantity of cones demanded.

© 2007 Thomson South-Western Shifts in the Demand Curve Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product.

© 2007 Thomson South-Western 0 D Price of Ice- Cream Cones Quantity of Ice-Cream Cones A tax on sellers of ice- cream cones raises the price of ice-cream cones and results in a movement along the demand curve. A B $ Changes in Quantity Demanded

© 2007 Thomson South-Western Shifts in the Demand Curve are caused by … Consumer income Prices of related goods Tastes Expectations Number of buyers Shifts in the Demand Curve result in … Curve shifting either to the left or right.

© 2007 Thomson South-Western Shifts in the Demand Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones Increase in demand Decrease in demand Demand curve,D 3 Demand curve,D 1 Demand curve,D 2 0

© 2007 Thomson South-Western Shifts in the Demand Curve Prices of Related Goods –Substitutes – used in place of each other A fall in the price of one good reduces the demand for another good –Complements – used together a fall in the price of one good increases the demand for another good

© 2007 Thomson South-Western Shifts in the Demand Curve Consumer Income As income increases the demand for a normal good will increase. As income increases the demand for an inferior good will decrease.

© 2007 Thomson South-Western $ Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand An increase in income... D1D1 D2D2 Consumer Income Normal Good

© 2007 Thomson South-Western $ Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 Decrease in demand An increase in income... D1D1 D2D2 Consumer Income Inferior Good

© 2007 Thomson South-Western Table 1 Variables That Influence Buyers

© 2007 Thomson South-Western SUPPLY Law of Supply states … –that, other things equal, –the quantity supplied of a good rises when the price of the good rises. Quantity supplied is … the amount of a good that sellers are willing and able to sell.

© 2007 Thomson South-Western The Supply Curve: The Relationship between Price and Quantity Supplied Supply Schedule is … a relationship table between the price of the good and the quantity supplied.

© 2007 Thomson South-Western Ben’s Supply Schedule

© 2007 Thomson South-Western The Supply Curve: The Relationship between Price and Quantity Supplied Supply curve is … A relationship graph between the price of a good and the quantity supplied.

© 2007 Thomson South-Western Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones $ An increase in price increases quantity of cones supplied.

© 2007 Thomson South-Western Market Supply versus Individual Supply Market supply is … the sum of all individual supplies for all sellers of a particular good or service. Individual supply curves are … summed to obtain the market supply curve.

© 2007 Thomson South-Western Market Supply as the Sum of Individual Supplies Price of Ice-Cream Cone Ben +Jerry= Market $ cones

© 2007 Thomson South-Western Shifts in the Supply Curve Input prices Prices of related good or services Technology Expectations Number of sellers

© 2007 Thomson South-Western Shifts in the Supply Curve Change in Quantity Supplied is … Movement along the supply curve. Caused by a change in anything that alters the quantity supplied at each price.

© 2007 Thomson South-Western Figure 7 Shifts in the Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

© 2007 Thomson South-Western Variables That Influence Sellers

© 2007 Thomson South-Western Shifts v. Movement Supply curve shift is called a change in supply. Movement along a supply curve is called a change in quantity supplied. Demand curve shift is called a change in demand. Movement along a demand curve is called a change in quantity demanded.

© 2007 Thomson South-Western DO NOW 1.What causes a movement along a curve? 2.List two things which cause the demand curve to shift. 3.List two things which cause the supply curve to shift. 4.Explain the difference between a change in supply and a change in quantity supplied.

© 2007 Thomson South-Western SUPPLY AND DEMAND TOGETHER Equilibrium is when … –quantity supplied equals quantity demanded

© 2007 Thomson South-Western SUPPLY AND DEMAND TOGETHER Equilibrium Price is … –the price at which the supply and demand curves intersect on a graph. Equilibrium Quantity is … –the quantity at which the supply and demand curves intersect on a graph.

© 2007 Thomson South-Western At $2.00, the quantity demanded is equal to the quantity supplied! SUPPLY AND DEMAND TOGETHER Demand ScheduleSupply Schedule

© 2007 Thomson South-Western Figure 8 The Equilibrium of Supply and Demand Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00

© 2007 Thomson South-Western Equilibrium Surplus is when … price > equilibrium price then quantity supplied > quantity demanded excess supply Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

© 2007 Thomson South-Western Markets Not in Equilibrium Price of Ice-Cream Cone 0 Supply Demand (a) Excess Supply Quantity demanded Quantity supplied Surplus Quantity of Ice-Cream Cones 4 $

© 2007 Thomson South-Western Equilibrium Shortage is when … price < equilibrium price quantity demanded > the quantity supplied. excess demand Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

© 2007 Thomson South-Western Markets Not in Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand (b) Excess Demand Quantity supplied Quantity demanded $ Shortage

© 2007 Thomson South-Western Equilibrium Law of Supply and Demand is … the price of any good adjusts to bring the quantity supplied and the quantity demanded into balance.

© 2007 Thomson South-Western Three Steps for Analyzing Changes in Equilibrium 1.What shifter is at work in the market? 2.Which curve is shifting ( or both ) and in what direction? 3.What happens to equilibrium price and quantity?

© 2007 Thomson South-Western How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Initial equilibrium D D 3....and a higher quantity sold resulting in a higher price Hot weather increases the demand for ice cream New equilibrium $

© 2007 Thomson South-Western DO NOW 1.What is a surplus? 2.Draw a graph showing a surplus. 3.What is a shortage? 4.Draw a graph showing a shortage.

© 2007 Thomson South-Western Draw the Graph: During a recession, people buy fewer new cars and trucks? What happens to the price of a new car or truck? 1.Draw equilibrium for new cars. Correctly label the graph. 2.Answer the three steps for determining what changes. 3.Draw the shift for the demand curve. Correctly label the graph.

© 2007 Thomson South-Western How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Demand New equilibrium Initial equilibrium S1S1 S2S resulting in a higher price of ice cream An increase in the price of sugar reduces the supply of ice cream and a lower quantity sold $2.50 4

© 2007 Thomson South-Western Draw the Graph: Production technology has greatly improved in agriculture, producing more corn on the same amount of land. How has the better technology affected the price of corn? 1.Draw equilibrium for the corn market. Correctly label the graph. 2.Answer the three steps for determining what changes. 3.Draw the shift for the supply curve. Correctly label the graph.

© 2007 Thomson South-Western Demand and Supply Curves Shift Four possibilities. D and S

© 2007 Thomson South-Western Draw the Graph: Suppose the price of cheeseburgers is rising. In addition, the price of pepperoni is rising. How will these two events affect the market for pizza? 1.Draw equilibrium for the pizza market. Correctly label the graph. 2.Answer the three steps for determining what changes the curve(s). 3.Draw the shift for the curve(s). Correctly label the graph. 4.What can we say about the price of pizza? 5.What can we say about the change in quantity?

© 2007 Thomson South-Western What Happens to Price and Quantity When Supply or Demand Shifts?