1. Chapter 3 Supply and Demand ECONOMICS: Principles and Applications, 4e
HALL & LIEBERMAN, © 2008 Thomson South-Western

2. Markets Market The economy
A group of buyers and sellers with the potential to trade with each other
Can be defined broadly or narrowly
Macroeconomics
Microeconomics
The economy
A collection of individual markets

3. Markets Macroeconomic Markets Microeconomic Markets
All capital goods - one market
All consumer goods - “consumption goods”
Overall view of the economy
Microeconomic Markets
Narrowly defined
Models - specific commodities

4. Product and Resource Markets
Product market
Goods and services
Firms – suppliers
Households – buyers
Resource market
Resources
Firms – buyers
Households – suppliers

5. Product and Resource Markets
Figure 1 The Circular Flow Model
Flow of goods and resources
Resource market
- Households sell resources
- Firms buy resources to produce goods and services
Product Market
- Firms sell goods and services to households
Money flows
- Firms – pay the resource owners
- Households – receive income for resources (to buy goods and services )

6. Competition in Markets
Imperfectly competitive markets
Buyers/sellers can influence the price
A few large buyers or sellers
Product differentiation
Perfectly competitive markets (or just competitive markets)
Buyers/sellers take the market price
Many small buyers and sellers
Standardized product

7. Using Supply and Demand
Supply and demand model
Designed to explain how prices are determined in perfectly competitive markets
Perfect competition
Rare in the real world
Many markets are close to perfect competition
To analyze a market, we need both, Supply and Demand

8. How to make a deal Single price (most cases)
Quantity price(buy one get one half price)
Two part tariff (membership fee)
Customer price (Dentist charges different price according to customers)
Bargaining price (Vehicle, House)
Auction price (Antique, Land)

9. Demand – Quantity Demanded
amount of a good
all buyers in a market would choose to buy
during a period of time
given their constraints
Implies a Choice
Households choose to buy – considering the opportunity cost of their decisions

10. The Law of Demand
When the price of a good rises and everything else remains the same, the quantity of the good demanded will fall
Ceteris paribus assumption
many variables change simultaneously
understand each variable separately
we assume “everything else remains the same”
understand how demand reacts to price

11. Demand Schedule and Demand Curve
list of different quantities demanded at different prices, ceteris paribus
Demand curve
relationship between the price of a good and the quantity demanded, ceteris paribus

12. The Demand Curve Each point on the demand curve
total quantity that buyers would choose to buy at a specific price
Graphical depiction of a demand schedule
Slopes downward
Law of Demand

13. The Demand Curve
Figure 2 The Demand Curve – movement along the demand curve
Number of Bottles per Month
Price per Bottle
When the price is $4.00
per bottle, 40,000 bottles
are demanded A
$4.00
At $2.00 per bottle,
60,000 bottles are
demanded B
2.00 D
40,000
60,000

14. Movements Along the Demand Curve
a change in the price of a good causes a movement along the demand curve, ceteris paribus.
In Figure 2
a fall in price - move rightward along the demand curve (from A to B)
a rise in price - move leftward along the demand curve (from B to A).

15. Shifts of the Demand Curve
a change in any variable that affects demand—except for the good’s price— causes the demand curve to shift.
An increase in quantity at any price
The demand curve shifts rightward (increase in demand)
A decrease in quantity at any price
The demand curve shifts leftward (decrease in demand)

16. The Demand Curve Figure 3 A Shift of the Demand Curve
Number of Bottles per Month
Price per Bottle
An increase in income
shifts the demand curve
for maple syrup from D1 to D2 D2 D1
At each price, more bottles
are demanded after the shift B C
$2.00
60,000
80,000

17. Change in Quantity Demanded
A particular amount
buyers would choose to buy at a specific price
One point on a demand curve
Change in quantity demanded
A movement along a demand curve in response to a change in price

18. Change in Demand “Demand” Change in demand
Relationship between price and quantity demanded
Represented by the entire demand curve
Change in demand
Shift of the demand curve
From changes in something other than price

19. Factors that Shift the Demand Curve
Income
Normal Good
People demand more as the income rises
Inferior Good
People demand less as the income rises
A rise in income will
increase the demand for a normal good
decrease the demand for an inferior good

20. Factors that Shift the Demand Curve
Wealth
Total value of everything you own minus the total dollar amount you owe
Measured at a point in time
An increase in wealth will
increase demand (shift rightward) for a normal good
decrease demand (shift leftward) for an inferior good

21. Factors that Shift the Demand Curve
Prices of Related Goods
Substitutes
can be used in place of some other good
fulfills more or less the same purpose
A rise in the price of a substitute will:
increase the demand for a good (shift the demand curve to the right)

22. Factors that Shift the Demand Curve
Prices of Related Goods
Complements
used together with the good we are interested in
A rise in the price of a complement will
decrease the demand for a good (shifts the demand curve to the left)

23. Factors that Shift the Demand Curve
Population
An increase in population will
increase the number of buyers
increase the demand (rightward shift)
Expected Price
An expected rise in price shifts the demand curve rightward (increase)
An expected fall in price shifts the demand curve leftward (decrease)

24. Factors that Shift the Demand Curve
Tastes/Preferences
tastes change toward a good
demand increases (demand curve shifts right)
tastes change away from a good
demand decreases (demand curve shifts left)

25. The Demand Curve Figure 4 The Demand Curve – A summary Price ↓
Move rightward along
the demand curve
Price ↑
Move leftward along
the demand curve P P A B P1 P2 B A P2 P1 D D Q1 Q2 Q Q2 Q1 Q

26. The Demand Curve Figure 4 The Demand Curve – A summary
The Demand curve shifts rightward P
Income or wealth ↑
Price of substitute↑
Price of complement ↓
Population ↑
Expected price ↑
Tastes shift toward good D2 D1 Q

27. The Demand Curve Figure 4 The Demand Curve – A summary
The Demand curve shifts leftward P
Income or wealth ↓
Price of substitute ↓
Price of complement ↑
Population ↓
Expected price ↓
Tastes shift away from good D1 D2 Q