2 MarketsA 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.And Economics, especially Microeconomics is about how supply and demand interact in markets.4
3 Market Types or Structures Competitive MarketsProducts are the same,price takersMonopolyMonopolistic CompetitionOligopoly
4 Demand CurvePrice of Ice-Cream Cone$3.002.502.001.50Use the cookie or snack example to illustrate individual and market demand.1.000.50Quantity of Ice-Cream Cones12345678910111217
5 Why does the Demand Curve Slope Downward? Law of DemandInverse relationship between price and quantity.Law of Diminishing Marginal Utility.Utility is the extra satisfaction that one receives from consuming a product.Marginal means extra.Diminishing means decreasing.
6 Market DemandMarket demand refers to the sum of all individual demands for a particular good or service.Graphically, individual demand curves are summed horizontally to obtain the market demand curve.Use the market example on pages Use Famous Amos cookies.
7 Ceteris ParibusCeteris paribus is a Latin phrase that means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.”Need to emphasize the point of holding all other factors constant.The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded!18
8 Two Simple Rules for Movements vs. Shifts Rule OneWhen an independent variable changes and that variable does not appear on the graph, the curve on the graph will shift.Rule TwoWhen an independent variable does appear on the graph, the curve on the graph will not shift, instead a movement along the existing curve will occur.Let’s apply these rules to the following cases of supply and demand!
9 Change in Quantity Demanded versus Change in Demand Movement along the demand curve.Caused by a change in the price of the product.19
10 Changes in Quantity Demanded Price of Cigarettes per PackA tax that raises the price of cigarettes results in a movement along the demand curve.C$4.00A2.00D11220Number of Cigarettes Smoked per Day
11 Change in Quantity Demanded versus Change in Demand A shift in the demand curve, either to the left or right.Caused by a change in a determinant other than the price.Need to emphasize that this difference is because of ceteris paribus. Very important distinction.19
12 Determinants of Demand Market priceConsumer incomePrices of related goodsTastesExpectationsWhat are some examples?11
13 Consumer Income Normal Good Price of Ice-Cream Cone$3.00An increase in income...2.50Increasein demand2.001.501.000.50D2D1Quantity of Ice-Cream Cones123456789101112
14 Consumer Income Inferior Good Price of Ice-Cream Cone$3.002.50An increase in income...2.00Decreasein demand1.501.000.50D2D1Quantity of Ice-Cream Cones123456789101112
15 Prices of Related Goods Substitutes & Complements When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.When a fall in the price of one good increases the demand for another good, the two goods are called complements.Use the Cold Soda example from page in the Instructors Manual. Shows very nicely the two different demand curves.15
16 Change in Quantity Demanded versus Change in Demand Variables that Affect Quantity DemandedA Change inThis Variable . . .PriceRepresents a movementalong the demand curveIncomeShifts the demand curvePrices of relatedgoodsTastesExpectationsNumber ofbuyers19
17 Supply CurvePrice of Ice-Cream Cone$3.002.502.001.501.000.50Quantity of Ice-Cream Cones12345678910111229
18 Law of SupplyThe law of supply states that there is a direct (positive) relationship between price and quantity supplied.28
19 SupplyQuantity supplied is the amount of a good that sellers are willing and able to sell.25
20 Change in Quantity Supplied Price of Ice-Cream ConeSC$3.00A rise in the price of ice cream cones results in a movement along the supply curve.A1.00Quantity of Ice-Cream Cones1530
21 Market SupplyMarket supply refers to the sum of all individual supplies for all sellers of a particular good or service.Graphically, individual supply curves are summed horizontally to obtain the market supply curve.
22 Determinants of Supply Market priceInput pricesTechnologyExpectationsNumber of producersWhat are some examples?27
23 Change in Supply S3 S1 S2 Decrease in Supply Increase in Supply Price of Ice-Cream ConeS1S2Decrease in SupplyIncrease in SupplyQuantity of Ice-Cream Cones30
24 Change in Quantity Supplied versus Change in Supply 30
25 Equilibrium of Supply and Demand Price of Ice-Cream ConeSupply$3.00DemandEquilibrium2.502.001.501.000.50Quantity of Ice-Cream Cones12345678910111230
27 Excess Demand Shortage Supply Demand Price of Ice-Cream Cone $2.00 $1.50Campus Parking situation page 63 in the Instructors Manual.ShortageDemand12345678910111213Quantity ofIce-Cream Cones37
28 Three Steps To Analyzing Changes in Equilibrium Decide whether the event shifts the supply or demand curve (or both).Decide whether the curve(s) shift(s) to the left or to the right.Examine how the shift affects equilibrium price and quantity.45
30 How a Decrease in Supply Affects the Equilibrium Price ofIce-CreamCone1. An earthquake reducesthe supply of ice cream...S2S1Newequilibrium$2.502. ...resultingin a higherprice...2.00Initial equilibriumArrange students in groups and give them hypothetical scenarios that force them to shift either supply or demand and then have them write their answers on the board. Focus on the three steps to analyze equilibrium.Demand123478910111213Quantity ofIce-Cream Cones3. ...and a lowerquantity sold.46