1. The Market Forces of Supply and Demand

2. Markets and Competition  Market – a group of buyers and sellers of a particular good or service.  The buyers as a group determine the demand for the product  Markets can be highly organized or not very organized

3. Competitive Market  Describes a market in which there are so many buyers and sellers that each has a negligible impact on the market price  In this chapter we assume that markets are perfectly competitive – the highest form of competition. In order to have perfect competition, a market must have 2 characteristics:

4.  1. the goods offered for sale are identical  2. the buyers and sellers are so numerous that no one has any influence over price (called “price takers”)  Example: wheat market  Most markets are NOT perfectly competitive and fall between perfect competition and monopoly

5. DEMAND  Quantity Demanded – the amount of a good buyers are willing and able to buy.  Quanitity demanded and Price are negatively related  Law of Demand – the quantity demanded falls as price rises  Demand schedule – table that shows the relationship b/t the price of a good and the Qd.

6. Catherine’s Demand Schedule

7. Figure 1 Catherine’s Demand Schedule and Demand Curve Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1234567891011 Quantity of Ice-Cream Cones $3.00 12 1. A decrease in price... 2....increases quantity of cones demanded.

8. Individual vs. Market Demand  The market demand is the sum of all the individual demands for a particular good or service  *****THE ONLY THING THAT CHANGES THE Qd IS CHANGES IN PRICE!*****

9. The Market Demand Curve Price of Ice- Cream Cone 2.00 4 3 7 1.00 8 5 13 Quantity of Ice-Cream Cones Catherine’s Demand Nicholas’s Demand Market Demand + = When the price is $2.00, Catherine will demand 4 ice-cream cones. When the price is $2.00, Nicholas will demand 3 ice-cream cones. The market demand at $2.00 will be 7 ice-cream cones. When the price is $1.00, Catherine will demand 8 ice-cream cones. When the price is $1.00, Nicholas will demand 5 ice-cream cones. The market demand at $1.00, will be 13 ice- cream cones. The market demand curve is the horizontal sum of the individual demand curves!

10. 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 8 1.00 $2.00 4 Changes in Quantity Demanded

11. Change in Demand: Shifts in the Demand Curve  Many things can cause a shift, here are the most important:  Income – If the D for a good falls when income falls, it is a normal good; if the D for a good rises when income falls, it is an inferior good  Prices of Related Goods: Substitutes – an increase in the P of one causes an increase in the D of the other Complements – an increase in the P of one causes an decrease in the D of the other

12. Examples  Butter and margarine?  PB and J?  Razor handles, razor blades?  Cereal and milk?  Apples and oranges?

13.  Tastes – can change over time  Expectations – about the future may affect your demand today. Ex: expecting a raise  # of buyers – fewer or more buyers in market

14. $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand An increase in income... D1D1 D2D2 Consumer Income Normal Good

15. $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 Decrease in demand An increase in income... D1D1 D2D2 Consumer Income Inferior Good

16. Figure 3 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