1

Chapter 4 Demand, Supply

and Markets

These slides supplement the textbook, but should not replace reading the textbook

2

What is a market?A group of buyers and sellers with the potential to trade

3

What is demand?A relation showing the quantities of a good consumers are willing and able to buy at various prices during a given period of time, other things constant

4

What is ademand curve?

A curve showing the quantities of a commodity demanded at various possible prices, other things constant

5

What is a change in quantity demanded?A movement along the demand curve in response to a change in the price, other things constant

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Why do demand curves have a negative slope?At a higher price, consumers will buy fewer units; at a lower price, they will buy more units

7

What does an inverse relationship between

price and quantity mean? It means that the two move in opposite directions

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What is thelaw of demand?

The quantity of a good demanded is inversely related to its price, other things constant

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What is ademand schedule?

Shows the specific quantity of a good or service that people are willing and able to buy at different prices

10

The Demand Schedule for Milk

Price per quartQuantity demanded

per Month (millions of quarts)

a

b

c

d

e

$1.25

1.00

0.75

0.50

0.25

8

14

20

26

32

11

Millions of quarts per month

Pri

ce p

er q

uar

t

8 14 20 26 32

$1.251.00

0.750.500.25

0

abcdeD

The Demand Curve for Milk

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Why do consumers buy more as price

decreases and less when price increases?

Substitution effectIncome effect

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What is thesubstitution effect?

When the price of a good falls, consumers will substitute it for other goods, which are now relatively expensive

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What is money income?The number of dollars received per period of time, such as $100 per week

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What is real income?Income measured in terms of the goods and services it can buy

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What is theincome effect?

A fall in the price of a good increases consumers’ real income, making them more able to purchase all goods, so the quantity demanded increases

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What isindividual demand?The demand for an individual consumer

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What is market demand?

The sum of the individual demands of all consumers in the market

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What is a normal good?A good for which demand increases as consumer income rises

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What is aninferior good?

A good for which demand decreases as consumer income rises

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What are complements?Goods that are related in such a way that an increase in the price of one leads to a decrease in the demand for the other

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What are substitutes?Goods that are related in such a way that an increase in the price of one leads to an increase in the demand for the other

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What is achange in demand?

A shift in a given demand curve caused by a change in one of the nonprice determinants of demand for the good

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An Increase in the Demand for Milk

8 14 20 26 32Millions of quarts

per month

Pri

ce p

er q

uar

t $1.251.00

0.750.500.25

0DD'

25

IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND

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What can cause a change in the demand of a good or service?

A change in ...

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Number in the marketConsumer incomePrices of related goodsConsumer expectationsConsumer demographicsConsumer tastes

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What is supply?A relation showing the quantities of a good producers are willing and able to sell at various prices during a given time period, other things constant

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What is asupply curve?

A curve showing the quantities of a good supplied at various prices, other things constant

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What is thelaw of supply?

The quantity of a product supplied in a given time period is usually directly related to its price, other things constant

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What is a change in quantity supplied?

A movement along the supply curve in response to a change in the price, other things constant

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The Supply Schedule for Milk

Quantity supplied per month (millions of quarts)

Price per quart

$1.25

1.00

0.75

0.50

0.25

28

24

20

16

12

33

The Supply Curve for Milk

Millions of quarts per month

Pri

ce p

er q

uar

t

12 16 20 24 28

$1.251.00

0.750.500.25

0

S

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What arerelevant resources?

Resources used to produce the good in question

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What arealternative goods?

Other goods that use some of the same types of resources used to produce the good in question

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IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY

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What is achange in supply?

A shift in a given supply curve caused by a change in one of the nonprice determinants of the supply of the good

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What can cause a change in the supply of a good or service?

A change in ...

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TechnologyPrices of relevant resources

Prices of alternative goodsProducer expectationsNumber of producers

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What happens when we put demand and

supply together?

Equilibrium

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What is an equilibrium?

An equilibrium is the point toward which the economy tends

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What is disequilibrium?

Usually a temporary mismatch between quantity supplied and quantity demanded as the market seeks equilibrium

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What is a surplus?An excess quantity supplied over quantity demanded at a given price

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Why is a surplus a disequilibrium?

When there is a surplus the supplier will lower the price to get rid of the surplus

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What is a shortage?An excess of quantity demanded over quantity supplied at a given price

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Why is a shortage a disequilibrium?

When there is a shortage consumers will bid up the price to determine who gets and who does not get

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What is market equilibrium?

The condition that exists in a market when the plans of the buyers match the plans of the sellers

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Equilibrium in the Milk MarketPanel B: Market Curves

Millions of quarts per month

Pri

ce p

er q

uar

t $1.251.00

0.750.500.25

01416 20 24 26

D

SSurplus

Shortage

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What causes an increase in equilibrium price?

An increase in demand or a decrease in supply

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Millions of quarts per month

Pri

ce p

er q

uar

t

20 24

$1.000.75

0

Effects of an Increase in Demand

S

D'D

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Effects of a Decrease in Supply

Millions of quarts per month

Pri

ce p

er q

uar

t

0 20 26

D

S0.75

0.50

S’

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What causes a decrease in equilibrium price?

A decrease in demand or an increase in supply

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Millions of quarts per month

Pri

ce p

er q

uar

t

20 24

$1.000.75

0

Effects of a Decrease in Demand

S

D

D’

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Effects of an Increase in Supply

Millions of quarts per month

Pri

ce p

er q

uar

t

020 26

D

S'0.75

0.50

S

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P'

S

D'

S'

DQ'

Units per period

Pri

ce

P

0

An Increase in Supply and Demand Panel A: Shift in Demand Dominates

Q

56Units per period

Pri

ce

P

0

An Increase in Supply and Demand Panel B: Shift in Supply Dominates

Q

P''

S

Q''

S''

DD''

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What is a price floor?A minimum legal price below which a good or service cannot be sold

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Millions of wage earners

Wag

e ra

te p

er h

ou

r

14 24

$6.00

0

Effects of a Price Floor for Labor (minimum wage)

S

D

Surplus

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What is a price ceiling?A maximum legal price above which a good or service cannot be sold

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Thousands of rental units per month

Pri

ce p

er u

nit

40 60

$400

0

Effects of a Price Ceiling for Rent

SD

Shortage

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END