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Represent the interaction of buyers and sellers
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Objectives Explain the law of demand
Change in quantity demanded Change in demand
Markets
MarketsRepresent the interaction of buyers and
sellers
Markets
MarketsMarkets set the prices we pay and receive
The Law of Demand Demand
Quantities of specific goods or services that individuals or groups will purchase at various possible prices, ceteris paribus.
The Law of Demand Law of Demand
Quantity demanded is inversely related to price, all things equal
The Law of Demand
What are we holding constant?
Income Income Effect
Price of other goodsSubstitution Effect
Many other factors
The Demand Schedule
The demand schedule is a table relating prices to quantity demanded.
We must consider:The time dimensionConstant-quality units
The Market DemandSchedule for Minidisks
The Market DemandCurve for Minidisks
Shifts in Demand
Determinants of demand
Income
Tastes and preferences
The price of related goodsComplementsSubstitutes
Shifts in Demand
Determinants of demand
ExpectationsFuture pricesIncomeProduct availability
Market size (number of buyers)
Shifts in Demand
The Determinants of DemandIncome: Normal Good
D1
Q/Units
D2D3
Price
Decrease in incomedecreases demand
Increase in incomeincreases demand
Shifts in Demand
The Determinants of DemandIncome: Inferior Good
D1
Q/Units
Decrease in incomeincreases demand
Increase in incomedecreases demand
Price
D2D3
Shifts in Demand
The Determinants of DemandIncome: Tastes and Preferences
D1
Q/Units
Price
Sport Utility Vehicle• Increase in demand
D2
Smoking• Decrease in demand D3
Shifts in Demand
The Determinants of DemandPrice of Related Goods: Substitutes
D1
Q/Butter
Butter and Margarine• Price of both = $2/lb.• Price of margarine
increases to $3/lb.
• Demand for butter increases
D2
Price
Shifts in Demand
The Determinants of DemandPrice of Related Goods: Complements
D1
Q/Speakers
Speakers and Amplifiers• Decrease the relative
price of amplifiers• Demand for speakers
increases
D2D3
Speakers and Amplifiers• Increase the relative
price of amplifiers• Demand for speakers
decreases
Price
Shifts in Demand
The Determinants of DemandExpectations
D1
Q/Units
A higher income or expectations of a higher future price will increase demand
D2D3
A lower income or expectations of a lower future price will decrease demand
Price
Shifts in Demand
The Determinants of DemandPopulation
D1
Q/Units
Increase in the population increases demand
D2D3
Decrease in population decreases demand
Price
Shifts in Demand
• Changes in demand versus changes in quantity demanded– A change in one or more of the non-price
determinants (income, tastes, etc.) will lead to a change in demand.
– This is a movement of the whole curve.
Shifts in Demand
• Changes in demand versus changes in quantity demanded– A change in a good’s own price leads to a
change in quantity demanded.– This is a movement on the same curve.
Movement Along a Given Demand Curve
Quantity of Rewritable CDs Demanded(millions of constant-quality units per year)
Pric
e of
Rew
ritab
le C
Ds(
$)
2 4 6 80
1
2
3
4
5
10 12
A change in the price changes the quantity of a good demanded
Movement Along a Given Demand Curve
Quantity of Rewritable CDs Demanded(millions of constant-quality units per year)
Pric
e of
Rew
ritab
le C
Ds(
$)
2 4 6 80
1
2
3
4
5
10 12
D
D
A change in the price changes the quantity
of a good demanded
Movement Along a Given Demand Curve
Quantity of Rewritable CDs Demanded(millions of constant-quality units per year)
Pric
e of
Rew
ritab
le C
Ds(
$)
2 4 6 80
1
2
3
4
5
10 12
Movement Along a Given Demand Curve
Quantity of Rewritable CDs Demanded(millions of constant-quality units per year)
Pric
e of
Rew
ritab
le C
Ds(
$)
2 4 6 80
1
2
3
4
5
10 12
D
A change in the price changes the quantity
of a good demanded
Objectives Explain the law of supply
Distinguish between changes in supply and changes in quantity supplied
Explain how supply and demand interact to determine equilibrium price and quantity
The Law of Supply
• Supply– The amount of a product or service that firms
are willing to sell at alternative prices
– Chicago Burgerwurks8819 Ogden AveBrookfield, IL 60513-2115
The Law of Supply
• Law of Supply– The price of a product or service and the
quantity supplied are directly related
The Market Supply Schedulefor Rewritable CDs
The Market Supply Curvefor Rewritable CDs
Shifts in Supply
Determinants of supplyCost of inputsTechnology and productivityTaxes and subsidiesPrice of other goodsPrice expectationsNumber of firms in industry
Shifts in Supply
The Determinants of SupplyCost of Inputs
S1
Q/Units
Decrease in cost increases supply
S2Increase in costdecreases supply
S3
Price
Shifts in Supply
The Determinants of SupplyTechnology and Productivity
S1
Q/Units
Improvements in technology or increases in productivity increase supply
S2
Decreases in productivity decrease supply
S3
Price
Shifts in Supply
The Determinants of SupplyTaxes and Subsidies
S1
Q/Units
Decreases in taxes or increases in subsidies increase supply
S2
Increases in taxes or decreases in subsidies decrease supply
S3
Price
Shifts in Supply
The Determinants of SupplyPrice Expectations
S1
Q/Units
Expectations of lower future prices increase supply
S2Expectations of higher future prices decrease supply
S3
Price
Shifts in Supply
The Determinants of SupplyNumber of Firms in Industry
S1
Q/Units
Increase in the number of firms increases supply
S2Decrease in the number of firms decreases supply
S3
Price
Shifts in Supply
Changes in supply versus changes in quantity suppliedA change in one or more of the non-price
determinants will lead to a change in supply.
This is a movement of the whole curve.
Shifts in Supply
Changes in supply versus changes in quantity suppliedA change in a good’s own price leads to a
change in quantity supplied.This is a movement on the same curve.
Your 3 Step ProgramYour 3 Step Program
Decide if event shifts supply or Decide if event shifts supply or demanddemand
Decide direction the curve shiftsDecide direction the curve shifts
Identify new equilibriumIdentify new equilibrium
Putting Demandand Supply Together
Putting Demandand Supply Together
Quantity of Rewritable CDs(millions of constant-quality units per year)
Pric
e pe
r Rew
ritab
le C
D($
)
2 4 6 80
1
2
3
4
5
10 12
S
D
A B
Excess quantity demanded at price $1
Shortage• At P = $1: Qs (A) = 2 < Qd (B) = 10• All prices below $3 Qd > Qs
• Price will be pushed up
Putting Demandand Supply Together
Quantity of Rewritable CDs(millions of constant-quality units per year)
Pric
e pe
r Rew
ritab
le C
D($
)
2 4 6 80
1
2
3
4
5
10 12
S
D
D C
Excess quantity demanded at price $5
Surplus• At P = $5: Qd (D) = 2 < Qs (C) = 10• All prices above $3 Qd < Qs
• Price will be pushed down
Putting Demandand Supply Together
Quantity of Rewritable CDs(millions of constant-quality units per year)
Pric
e pe
r Rew
ritab
le C
D($
)
2 4 6 80
1
2
3
4
5
10 12
S
D
D C
Excess quantity demanded at price $5
A B
Excess quantity demanded at price $1
EquilibriumMarket clearing, or equilibrium price
E
Putting Demandand Supply Together
EquilibriumThe situation when quantity supplied
equals quantity demanded at a particular price
Putting Demandand Supply Together
ShortagesThe situation when quantity demanded is
greater than quantity suppliedExists at any price below the equilibrium
price Is not the same as scarcity
Putting Demandand Supply Together
SurplusesThe situation when quantity supplied is
greater than quantity demandedExists at any price above the equilibrium
price
Why Online Auctions Aren’t Why Online Auctions Aren’t So Lucrative AnymoreSo Lucrative Anymore
• Selling prices of auctioned items have fallen in the past two years– More items are for sale– The supply of items has increased more
rapidly than has the demand, causing a drop in equilibrium prices
Why Online Auctions Aren’t So Lucrative Anymore
Summary The law of demand says that prices and
quantity demanded are inversely related. A change in quantity demanded versus a
change in demand A change in quantity demanded is a movement
along the same demand curve A change in demand is a shift of the whole
demand curve
Summary The law of supply states that price and
quantity supplied are directly related. A change in quantity supplied versus a
change in supply A change in quantity supplied is a movement
along the same supply curve A change in supply is a shift of the whole supply
curve
Summary Determining market price and equilibrium
quantity The demand and supply curves intersect at the
equilibrium point. Shortages exist when the price of a good is below
the market price. Surpluses exist if the price of the good is greater
than the market price.
Conclusion Market economies harness the forces of
supply and demand. Supply and demand together determine the
prices of the economy’s goods and services. Prices are the signals that guide the allocation
of resources.
