Module Supply and Demand: Introduction and Demand 5 KRUGMAN'S MACROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: What a competitive market is and how it is described by the supply and demand model What the demand curve is The difference between movements along the demand curve and changes in demand The factors that shift the demand curve

Supply and Demand: A Model of a Competitive Market Supply and Demand Model i Start with a definition of a market: A market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services. 1. A market may be local, national, or international in scope. 2. Some markets are highly personal with face‑to‑face exchanges and flexible prices (a garage sale or estate auction) while others are impersonal and remote (global market for oil or coffee beans). 3. This chapter concerns competitive markets with a large number of independent buyers and sellers. 4. Each of these buyers and sellers are so small that they cannot affect the price of the product.   Stress to the students that the assumption of competitive markets just simplifies the analysis. Much information can be gained by looking at demand and supply in a competitive market, and in later chapters of a microeconomics textbook, students would study markets that are not competitive.

The Demand Curve Demand schedule: Shows how much of a product consumers are willing & able to buy at each series of possible prices during a specified time period. Quantity demanded: Quantity demanded depends on price at any given pt on the curve Demand curve: graph that illustrates the quantity demanded at each given price- inverse relationship Law of Demand: all other things being equal- as the price increases, the corresponding quantity demanded falls. A. Demand Schedule and Curve Demand is a schedule that shows how much of a product consumers are willing and able to buy at each of a series of possible prices during a specified time period. The demand schedule shows that when the price is high, the quantity of sodas demanded is low. This relationship is known as the Law of Demand.   Law of demand is a fundamental characteristic of demand behavior. 1. Other things being equal, as the price increases, the corresponding quantity demanded falls. 2. Restated, there is an inverse relationship between price and quantity demanded. 3. Note the “other things being equal” assumption which refers to a handful of other factors that affect our demand for a good. These will be covered shortly.

Demand Schedule and Demand Curve Price Quantity $ 8 3 $ 7 5 $ 6 7 $ 5 10 $ 4 12 $ 3 16 $ 2 22 Price Quantity

Understanding Shifts of the Demand Curve Increase = right, Decrease = left M.E.R.I.T. shifts demand market size (number of consumers) expectations related prices (complements, substitutes) income (normal, inferior): As income rises increase in demand for normal goods, reverse for inferior goods. Steak-normal, second hand clothing –inferior tastes There are several “shifters” of demand or the “other things,” besides price, which affect demand.   Changes in a shifter cause changes in demand. If demand has increased, it has shifted to the right. At any price, consumers wish to buy more. If demand has decreased, it has shifted to the left. At any price, consumers with to buy less. 1. Prices of related goods i. Substitute goods (those that can be used in place of each other): Price of substitute and demand for the other good are directly related. If the price of Nike shoes rises, the demand for New Balance shoes should shift to the right. ii. Complementary goods (those that are used together like tennis balls and rackets): When goods are complementary, there is an inverse relationship between the price of one and the demand for the other. If the price of tennis rackets rises, demand for tennis balls will shift to the left. 2. Income i. Normal goods More income leads to an increase in demand; less leads to decrease in demand for most goods and services. Steak is a normal good. So are textbooks, running shoes, and iPods. ii. Inferior goods For a few goods, more income leads to a decrease in demand. City bus tickets are inferior goods. So are second-hand clothing and store-brand food items. 3. Tastes A favorable change in tastes leads to an increase in demand; an unfavorable change to a decrease. EX. Demand for a sport team’s apparel increases when the team is winning. 4. Expectations Consumers have expectations about future prices, product availability, and income, and these expectations can shift demand. EX. If I expect the price of gas to decrease next week, my demand for gas will decrease this week. I will wait for the price to fall. Ex. If I take a new job and expect my salary to rise next month, I may increase my demand for a new suit today. 5. Number of buyers—the more buyers lead to an increase in demand; fewer buyers lead to decrease. EX. Demand for prescription drugs has increased, as the population has grown older. Ex. Demand for infant formula would decrease if families had fewer babies.

Common Student Difficulties Do not confuse movement along the demand curve with how it differs from a shift in the entire demand curve. Movement and Shifting are different Precise use of language matters: Correct: “A decrease in the price of tacos causes an increase in the quantity of tacos demanded. Incorrect: “A decrease in the price of tacos causes an increase in the demand for tacos”

Drawing a Demand Curve A private parking space on campus: A new Mac Notebook: Concert tickets to _________________ : An I phone 6: Visits to a tanning salon and spa: An Apple Watch: Seasons tickets to Panther Football Games: A Kindle Fire : A new X-Box game system : An AK yearbook A car stereo system/including sub woofers and amp _______________________________________________________________________ 1. Teams will brainstorm five possible prices for their product from high to low. 2. Teams agree on how all members will conduct the survey. For Ex: “If the price is __ how many will you buy (in a wk, a month, a year) or if the price is ___ will you buy it?” If yes is counted as 1 and not is counted as 0. 3. Each team member interviews 2 students in the class regarding their demand for the team’s product. 4. Students return to the team and add the quantity demanded at each price for all team member surveys 5. Teams draw the demand curve for their product and post it on the board.