Where Prices Come From: The Interaction of Demand and Supply

The Demand Side of the Market LEARNING OBJECTIVE 1 The Demand Side of the Market The Demand of an Individual Buyer 3 - 1 Plotting a Price-Quantity Combination on a Graph Quantity demanded The quantity of a good or service that a consumer is willing and able to purchase at a given price.

The Demand Side of the Market Demand Schedules and Demand Curves 3 - 2 Kate’s Demand Schedule and Demand Curve

The Demand Side of the Market Demand Schedules and Demand Curves Demand curve A curve that shows the relationship between the price of a product and the quantity of the product demanded. Demand schedule A table showing the relationship between the price of a product and the quantity of the product demanded.

The Demand Side of the Market Individual Demand and Market Demand Market demand The demand by all the consumers of a given good or service. The Law of Demand The Law of Demand Holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

The Demand Side of the Market What Explains the Law of Demand? Substitution effect The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes. Income effect The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumer purchasing power.

The Demand Side of the Market Holding Everything Else Constant: The Ceteris Paribus Condition Ceteris paribus (“all else equal”) The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.

The Demand Side of the Market Holding Everything Else Constant: The Ceteris Paribus Condition 3 - 4 Shifting the Demand Curve

The Demand Side of the Market Variables That Shift Market Demand Price of related goods Substitutes Goods and services that can be used for the same purpose. Complements Goods that are used together. Income Normal good A good for which the demand increases as income rises and decreases as income falls. Inferior good A good for which the demand increases as income falls, and decreases as income rises. Tastes Population and demographics Demographics The characteristics of a population with respect to age, race, and gender. Expected future prices

The Demand Side of the Market Variables That Shift Market Demand 3 - 1 Variables That Shift Market Demand Curves

The Demand Side of the Market Variables That Shift Market Demand 3 - 1 (continued) Variables That Shift Market Demand Curves

The Demand Side of the Market A Change in Demand versus a Change in Quantity Demanded 3 - 5 A Change in Demand versus a Change in the Quantity Demanded

The Supply Side of the Market LEARNING OBJECTIVE 2 The Supply Side of the Market Quantity supplied The quantity of a good or service that a firm is willing and able to supply at a given price. Supply Schedules and Supply Curves Supply schedule A table that shows the relationship between the price of a product and the quantity of the product supplied. Supply curve A curve that shows the relationship between the price of a product and the quantity of the product demanded.

The Supply Side of the Market Supply Schedules and Supply Curves 3 - 6 Hewlett-Packard’s Supply Schedule and Supply Curve

The Supply Side of the Market The Law of Supply Law of supply Holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

The Supply Side of the Market Variables That Shift Supply 3 - 8 Shifting the Supply Curve

The Supply Side of the Market Variables That Shift Supply Price of inputs Technological change A positive or negative change in the ability of a firm to produce a given level of output with a given amount of inputs. Prices of substitutes in production Expected future prices Number of firms in the market

The Supply Side of the Market Variables That Shift Supply 3 - 2 Variables That Shift Market Supply Curves

The Supply Side of the Market Variables That Shift Supply 3 - 2 (continued) Variables That Shift Market Supply Curves

The Supply Side of the Market A Change in Supply versus a Change in Quantity Supplied A Change in Supply versus a Change in the Quantity Supplied 3 - 9

Market Equilibrium: Putting Demand and Supply Together LEARNING OBJECTIVE 3 Market Equilibrium: Putting Demand and Supply Together 3 - 10 Market Equilibrium Market equilibrium A situation in which quantity demanded equals quantity supplied. Competitive market equilibrium A market equilibrium with many buyers and many sellers.

Market Equilibrium: Putting Demand and Supply Together How Markets Eliminate Surpluses and Shortages 3 - 11 The Effect of Surpluses and Shortages on the Market Price Surplus A situation in which the quantity supplied is greater than the quantity demanded. Shortage A situation in which the quantity demanded is greater than the quantity supplied.

The Effect of Demand and Supply Shifts on Equilibrium LEARNING OBJECTIVE 4 The Effect of Demand and Supply Shifts on Equilibrium The Effect of Shifts in Supply on Equilibrium 3 - 12 The Effect of a Decrease in Supply on Equilibrium

3 - 4 The Falling Price of Large Flat-Screen Televisions Corning’s breakthrough spurred the manufacture of LCD televisions in Taiwan, South Korea, and Japan, and an eventual decline in price.

The Effect of Demand and Supply Shifts on Equilibrium The Effect of Shifts in Demand on Equilibrium 3 - 13 The Effect of an Increase in Demand on Equilibrium

3 - 2 High Demand and Low Prices in the Lobster Market? LEARNING OBJECTIVE 4 High Demand and Low Prices in the Lobster Market? Supply and demand for lobster both increase during the summer, but the increase in supply is greater than the increase in demand, therefore, equilibrium price falls.

Ceteris paribus (“all else equal”) Competitive market equilibrium Complements Demand curve Demand schedule Demographics Income effect Inferior good Law of demand Law of supply Market demand Market equilibrium Normal good Quantity demanded Quantity supplied Shortage Substitutes Substitution effect Supply curve Supply schedule Surplus Technological change