Paul Schneiderman, Ph.D., Professor of Finance & Economics, Southern New Hampshire University ©2008 South-Western

Market Any place people come together to trade Trade or exchange may take place at a physical or virtual location

Demand - A Definition The willingness and ability of buyers: to purchase different quantities of a good at different prices during a specific time period.

Law of Demand As the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises, ceteris paribus Price Quantity

Ceteris Paribus A Latin term meaning “all other things constant” or “nothing else changes.” Ceteris paribus is an assumption used to examine the effect of one influence on an outcome while holding all other influences Constant.

Demand Click graph to watch tutorial on demand.

Demand Schedule The numerical tabulation of the quantity demanded of a good at different prices. A demand schedule is the numerical representation of the law of demand.

Downward Slopping Demand Curve The graphical representation of the demand schedule and law of demand.

Demand - Schedule and Graph

Why does the price of one more day at Disney World cost less than the cost of the first day?

Law of Diminishing Marginal Utility For a given time period, the marginal (additional) utility or satisfaction gained by consuming equal successive units of a good will decline as the amount consumed increases.

Derivation of Market Demand Schedule

Derivation of Market Demand Curve

Change in Quantity Demanded

Change in Demand

Factors Causing a Shift in the Demand Curve  Income  Preferences  Prices of substitute goods  Prices of complementary goods  Number of buyers  Expectations of future prices

Factors Causing a Shift in the Demand Curve - Income Normal Good - A good the demand for which rises (falls) as income rises (falls). Inferior Good - A good the demand for which falls (rises) as income rises (falls). Neutral Good – A good the demand for which does not change as income rises or falls.

Factors Causing a Shift in the Demand Curve - Substitutes Substitutes Two goods that satisfy similar needs or desires. If two goods are substitutes, the demand for one rises as the price of the other rises (or the demand for one falls as the price of the other falls).

Factors Causing a Shift in the Demand Curve - Complements Complements Two goods that are used jointly in consumption. If two goods are complements, the demand for one rises as the price of the other falls (or the demand for one falls as the price of the other rises).

Effect on Demand if Price Increases on a Substitute Good

Effect on Demand if Price Increases on a Complementary Good

Self Test Questions  As Sandi’s income rises, her demand for popcorn rises. As Mark’s income falls, his demand for prepaid telephone cards rises. What kinds of goods are popcorn and telephone cards for the people who demand each?  Why are demand curves downward sloping?  Give an example that illustrates how to derive a market demand curve.  What factors can change demand? What factors can change quantity demanded?

Supply Click graph to watch tutorial

Supply The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period.

Law of Supply As the price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of the good falls, ceteris paribus. Price Quantity

Supply Curve The graphical representation of the law of supply, which states that price and quantity supplied are directly related, ceteris paribus.

Fixed Supply

Supply Schedule  The numerical tabulation of the quantity supplied of a good at different prices.  A supply schedule is the numerical representation of the law of supply.

Deriving a Market Supply Schedule

Deriving a Market Supply Curve

Factors that Cause the Supply Curve to Shift  Prices of relevant resources  Technology  Number of sellers  Expectation of future prices  Taxes and subsidies  Government restrictions

Change in Supply

Change in Quantity Supplied  A change in quantity supplied refers to a movement along a supply curve.  The only factor that can directly cause a change in the quantity supplied of a good is a change in the price of the good, or own price.

Change in Quantity Supplied

Self Test Questions  What would the supply curve for houses (in a given city) look like for a time period of (a) the next ten hours and (b) the next three months?  What happens to the supply curve if each of the following occurs? a.There is a decrease in the number of sellers. b.A per-unit tax is placed on the production of a good. c. The price of a relevant resource falls.  3.“If the price of apples rises, the supply of apples will rise.” True or false? Explain your answer.

Market Equilibrium Click graph to watch tutorial

Putting Supply and Demand Together

Market Equilibrium  Equilibrium in a market is the price quantity combination from which there is no tendency for buyers or sellers to move away.  Graphically, equilibrium is the intersection point of the supply and demand curves.

Equilibrium Equilibrium Price (Market- Clearing Price) The price at which quantity demanded of the good equals quantity supplied

Surplus and Shortage Surplus (Excess Supply) - A condition in which quantity supplied is greater than quantity demanded. Surpluses occur only at prices above equilibrium price. Shortage (Excess Demand) - A condition in which quantity demanded is greater than quantity supplied. Shortages occur only at prices below equilibrium price.

Move to Market Equilibrium

Market Demand and Supply

Moving to Equilibrium Equilibrium

Self-Test Questions  When a person goes to the grocery store to buy food, there is no auctioneer calling out prices for bread, milk, and other items. Therefore, supply and demand cannot be operative. Do you agree or disagree? Explain your answer.  The price of a given-quality personal computer is lower today than it was five years ago. Is this necessarily the result of a lower demand for computers? Explain your answer.

Self-Test Questions (continued)  What is the effect on equilibrium price and quantity of the following? a.A decrease in demand that is greater than the increase in supply b.An increase in supply c.A decrease in supply that is greater than the increase in demand d.A decrease in demand

Self-Test Questions (continued)  At equilibrium quantity, what is the relationship between the maximum buying price and the minimum selling price?  If the price paid is $40 and the consumers’ surplus is $4, then what is the maximum buying price? If the minimum selling price is $30 and producers’ surplus is $4, then what is the price received by the seller?

Price Controls Click graph to watch tutorial

Price Controls Price Ceiling - A government-mandated maximum price above which legal trades cannot be made. Price Floor - A government-mandated minimum price below which legal trades cannot be made.

Price Ceiling

Price Floor

Self Test Questions  Do buyers prefer lower prices to higher prices?  “When there are long-lasting shortages, there are long lines of people waiting to buy goods. It follows that the shortages cause the long lines.” Do you agree or disagree? Explain your answer.  Who might argue for a price ceiling? a price floor?