Microeconomics Demand and Supply

MARKET THEORY A MARKET IS WHERE BUYERS AND SELLERS COME TOGETHER TO CARRY OUT AN ECONOMIC TRANSACTION. PRODUCT MARKETS A PHYSICAL PLACE: MCDONALDS, GROCERY STORE, HAIR SALON AN ONLINE MARKET: EBAY, TAOBAO, 360BUY RESOURCE 0R “FACTOR” MARKETS THE LABOR MARKET REAL ESTATE MARKET FINANCIAL MARKETS STOCK EXCHANGE FOREIGN EXCHANGE MARKET

DEMAND AT THE CORE OF THE MARKET THEORY ARE THE CONCEPTS OF SUPPLY AND DEMAND. DEFINITION OF DEMAND: THE QUANTITY OF A GOOD OR SERVICE THAT CONSUMERS ARE WILLING AND ABLE TO PURCHASE AT A GIVEN PRICE IN A GIVEN TIME PERIOD. The important phrase here is willingness and ability. It is not enough for consumers to be willing to purchase a good or service, they must also be able to purchase it – meaning they have the financial means to buy the product. Thus the “ability to buy”.

EFFECTIVE DEMAND The important phrase here is willingness and ability. It is not enough for consumers to be willing to purchase a good or service, they must also be able to purchase it – meaning they have the financial means to buy the product. Thus the “ability to buy”. THIS IS KNOWN AS EFFECTIVE DEMAND AND IT IS THIS THAT IS SHOWN ON A DEMAND CURVE.

THE LAW OF DEMAND SIMPLY STATES THAT “AS THE PRICE OF A PRODUCT FALLS, THE QUANTITY DEMANDED WILL USUALLY INCREASE, ceteris paribus”. Ceteris paribus: Latin for “all other things being equal” – an assumption that when there are a number of different factors that determine something, only one is changing and the others are kept constant. In this case, Price is changing, but any other determinants of demand are assumed to be unchanging. THE DEMAND CURVE NORMALLY SLOPES DOWNWARD.

Demand Schedule for Soft Drinks …at a sports event Price of soft drinks ($) Quantity demanded of soft drinks (cans) 2.00 100 1.20 150 .80 225 .40 400

The Demand Curve P 19 in book Demand curves are normally convex at origin, but for ease of analysis, economists usually draw them as straight lines (even though they are called curves).

Increase in Demand – Why? Income Effect When the price of a project falls, then people will have an increase in their “real” income. “real” income reflects the amount that their incomes will buy. With this increase, the people are more likely to buy. Example: I have 28 RMB budgeted for lunch. McD lunch is only 14 RMB so I buy 2 instead of 1 lunch. Substitution Effect When the price falls, then the product will be relatively more attractive to people that other products (whose price hasn’t changed) Example: I buy McD coffee each day for 10 RMB. Costa changes their price to 15 RMB so I stop going to McD and switch to Costa.

Non-Price Determinants of Demand Income Normal Goods For most goods, as income rises the demand for the product will also rise. As income rises, the demand curve will shift to the right. Ex: Air Travel Inferior Goods For inferior products, the demand for the product will fall as income rises. This is because the consumer will start buying higher priced items. The demand curve will shift to the left and eventually disappear. Ex: cheap wine, “generic” soap

Non-Price Determinants of Demand The Price of Other Products Substitutes If the products are substitutes for each other, then a change in one will lead to a change in the demand of the other. Ex: Chicken and Beef Complements These are products that are often purchased together like printers and ink cartridges. A change in one lead to a change in the other. Ex: DVD players and DVDs

Non-Price Determinants of Demand Taste/Preferences Other Factors A trend or advertising campaign may influence demand. For example: Increase in Hamster sales during the Chinese Year of the Rat. The size of the population Changes in the age structure of the population Changes in Income distribution Government Policy changes Seasonal Changes

Movement along the curve or shift in curve? A change in the price of the good itself leads to a movement along the existing demand curve. A change in any of the other determinants will always lead to a shift to the right or left.

DUE: Tuesday Two Assignments 1. P 24 in book: Student workpoint 2.1 Use graph paper, label accurately 2. Worksheet – Demand Curves DUE: Tuesday