Markets

What is a market? markets are places where 1 or more buyers and 1 or more sellers come together ex: swap meet, stock market, grocery store, E-Bay –good is a tangible item [product] that gives a person utility or satisfaction –service is an intangible item that gives a person utility or satisfaction utility = usefulness

Markets have 2 parts BuyersDemandBuyers provide the Demand SellersSupplySellers provide the Supply

Demand

What is demand? Demand- is the willingness and ability to purchase a good or service. –willingness to purchase refers to a person’s want or desire for a good –ability to purchase means having the money to pay for the good. You may want something but may not have the ability to pay for it. demandBOTH There is no demand unless BOTH components are there.

wants ≠ demand

The Law of Demand Law of Demand –as the price (P) of a good increases, the quantity demanded (Q D ) of the good decreases –as the price of a good decreases, the quantity demanded increases Quantity Demanded (Q D ) –the number of units of a good purchased at a specific price

Inverse Relationship between P and Q D P Q D

Why is this true? Costs v. Benefits Analysis Costs Rise –Price is one element of cost Benefits stay the same

Why is this true? Law of Demand When price rises, quantity demanded falls When price falls, quantity demanded rises Because... …of the Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility utility = usefulness

Economists like to use graphs to represent changes in demand A market can be described by analyzing supply and demand

Demand Schedule a numerical chart that shows the law of demand PriceQuantity Demanded $4 $3 $2 $ as price falls, demand increases

Demand Curve a graphic representation of the law of demand PriceQuantity Demanded $4 $3 $2 $ Let’s convert the ipod demand schedule to a demand curve.

Shifts in Demand Curves

Demand increases DC shifts Right Demand decreases DC shifts left W hat causes demand curves to shift? Shifts in Demand Curves

Now the ipod not only has all its original features,but also has all the answers to your homework in a print format How will that change the demand curve? Can you predict other things that might cause a demand curve to shift?

What causes demand curves to shift? PreferencesPreferences Number of BuyersNumber of Buyers IncomeIncome Price of Related GoodsPrice of Related Goods Buyers demand more or less of a good at all prices

Preferences Fads Styles Change

Number of Buyers Population Changes –birth/death rate –migration

Income Income may shift demand curve (affects ability) If income increases and… –More of a good is demanded: NORMAL GOOD –Less of the good is demanded: INFERIOR GOOD –Neither more or less of the good is demanded: NEUTRAL GOOD

Price of Related Goods 2 types of related goods –Substitutes –Coke for Pepsi »Price increase for Coke—demand increase for Pepsi –Complements –Peanut Butter and Jelly »Price increase for pb—demand decrease for j

Caution! Change of Demand (shift of demand curve) IS NOT THE SAME AS Change in Quantity Demanded (change along the line-based only on change in price)