The Market Forces of Supply and Demand Chapter 4 by yanling

The Market Forces of Supply and Demand uSupply and demand are the two words that economists use most often. uSupply and demand are the forces that make market economies work. uModern microeconomics is about supply, demand, and market equilibrium.

Markets uA market is a group of buyers and sellers of a particular good or service. uThe terms supply and demand refer to the behavior of people... as they interact with one another in markets.

Markets u Buyers determine demand. u Sellers determine supply.

Market Type: A Competitive Market A competitive market is a market...  with many buyers and sellers.  that is not controlled by any one person.  in which a narrow range of prices are established that buyers and sellers act upon.

Demand Quantity demanded is the amount of a good that buyers are willing and able to purchase. （ p32)

Law of Demand The law of demand states that there is an inverse relationship between price and quantity demanded.

Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

Demand Schedule

Determinants of Demand uMarket price uConsumer income uPrices of related goods uTastes uExpectations

Demand Curve The demand curve is the downward- sloping line relating price to quantity demanded.

Demand Curve $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0

Ceteris Paribus Ceteris paribus is a Latin phrase that means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “ other things being equal. ” The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded!

Determinants of Demand uMarket price uConsumer income uPrices of related goods uTastes uExpectations

Change in Quantity Demanded versus Change in Demand Change in Quantity Demanded uMovement along the demand curve. uCaused by a change in the price of the product.

Changes in Quantity Demanded 0 D1D1 Price of Cigarettes per Pack Number of Cigarettes Smoked per Day A tax that raises the price of cigarettes results in a movement along the demand curve. A C $

Change in Quantity Demanded versus Change in Demand Change in Demand uA shift in the demand curve, either to the left or right. uCaused by a change in a determinant other than the price.

Changes in Demand 0 D1D1 Price of Ice-Cream Cone Quantity of Ice-Cream Cones D3D3 D2D2 Increase in demand Decrease in demand

Consumer Income uAs income increases the demand for a normal good will increase. uAs income increases the demand for an inferior good will decrease.

Consumer Income Normal Good $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand An increase in income... D1D1 D2D2

Consumer Income Inferior Good $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Decrease in demand An increase in income... D1D1 D2D2

Prices of Related Goods Substitutes & Complements uWhen a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. EX.: milk and soya milk/ BMW and Audi. uWhen a fall in the price of one good increases the demand for another good, the two goods are called complements. Ex: squash balls and squash racquets.

Change in Quantity Demanded versus Change in Demand

Exercises: a)The price of a can of Coke has increased from $1 to $3. Does this cause a movement along or a shift of the demand curve for Coke? Why? b)A new scientific research has proven that Coke drinkers live on average 5 years longer. Does this finding cause a movement along or a shift of the demand curve for Coke? Why? c) What would be the effect of a sharp increase in the price of squash balls on the demand for squash racquets? Why?

d) What would be the effect of a sharp increase in the price of Pepsi on the demand for Coke? Why? e) As Larissa’s income goes up, she buys less instant noodles. What kind of good is instant noodles for Larissa? f) Following David Beckham, more men start to follow the fashion of Wearing skirts. What would the effect of this change in tastes on the demand for skirts? g) Scientists announce that there will be no fish left in the oceans in 5 years. What would be the effect of this announcement on demand for sushi?