1 Chapter 3 Market Supply and Demand ©2002 South-Western College Publishing Key Concepts Key Concepts Summary Practice Quiz Internet Exercises Internet Exercises

2 What is the law of demand? The principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus

3 What does “ceteris paribus” mean? All else remains the same

4 What is a demand curve? Depicts the relationship between price and quantity demanded

5 $20 $15 $10 $ A B C D Individual’s Demand Curve for Compact Discs Demand Curve P Q

6 Why do demand curves have a negative slope? At a higher price consumers will buy fewer units, and at a lower price they will buy more units

7 What is a demand schedule? Shows the specific quantity of a good or service that people are willing and able to buy at different prices

8 What is market demand? The summation of the individual demand schedules

9 IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND

10 When price changes, what happens? The curve does not shift - there is a change in the quantity demanded

11 Decrease in Price Increase in Quantity Demanded

12 $20 $15 $10 $ P Q Fred’s Demand Curve D1D1

13 $20 $15 $10 $ P Q Mary’s Demand Curve D2D2

14 $20 $15 $10 $ P Q Market Demand Curve D3D3 12

15

16 $ = 1 $ $ $ $ Price Fred Mary Total Demanded Market Demand Schedule for Compact Discs

17 $20 $15 $10 $ A B A change in price causes a change in the quantity demanded D P Q 50

18 When something changes other than price, what happens? The whole curve shifts,there is a change in demand

19 $20 $15 $10 $ D1D1 D2D2 P 50 A When the ceteris paribus assumption is relaxed, the whole curve can shift Q B

20 Change in nonprice determinant Increase in demand

21 What can cause a shift in a demand curve? Tastes and preferences Number of buyers in the market Income Expectations of consumers Prices of related goods

22 Price increases Upward movement along the demand curve Decrease in quantity demanded

23 Price decreases Downward movement along the demand curve Increase in quantity demanded

24 Nonprice determinant Leftward or rightward shift in the demand curve Decrease or increase in demand

25 What is a normal good? Any good for which there is a direct relationship between changes in income and its demand curve

26 What is an inferior good? Any good for which there is an inverse relationship between changes in income and its demand curve

27 What are substitute goods? Goods that compete with one another for consumer purchases

28 What happens when the price increases for a good that has a substitute? The demand curve for the substitute good increases

29 What happens when the price decreases for a good that has a substitute? The demand curve for the substitute good decreases

30 What does a direct relationship between price and quantity mean? The two move in the same direction

31 What are complementary goods? Goods that are jointly consumed with another good

32 What happens when the price increases for a good that has a complement? The demand curve for the complement good decreases

33 What happens when the price decreases for a good that has a complement? The demand curve for the complement good increases

34 What does an inverse relationship between price & quantity mean? It means that the two move in opposite directions

35 What is the law of supply? The principle that there is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus

36 Why do supply curves have a positive slope? Only at a higher price will it be profitable for sellers to incur the higher opportunity cost associated with supplying a larger quantity

37 $20 $15 $10 $ A B C Supply Curve A company’s Supply Curve for Compact Discs P Q

38 A $20 40 B C 6 20 Point Price Quantity An Individual Seller’s Supply for Compact Discs

39 $25 $20 $15 $10 10 P Q 1520 Super Sound Supply Curve S1S1 25

40 $25 $20 $15 $10 20 P Q 2530 High Vibes Supply Curve S2S2 35

41 What is a market? Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged

42 What is market supply? The horizontal summation of all the quantities supplied at various prices that might prevail in the market

43 $25 $20 $15 $10 40 P Q 4555 Market Supply Curve 60 S total

44 $ = 60 $ $ $ $ Price Super Sound High Vibes Total Market Supply Schedule for Compact Discs

45 IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY

46 When price changes, what happens? The curve does not shift - there is a change in the quantity supplied

47 $20 $15 $10 $ A B C Supply Curve A change in price causes a change in the quantity supplied P Q

48 Increase in Price Increase in Quantity Supplied

49 When something changes other than price, what happens? The whole curve shifts - there is a change in supply

50 $20 $15 $10 $ S1S1 S2S2 When the ceteris paribus assumption is relaxed, the whole curve can shift P Q

51 Change in nonprice determinant Increase in supply

52 What can cause a shift in a supply curve? 1. Number of sellers in the market 2. Technology 3. Resource prices 4. Taxes and subsidies 5. Expectations of producers 6. Prices of other goods the firm could produce

53 $120 $90 $60 $30 1,0002,0003,0004,000 D S The Supply & Demand for Tennis Shoes P Q Surplus Shortage

54 What is an equilibrium? A market condition that occurs at any price for which the quantity demanded and the quantity supplied are equal

55 What is the price system? A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices

56 Key Concepts

57 Key Concepts What is the law of demand? What is a demand curve? Why do demand curves have a negative slope?Why do demand curves have a negative slope? When price changes, what happens? When something changes other than price, what happens?When something changes other than price, what happens? What can cause a shift in a demand curve?

58 Key Concepts cont. What is the law of supply? Why do supply curves have a positive slope?Why do supply curves have a positive slope? When price changes, what happens? When something changes other than price, what happens?When something changes other than price, what happens? What can cause a shift in a supply curve? What is a market? What is an equilibrium?

59 Summary

60 The law of demand states there is an inverse relationship between the price and the quantity demanded, ceteris paribus. A market demand curve is the horizontal summation of individual demand curves.

61 $20 $15 $10 $ A B C D Individual’s Demand Curve for Compact Discs Demand Curve P Q

62 A change in quantity demanded is a movement along a stationary demand curve caused by a change in price. When any of the nonprice determinants of demand changes, the demand curve responds by shifting. An increase in demand (rightward shift) or a decrease in demand (leftward shift) is caused by a change in one of the nonprice determinants.

63 $20 $15 $10 $ D1D1 D2 P 50 A When the ceteris paribus assumption is relaxed, the whole curve can shift Q B

64 Nonprice determinants of demand: a. the number of buyers, b. tastes and preferences. c. income (normal and inferior). d. expectations of future p;rice and income changes, and e. prices of related goods (substitutes and complements)

65 The law of supply states there is a direst relationship between the price and the quantity supplied, ceteris paribus. The market supply curve is the horizontal summation of individual supply curves.

66 A change in quantity supplied is a movement along a stationary supply curve caused by a change in price. When any of the nonprice determinants of supply changes, the supply curve responds by shifting. An increase in supply (rightward shift) or a decrease in supply (leftward shift) is caused by a change in one of the nonprice determinants.

67 $20 $15 $10 $ A B C Supply Curve A company’s Supply Curve for Compact Discs P Q

68 $20 $15 $10 $ S1S1 S2S2 When the ceteris paribus assumption is relaxed, the whole curve can shift P Q

69 Nonprice determinants of supply: a. the number of sellers. b. technology c. resource prices. d. taxes and subsidies. e. expectations of future price changes, f. prices of other goods.

70 A surplus or shortage exists at any price where the quantity demanded and the quantity supplied are not equal. When the price of a good is greater than the equilibrium price, there is an excess quantity supplied called a surplus. When the price is less than the equilibrium price, there is an excess quantity demanded called a shortage.

71 Equilibrium is the unique price and quantity established at the intersection of the supply and the demand curves. Only at equilibrium does quantity demanded equal quantity supplied.

72 $120 $90 $60 $30 1,0002,0003,0004,000 D S The Supply & Demand for Tennis Shoes P Q Surplus Shortage

73 The price system is the supply and demand mechanism that establishes equilibrium through the ability of prices to rise or fall.

74 END