1. Market Demand and Supply
Key Concepts
Summary
©2005 South-Western College Publishing

2. Why is this chapter important?
This chapter is very important because it introduces basic supply and demand analysis

3. What is demand?
Demand represents the choice making behavior of buyers

4. What is supply?
Supply represents the choice making behavior of sellers

5. 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

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

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

8. Individual’s Demand Curve for Compact Discs
$20 B
$15 C
$10 D $5
Demand Curve Q 4 8 12 16

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

10. 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

11. What is market demand?
The summation of the individual demand schedules in a market

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

13. P
Fred’s Demand Curve
$20
$15
$10 $5 D1 Q 1 2 3 4 5 6 7 8 9

14. P
Mary’s Demand Curve
$20
$15
$10 D2 $5 Q 1 2 3 4 5 6 7 8 9

15. P
Market Demand Curve
$20
$15
$10 D3 $5 Q 3 4 5 6 7 8 9 10 11 12

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

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

19. Change in Quantity Demanded
Price

20. A change in price causes a change in the quantity demanded
$20 A
$15 B
$10 D $5 Q 10 20 30 40 50

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

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

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

24. P
When the ceteris paribus assumption is relaxed, the whole curve can shift
$20 A B
$15
$10 D2 D1 $5 Q 10 20 30 40 50

25. Change in nonprice determinant
Change in demand
Change in nonprice determinant

26. What can cause a demand curve to shift? A change in:
Number of buyers in the market
Tastes and preferences
Income
Expectations of consumers
Prices of related goods

27. Decrease or increase in demand
Leftward or rightward shift in the demand curve
Change in a Nonprice determinant

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

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

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

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

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

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

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

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

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

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

38. 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

39. 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

40. A company’s Supply Curve for Compact Discs
$20
$15 B
$10 C $5 Q 10 20 30 40

41. An Individual Seller’s Supply for Compact Discs
Point Price Quantity
A $ B C

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

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

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

45. Super Sound Supply Curve
$25
$20
$15
$10 Q 10 15 20 25

46. High Vibes Supply Curve
$25
$20
$15
$10 Q 20 25 30 35

47. P
Market Supply Curve
$25
$20
S total
$15
$10 Q 40 45 55 60

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

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

50. A change in price causes a change in the quantity supplied
Supply Curve A
$20
$15 B
$10 C $5 Q 10 20 30 40

51. Change in Quantity Supplied
Price

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

53. When the ceteris paribus assumption is relaxed, the whole curve can shift
$20 S1
$15
$10 $5 Q 10 20 30 40

54. Change in nonprice determinant
Change in supply
Change in nonprice determinant

55. What can cause a supply curve to shift? A change in:
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

56. What is the equilibrium price?
The price towards which the economy tends

57. Where is the equilibrium price?
At the price where the quantity demanded and the quantity supplied are equal

58. The Supply & Demand for Tennis Shoes
$120 S
$90
Surplus
$60
Shortage
$30 D Q
1,000
2,000
3,000
4,000

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

60. Key Concepts

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

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

63. Summary

64. 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.

65. Individual’s Demand Curve for Compact Discs
$20 B
$15 C
$10 D $5
Demand Curve Q 4 8 12 16

66. 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.

67. P
When the ceteris paribus assumption is relaxed, the whole curve can shift
$20 A B
$15
$10 D2 $5 D1 Q 10 20 30 40 50

68. 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)

69. 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.

70. 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.

71. A company’s Supply Curve for Compact Discs
$20
$15 B
$10 C $5 Q 10 20 30 40

72. P
When the ceteris paribus assumption is relaxed, the whole curve can shift S2 S1
$20
$15
$10 $5 Q 10 20 30 40

73. 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.

74. 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.

75. 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.

76. The Supply & Demand for Tennis Shoes
$120 S
$90
Surplus
$60
Shortage
$30 D Q
1,000
2,000
3,000
4,000

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

78. END