1. Individual Markets Demand & Supply
Chapter 3
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2. Markets Buyers and sellers are brought together.
All situations that link potential buyers with potential sellers are markets.
Markets are face-to-face, impersonal, local, national, or international.
Markets exist in many forms: corner gas station, e-commerce sites, local music store, farmer’s roadside stand are markets.
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3. Demand
Various amounts of a product that consumers are willing & able to buy at different prices
Can be shown in table or graph form
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4. Demand Schedule (Table 3.1)
Price
Quantity Demanded $5 10 4 20 3 35 2 55 1 80
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5. Law of Demand
As price falls, the quantity demanded rises, and vice versa.
Negative or inverse relationship between price and quantity demanded.
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6. Inverse Relationship People buy more of a product at a low price.
Buyers derive less satisfaction (utility) from each additional unit consumed.
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7. Income & Substitution Effects
Income effect
lower prices increase purchasing power of an individual’s money
Substitution effect
lower prices provide incentive to the buyer to substitute to what is now a less expensive product.
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8. Market Demand
By adding the quantities demanded by all consumers at each price, we can get the market demand.
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9. Market Demand Schedule (Table 3.2)
Price
Buyer
Market Demand
Mitch
Zach
Rashad 5 10 12 8 30 4 20 23 17 60 3 35 39 26
100 2 55
154 1 80 87 54
221
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10. Determinants of Demand
Price
Consumer taste (preference)
# of consumers in the market
Consumer income
Price of related goods
Consumer expectations about future prices and incomes.
2) A favorable change in taste for a product will increase demand and the curve will shift to the right.
3) An increase in the number of buyers in a market increases demand.
4) A rise in income causes an increase in demand.
5) A change in the price of a related good may either increase or decrease the demand for a product depending on whether the related good is a substitute of complement.
6) If people expect something to occur in the future that may affect price, their demand will be influenced.
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11. Related Goods
Substitute good- a good that can be used in place of another good.
Complementary good- a good that is used together with another good.
When two products are complements, the price of one good and the demand for the other good move in opposite directions.
Beef and chicken are examples of substitutes. I.e. when the price of beef rises, consumers buy less beef, increasing the demand for chicken.
Goods that are used together and are usually demanded together. I.e. if the price of gasoline falls, and, as a result, you drive your car more often, the extra driving increases your demand for motor oil.
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12. Change in Demand
When at least one determinants of demand changes the entire demand curve will shift.
Increase- curve will shift to right.
Decrease- curve will shift to left.
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13. Changes in quantity demanded
Don’t confuse with “change in demand.”
Change in demand- entire shift of curve.
Change in quantity demanded- movement from one point to another on the “same” curve.
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14. Normal & Inferior Goods
Normal- As income rises, demand increases for this type of product (i.e. Luxury goods)
Inferior- As income falls, demand increases for this type of product (i.e. Mac N cheese)
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15. Supply
A schedule or curve showing the amounts of a product that producers are willing and able to make available for sale at each price.
Supply schedule- shows the quantities of corn that will be supplied at various prices.
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16. Supply Schedule
Price
Quantity Supplied 5 60 4 50 3 35 2 20 1
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17. Law of Supply
Positive or direct relationship exists between price and quantity supplied.
As price rises, quantity supplied rises.
Common sense…if businesses can get a higher price, they are willing to increase supply to make more money.
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18. Determinants of Supply
Resource prices
Technology
Taxes and subsidies
Prices of other goods
Price expectations
# of sellers in the market
I.e. if it costs more money to produce something, the supply will decrease
Improvements in technology enable firms to produce things in a less expensive fashion.
Taxes discourage supply increases, subsidies encourage it.
6) As more sellers enter the market, supply curve shifts to right lowering price.
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19. Changes in Quantity Supplied
Just like demand:
Movement along a supply curve
Don’t confuse with “change in supply”
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20. Equilibrium Price & Quantity
Quantity supply = quantity demanded.
Also called “market-clearing” price.
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21. Surpluses Excess supply This is above equilibrium price.
Quantity supplied is greater than quantity demanded.
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22. Shortages Quantity demanded is greater than quantity supplied.
This is below equilibrium price.
Excess demand.
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23. Supply & Demand Schedule
Price
Demand
Surplus/
Shortage
12,000 5
2,000
+10,000
10,000 4
4,000
+6,000
7,000 3
Equilibrium 2
11,000
-7,000
1,000 1
16,000
-15,000
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24. Price Floors & Ceilings
Aids the seller
Above equilibrium (surplus)
Ceilings
Aids the buyer
Below equilibrium (shortage)
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