2.  Supply & Demand is really a theory on how buyers and sellers interact with one another, and how prices are determined

3.  Organized or not, markets are a grouping of buyers & sellers  We are going to assume in this chapter that we have “competitive markets” meaning there are many buyers & many sellers – each has a very small impact on market price

4.  Two characteristics: 1. Good being offered for sale are all the same 2. Buyers & sellers are so numerous no single buyer can influence the market price  We’ll discuss other markets later such as monopolies, oligopolies, etc…

5.  Quantity Demanded = amount of a good that buyers are willing and able to purchase  What is the biggest determinant of demand?

6.  What is the relationship between price & demand?  Law of Demand: Other things being equal, the quantity demanded of a product is negatively related to the price; if the price rises, the quantity demanded falls

7.  These are things that can shift Demand 1. Income - Normal Good vs. Inferior Good 2. Prices of Related Goods - Substitutes & Complements 3. Tastes 4. Future expectations *** YOU MUST KNOW THESE ***

8.  Market Demand is the sum of all individual demands for a good/service - They are summed horizontally

9.  Fancy Latin term that means “other things being equal”

10.  Price changes cause a change in Quantity Demanded while other determinants (Income, Tastes, Related Goods, Expectations) cause a change or shift in Demand  Therefore, when price changes we move along the demand curve, but other determinants cause the entire curve to shift at all prices

11. 1. The amount of a good willing to be purchased at a given price 2. The amount of a good willing to be produced at a given price 3. The amount of a good willing to be purchased if prices of that good are kept constant 4. The amount of a good willing to be purchased if income can vary 5. The relationship that exists between price and demand at a variety of purchases

12. 1. Price 2. Demand 3. Supply 4. Quantity 5. Elasticity

13. 1. A change in the price of apples grown in Washington state 2. A drastic reduction in the incomes of people living in the U.S. 3. An article in the NY Times stating that an apple a day may lead to cancer 4. A drastic increase in the incomes of people living in the U.S. 5. A hurricane that destroys all apple orchards on the East Coast

14. 1. An increase in the price of marshmallows will decrease the demand for this good 2. An increase in consumer incomes will decrease the demand for this good 3. A decrease in consumer incomes will decrease the demand for this good 4. An increase in consumer incomes will increase the quantity demanded of this good 5. A change in income will have no effect on the demand or quantity demanded of this good