2.  Barter – goods are traded directly for other goods  Problem: › requires double coincidence of wants (have to find someone who has what I want and who also wants what I have)  Monetary economy solves this problem

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

4.  Buyers determine demand.  Sellers determine supply

5.  The forces that make market economies work!

6.  Quantity demanded is the amount of a good that buyers are willing and able to purchase.  Law of Demand › The law of demand states that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

7.  Demand Curve › The demand curve is a graph of the relationship between the price of a good and the quantity demanded.  Demand Schedule › The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

8. Copyright © 2004 South-Western Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1234567891011 Quantity of Ice-Cream Cones $3.00 12 1. A decrease in price... 2....increases quantity of cones demanded.

9.  Always called a Change in Quantity Demanded › Only caused by a change in the price of the product.  Remember change in price always equals a change in QUANTITY demanded  Change in quantity demanded always indicates movement along an existing demand curve Movement along an existing demand curve

10. 0 D Price of Ice- Cream Cones Quantity of Ice-Cream Cones A rise in the price of ice-cream cones results in a movement along the demand curve. A B 8 1.00 $2.00 4

11.  Consumer income changes - less money for treats Change in Demand – Creates an entirely new demand curve

12. › As income increases the demand for a normal good will increase. - steak, designer clothes, restaurant meals › As income increases the demand for an inferior good will decrease. - hot dogs, Ramen noodles, fast food › As income increases the demand for a neutral good will remain the same - gasoline, toothpaste, deodorant Changes in income = Shifts in the demand curve

13.  Consumer income changes - less money for treats  Prices of related goods - price change - sugar, cream, cones Change in Demand – Creates an entirely new demand curve

14. › When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. - coke and Pepsi, coffee and tea › When a fall in the price of one good increases the demand for another good, the two goods are called complements. - tennis racket and tennis ball, cars and tires Changes prices of related goods = Shifts in the demand curve

15.  Consumer income changes - less money for treats  Prices of related goods - price change - sugar, cream, cones  Tastes/Preferences - South Beach Diet (ice cream is bad) - ice cream cures cancer  Number of buyers - Immigrants love ice cream  Future Price - Expectations for changes in price Change in Demand – Creates an entirely new demand curve

16. › A shift in the demand curve, either to the left or right. › Caused by any change that alters the quantity demanded at every price. › This occurs when there is a change in a determinant of demand other than price. Change (Shift) in Demand – Creates an entirely new curve

17. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones Increase in demand Decrease in demand Demand curve,D 3 Demand curve,D 1 Demand curve,D 2 0

18. Fig. 2.8

19.  Quantity supplied is the amount of a good that sellers are willing and able to sell.  Law of Supply › The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises.

20.  Supply Curve › The supply curve is the graph of the relationship between the price of a good and the quantity supplied.  Supply Schedule › The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

21. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 1234567891011 Quantity of Ice-Cream Cones $3.00 12 0.50 1. An increase in price... 2.... increases quantity of cones supplied.

22.  Always called a Change in Quantity Supplied › Only caused by a change in the price of the product.  Remember change in price always equals a change in QUANTITY supplied  Change in quantity supplied always indicates movement along an existing supply curve Movement along an existing supply curve

23. 1 5 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve.

24. › A shift in the supply curve, either to the left or right. › Caused by any change that alters the quantity supplied at every price › This occurs when there is a change in a determinant of supply other than price.

25. Subsidies – government payments ex. targeted incentives to produce (corn, milk) Quotas – government limits to imports ex. protect national industries (auto) Resource prices – land, labor, capital prices increase or decrease ex. change in cost of production, oil prices up Technology – skills, knowledge, increased efficiency ex. New machines make production more profitable Taxes – government imposed increase in price, less profit for sellers ex. sin tax (cigarettes), gas, etc.

26. Number of sellers – Successful markets attract new sellers to open ex. increase in competition Future Price – changes supplier expectations ex. Gas prices will go up, suppliers hold back to make more money later Weather – nice or bad weather can change supply. ex. a hurricane wipes out tomato crops

27. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

28. Fig. 2.9

29.  A situation in which the supply of an item is exactly equal to its demand.  Price tends to remain stable in this situation.

30. D S P Q PQDQD QSQS $0240 1215 21810 315 41220 5925 6630 A situation in which the supply of an item is exactly equal to its demand.

31. P Q D S when quantity supplied is greater than quantity demanded Surplus Example: If P = $5, then Q D = 9 lattes and Q S = 25 lattes resulting in a surplus of 16 lattes

32. P Q D S when quantity demanded is greater than quantity supplied Example: If P = $1, then Q D = 21 lattes and Q S = 5 lattes resulting in a shortage of 16 lattes Shortage