1. Demand, supply and market equilibrium Basic decision-making units in market (the circular flow)

2. Household demand in product market Household’s decision about quantity demanded (number of units per period of time) depends on: - Price of product (p) - Income of household (normal vs. inferior goods) (y) - Household’s wealth (w) - Prices of other products (substitutes vs. complementary goods) (op) - Household’s tastes and preferences (pref) - Expectations about future income, wealth, and prices (exp)

3. Household demand curve issues Household demand curve: A graph illustrating how much of a product a household would be willing to buy at different prices. q p 0 D (y 0, w 0, op 0, pref 0, exp 0 ) Discussion: -Ceteris paribus or all else equal - Law of demand - Dem curve intersects q axis (time limitations and diminishing marginal utility) - Dem curve intersects p axis (limited income and wealth) - Change in income

4. From household demand to market demand Market demand: The sum of the quantities of a good demanded per period by all the households buying in that market.

5. Firm supply in product markets Firms engage in production to maximize profits. Therefore, firm’s decision about the quantity supplied (number of units per period of time) depends on: - Price of product (p) - Cost of producing the product: price of inputs (e.g. wage (w) and interest rate (r)), technology used (tech), short run limitations - Prices of other products (op)

6. Firm supply curve issues Firm supply curve: A graph illustrating how much of a product a firm would be willing to sell at different prices. q p 0 Discussion: - Law of supply - Change in wages - Short run vs. long run supply curve S (w 0, r 0, tech 0, op 0 )

7. From firm supply to market supply Market supply: The sum of what is supplied each period by all producers of a single product.

8. Market equilibrium Market equilibrium: The condition that exist when quantity supplied and quantity demanded are equal. At equilibrium there is no tendency for price to change. q p 0 S D q eq p eq Example: S: q s = -10 + p D: q d = 20 – p p eq =15, q eq =5 equilibrium point

9. Stability of market equilibrium Economists like equilibriums, but we love those that are stable!!! Stable equilibrium: The system always returns to it after small disturbances. Unstable equilibrium: The system moves away from the equilibrium after small disturbances

10. Stability of market equilibrium q p 0 S D equilibrium point excess demand excess supply p0p0 p1p1 The inherent forces of the market move the system to its equilibrium!!!

11. Changes in Equilibrium q p 0 S D 0 eq. point 0 Example: Increase in income D 1 eq. point 1