Chapter 4 Demand, Supply and Markets
description
Transcript of Chapter 4 Demand, Supply and Markets
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Chapter 4 Demand, Supply
and Markets
These slides supplement the textbook, but should not replace reading the textbook
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What is a market?A group of buyers and sellers with the potential to trade
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What is demand?A relation showing the quantities of a good consumers are willing and able to buy at various prices during a given period of time, other things constant
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What is ademand curve?
A curve showing the quantities of a commodity demanded at various possible prices, other things constant
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What is a change in quantity demanded?A movement along the demand curve in response to a change in the price, other things constant
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Why do demand curves have a negative slope?At a higher price, consumers will buy fewer units; at a lower price, they will buy more units
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What does an inverse relationship between
price and quantity mean? It means that the two move in opposite directions
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What is thelaw of demand?
The quantity of a good demanded is inversely related to its price, other things constant
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What is ademand schedule?
Shows the specific quantity of a good or service that people are willing and able to buy at different prices
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The Demand Schedule for Milk
Price per quartQuantity demanded
per Month (millions of quarts)
a
b
c
d
e
$1.25
1.00
0.75
0.50
0.25
8
14
20
26
32
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Millions of quarts per month
Pri
ce p
er q
uar
t
8 14 20 26 32
$1.251.00
0.750.500.25
0
abcdeD
The Demand Curve for Milk
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Why do consumers buy more as price
decreases and less when price increases?
Substitution effectIncome effect
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What is thesubstitution effect?
When the price of a good falls, consumers will substitute it for other goods, which are now relatively expensive
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What is money income?The number of dollars received per period of time, such as $100 per week
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What is real income?Income measured in terms of the goods and services it can buy
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What is theincome effect?
A fall in the price of a good increases consumers’ real income, making them more able to purchase all goods, so the quantity demanded increases
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What isindividual demand?The demand for an individual consumer
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What is market demand?
The sum of the individual demands of all consumers in the market
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What is a normal good?A good for which demand increases as consumer income rises
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What is aninferior good?
A good for which demand decreases as consumer income rises
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What are complements?Goods that are related in such a way that an increase in the price of one leads to a decrease in the demand for the other
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What are substitutes?Goods that are related in such a way that an increase in the price of one leads to an increase in the demand for the other
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What is achange in demand?
A shift in a given demand curve caused by a change in one of the nonprice determinants of demand for the good
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An Increase in the Demand for Milk
8 14 20 26 32Millions of quarts
per month
Pri
ce p
er q
uar
t $1.251.00
0.750.500.25
0DD'
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IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND
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What can cause a change in the demand of a good or service?
A change in ...
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Number in the marketConsumer incomePrices of related goodsConsumer expectationsConsumer demographicsConsumer tastes
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What is supply?A relation showing the quantities of a good producers are willing and able to sell at various prices during a given time period, other things constant
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What is asupply curve?
A curve showing the quantities of a good supplied at various prices, other things constant
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What is thelaw of supply?
The quantity of a product supplied in a given time period is usually directly related to its price, other things constant
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What is a change in quantity supplied?
A movement along the supply curve in response to a change in the price, other things constant
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The Supply Schedule for Milk
Quantity supplied per month (millions of quarts)
Price per quart
$1.25
1.00
0.75
0.50
0.25
28
24
20
16
12
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The Supply Curve for Milk
Millions of quarts per month
Pri
ce p
er q
uar
t
12 16 20 24 28
$1.251.00
0.750.500.25
0
S
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What arerelevant resources?
Resources used to produce the good in question
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What arealternative goods?
Other goods that use some of the same types of resources used to produce the good in question
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IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY
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What is achange in supply?
A shift in a given supply curve caused by a change in one of the nonprice determinants of the supply of the good
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What can cause a change in the supply of a good or service?
A change in ...
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TechnologyPrices of relevant resources
Prices of alternative goodsProducer expectationsNumber of producers
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What happens when we put demand and
supply together?
Equilibrium
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What is an equilibrium?
An equilibrium is the point toward which the economy tends
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What is disequilibrium?
Usually a temporary mismatch between quantity supplied and quantity demanded as the market seeks equilibrium
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What is a surplus?An excess quantity supplied over quantity demanded at a given price
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Why is a surplus a disequilibrium?
When there is a surplus the supplier will lower the price to get rid of the surplus
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What is a shortage?An excess of quantity demanded over quantity supplied at a given price
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Why is a shortage a disequilibrium?
When there is a shortage consumers will bid up the price to determine who gets and who does not get
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What is market equilibrium?
The condition that exists in a market when the plans of the buyers match the plans of the sellers
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Equilibrium in the Milk MarketPanel B: Market Curves
Millions of quarts per month
Pri
ce p
er q
uar
t $1.251.00
0.750.500.25
01416 20 24 26
D
SSurplus
Shortage
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What causes an increase in equilibrium price?
An increase in demand or a decrease in supply
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Millions of quarts per month
Pri
ce p
er q
uar
t
20 24
$1.000.75
0
Effects of an Increase in Demand
S
D'D
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Effects of a Decrease in Supply
Millions of quarts per month
Pri
ce p
er q
uar
t
0 20 26
D
S0.75
0.50
S’
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What causes a decrease in equilibrium price?
A decrease in demand or an increase in supply
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Millions of quarts per month
Pri
ce p
er q
uar
t
20 24
$1.000.75
0
Effects of a Decrease in Demand
S
D
D’
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Effects of an Increase in Supply
Millions of quarts per month
Pri
ce p
er q
uar
t
020 26
D
S'0.75
0.50
S
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P'
S
D'
S'
DQ'
Units per period
Pri
ce
P
0
An Increase in Supply and Demand Panel A: Shift in Demand Dominates
Q
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56Units per period
Pri
ce
P
0
An Increase in Supply and Demand Panel B: Shift in Supply Dominates
Q
P''
S
Q''
S''
DD''
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What is a price floor?A minimum legal price below which a good or service cannot be sold
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Millions of wage earners
Wag
e ra
te p
er h
ou
r
14 24
$6.00
0
Effects of a Price Floor for Labor (minimum wage)
S
D
Surplus
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What is a price ceiling?A maximum legal price above which a good or service cannot be sold
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Thousands of rental units per month
Pri
ce p
er u
nit
40 60
$400
0
Effects of a Price Ceiling for Rent
SD
Shortage
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