all rights reserveddr. david p echevarria1 lecture #3: microeconomics chapter 4 markets demand...

All Rights Reserved Dr. David P Echevarria 1

LECTURE #3: MICROECONOMICSCHAPTER 4

MarketsDemand Supply

Equilibrium


Markets and Competition

Market: buyers and sellers for a particular good or service

Competition: several sellers of a good or servicePerfect competition = all goods same, no single

buyer or seller can dominate price.Must accept the price determined in the

marketPrice takers

At the market priceBuyers - buy all they wantSellers - sell all they want

Monopoly = one seller who sets the price


Demand (the Buyers)

Demand: the quantity of goods buyers are willing and able to buy

Law of DemandThe quantity demanded is a function of priceThe lower the price, the greater the demand

for a good Demand Schedule: the combinations of price

and quantity demanded – downward sloping to right.

G. Mankiw Dr. David P Echevarria 4

Demand curve

Catherine’s Demand Schedule and Demand Curve

The demand curve illustrates how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward.

Price ofIce-cream

cone

QD

Cones demanded

$0.000.501.001.502.002.503.00

121086420

0 1210 1191 2 3 4 5 6 7 8Quantity of Ice-Cream Cones

$3.00

2.50

2.00

1.50

1.00

0.50

Price of Ice-Cream

Cones 1. A decreasein price . . .

2. . . . increases quantityof cones demanded.


Demand (the Buyers)

Market vs. Individual DemandIndividual demand is a function of income,

prices of related goods, expectations and tastes

Market demand is the sum of individual demands

Increases (decreases) in aggregate demand move the demand curve to the right (left)

G. Mankiw 6

Market Demand as the Sum of Individual Demands

(Demand Schedule)

6

Price of ice-cream cone

Catherine

Nicholas

Market

$0.000.501.001.502.002.503.00

121086420

+ 7654321

= 19161310741

The quantity demanded in a market is the sum of the quantities demanded by all thebuyers at each price: e.g., If price = $2.00, then Catherine demands 4 ice-creamcones, and Nicholas demands 3 ice-cream cones. The total quantity demanded in themarket at this price is 7 cones.

G. Mankiw 7

Market Demand as the Sum of Individual Demands

7

DCatherine

0 1210 1191 2 3 4 5 6 7 8

Quantity of Ice-Cream Cones

$3.00

2.50

2.00

1.50

1.00

0.50

Price of Ice

CreamCones

Catherine’sdemand

DNicholas

0 1 2 3 4 5 6 7


$3.00

2.50

2.00

1.50

1.00

0.50

Price of Ice

CreamCones

Nicholas’s demand+ =

DMarket

0 182 4 6 8 10 12 14 16


$3.00

2.50

2.00

1.50

1.00

0.50

Price of Ice

CreamCones

Market demand


Demand (the Buyers)

Prices of Related GoodsSubstitutes - two goods

An increase in the price of one leads to an increase in the demand for the other

Complements – two goodsAn increase in the price of one

leads to a decrease in the demand for the other


BREAK TIME


Supply (the Sellers)

Supply: the quantity of goods offered for sale

Law of SupplyThe quantity supplied is a function of priceThe greater the price, the more quantity is

offered for saleSupply Schedule: the combinations of

price and quantity supplied – upward sloping to right.

G. Mankiw 11

Ben’s Supply Schedule and Supply Curve

Supply curve

The supply schedule is a table that shows the quantity supplied at each price. Because a higher price increases the quantity supplied, the supply curve slopes upward.

Price ofIce-cream

cone

Quantity ofCones

supplied

$0.000.501.001.502.002.503.00

0 cones012345


$3.00

2.50

2.00

1.50

1.00

0.50

Price of Ice-Cream

Cones

1. An increasein price . . .

2. . . . increases quantityof cones supplied.


Supply (the Sellers)

Market vs. Individual SupplyIndividual supply is a function of input

costs, productive capacity, market prices, technology, expectations, competition

Market supply is the sum of individual supplies

Increases (decreases) in aggregate supply move the supply curve to the right (left)

G. Mankiw 13

Market Supply as the Sum of Individual Supplies

(Supply Schedule)Price of ice-cream

coneBen Jerry Marke

t

$0.000.501.001.502.002.503.00

0012345

+ 0002468

= 001471013

The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. If price = $2.00, then Ben supplies 3 ice-cream cones, and Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this price is 7 cones

G. Mankiw 14

Market Supply as the Sum of Individual Supplies

14

SBen

0 1210 1191 2 3 4 5 6 7 8


$3.00

2.50

2.00

1.50

1.00

0.50

Price of Ice

CreamCones

Ben’ssupply

SJerry

0 1 2 3 4 5 6 7


$3.00

2.50

2.00

1.50

1.00

0.50

Price of Ice

CreamCones

Jerry’ssupply+ =

SMarket

0 182 4 6 8 10 12 14 16


$3.00

2.50

2.00

1.50

1.00

0.50

Price of Ice

CreamCones

Marketsupply


Matching Demand and Supply

Equilibrium (ϵ): when the quantity demanded is equal to the quantity supplied

No excess supply and no excess demandThe markets clear at equilibrium.

G. Mankiw 16

The Equilibrium of Supply and Demand

Supply


$3.00

2.50

2.00

1.50

1.00

0.50

Price of Ice-Cream

Cones

Equilibrium

Demand

Equilibriumprice

Equilibriumquantity

Equilibrium = where the supply and demand curves intersect. Here the equilibrium price is $2.00: At this price, 7 cones supplied, and 7 cones are demanded.


Changes in Demand and Supply

What happens when there is a change in Demand?An increase in demand moves the

demand curve to the right – ϵ price increases

A decrease in demand moves the demand curve to the left – ϵ price decrease



What happens when there is a change in Supply?

An increase in supply moves the supply curve to the right – ϵ price decreases

A decrease in supply moves the demand curve to the left – ϵ price increases



What happens when supply exceeds demand?Surplus condition exists.In order to clear the markets, price must be reducedThe opposite is true if demand exceeds supply

(shortage) – prices must rise.

Allocation of Resources and PriceResources will be allocated to goods obtaining the

best prices for producersConsumers will allocate resources (time and labor or

income) for the best outcome


HOMEWORK: Chapter 4

Questions for Review: 1, 2, 3 (2nd part), 5

Problems and Applications: 1 (a, b), 2, 10, 13

all rights reserveddr. david p echevarria1 lecture #3: microeconomics chapter 4 markets demand...

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demand curvethe demand

buyers demand

combinations of price

lower price

aggregate demand

higher price

tastesmarket demand

good demand schedule