chapter 4 demand, supply and markets
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1
Chapter 4 Demand, Supply
and Markets
These slides supplement the textbook, but should not replace reading the textbook
2
What is a market?A group of buyers and sellers with the potential to trade
3
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
4
What is ademand curve?
A curve showing the quantities of a commodity demanded at various possible prices, other things constant
5
What is a change in quantity demanded?A movement along the demand curve in response to a change in the price, other things constant
6
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
7
What does an inverse relationship between
price and quantity mean? It means that the two move in opposite directions
8
What is thelaw of demand?
The quantity of a good demanded is inversely related to its price, other things constant
9
What is ademand schedule?
Shows the specific quantity of a good or service that people are willing and able to buy at different prices
10
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
11
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
12
Why do consumers buy more as price
decreases and less when price increases?
Substitution effectIncome effect
13
What is thesubstitution effect?
When the price of a good falls, consumers will substitute it for other goods, which are now relatively expensive
14
What is money income?The number of dollars received per period of time, such as $100 per week
15
What is real income?Income measured in terms of the goods and services it can buy
16
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
17
What isindividual demand?The demand for an individual consumer
18
What is market demand?
The sum of the individual demands of all consumers in the market
19
What is a normal good?A good for which demand increases as consumer income rises
20
What is aninferior good?
A good for which demand decreases as consumer income rises
21
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
22
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
23
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
24
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'
25
IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND
26
What can cause a change in the demand of a good or service?
A change in ...
27
Number in the marketConsumer incomePrices of related goodsConsumer expectationsConsumer demographicsConsumer tastes
28
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
29
What is asupply curve?
A curve showing the quantities of a good supplied at various prices, other things constant
30
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
31
What is a change in quantity supplied?
A movement along the supply curve in response to a change in the price, other things constant
32
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
33
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
34
What arerelevant resources?
Resources used to produce the good in question
35
What arealternative goods?
Other goods that use some of the same types of resources used to produce the good in question
36
IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY
37
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
38
What can cause a change in the supply of a good or service?
A change in ...
39
TechnologyPrices of relevant resources
Prices of alternative goodsProducer expectationsNumber of producers
40
What happens when we put demand and
supply together?
Equilibrium
41
What is an equilibrium?
An equilibrium is the point toward which the economy tends
42
What is disequilibrium?
Usually a temporary mismatch between quantity supplied and quantity demanded as the market seeks equilibrium
43
What is a surplus?An excess quantity supplied over quantity demanded at a given price
44
Why is a surplus a disequilibrium?
When there is a surplus the supplier will lower the price to get rid of the surplus
45
What is a shortage?An excess of quantity demanded over quantity supplied at a given price
46
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
47
What is market equilibrium?
The condition that exists in a market when the plans of the buyers match the plans of the sellers
48
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
49
What causes an increase in equilibrium price?
An increase in demand or a decrease in supply
50
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
51
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’
52
What causes a decrease in equilibrium price?
A decrease in demand or an increase in supply
53
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’
54
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
55
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
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''
57
What is a price floor?A minimum legal price below which a good or service cannot be sold
58
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
59
What is a price ceiling?A maximum legal price above which a good or service cannot be sold
60
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
61
END
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