ECON 1 1st Edition Lecture 5Outline of Last Lecture I. Specialization and TradeII. The Price of TradeOutline of Current Lecture II. Supply and demandCurrent LectureLook for the answers to these questions:• What factors affect buyers’ demand for goods?• What factors affect sellers’ supply of goods? • How do supply and demand determine the price of a good and the quantity sold? • How do changes in the factors that affect demand or supply affect the market price and quantity of a good? • How do markets allocate resources?I. Markets and Competitiona. Supply and demand are the forces that make market economies work. They determine the quantity of each good produced and price at which it is sold. b. Def.: Market: A group of buyers and sellers of a particular good/service.i. Buyers determine the demand for the product.ii. Sellers determine the supply of the product. c. Def.: Competitive market: a market with many buyers and sellers, where each hasa negligible effect on the market price. d. In a perfectly competitive market:i. All goods are exactly the same\ii. Buyers and sellers are so numerous that no one can affect market price—each is a “price taker”II. Demanda. Demand represents the behavior of buyers.b. Def.: Quantity demanded: Amount of a good that buyers are willing and able to purchase. i. Many things determine the Qd (quantity demanded) of any good—we will focus on price.o Ex: If the price of ice-cream rose to $20/scoop, you would most likely buy less ice cream. c. Def.: Law of Demand: The claim that the quantity demanded of a good falls whenthe price of the good rises, other things equal. d. Def.: Demand schedule: A table that shows the relationship between the price of a good and the quantity demanded.i. Ex: Helen’s demand for lattes.o Notice that Helen’s preferences obey the law of demand.Price of lattes Qd of lattes$0 161 142 123 104 85 66 4e. Def.: Demand curve: A graph of the relationship between the price of a good and the Qd.f. Demand curves can be read in two ways:i. Horizontally: How much buyers are willing and able to purchase at a certain price.ii. Vertically: The highest price buyers are willing to pay for a certain quantity. g. Def.: Consumer Surplus: The consumer’s gain from exchange.i. The difference between the highest price a consumer will pay at a given quantity and the actual market priceh. Def.: Total Consumer Surplus: Sum of consumer surplus of all buyers. i. Ex. Assume the ice cream market price is $1/scoop. If Ann is willing to pay$2.50/scoop, she enjoys a $1.50 consumer surplus III. Important demand shifters:a. The demand curve shows how price affects Qd, other things being equal.b. These “other things” are non-price determinants of demand (ex. things that determine buyers; demand for a good, other than the good’s price) o Incomeo Price of subso Price of complementso Expectationso Popo TastesDemand Shifters:1. Income: What would happen to your demand for ice cream if you lost your job one summer?ii. Demand for ice cream fallso Def.: Normal good: A good for which other things equal, an increase in income leads to an increase in demand. o Def.: Inferior good: A good for which other things equal, an increase in income leads to a decrease in demand. 2. Price of subso If pizza more expensive, Qd would increase.o Def.: Subs: Two goods for which an increase in the price of one, leads to an increase in the demand for us).3. Price of complementso Suppose price of hot fudge fallsa. Law of Demand: You will buy more fudge but also ice cream because they go together.o Def.: Complements: Two goods for which an increase in the rice of one leads to a decrease in the demand for others. o Example (Case Study): How to reduce smoking. 4. Expectations: Expectations about the future may affect your demand for a good or a servicetoday. a. Ex. 1: If you expect your income to increase next month, you might spend more now on ex. Eating out, etc.5. Number of buyers:a. More people, more demand. b. As the pop of an economy changes, the number of buyers of a particular good also changes (thereby changing its demand). 6. Tastesa. Anything that causes shift in tastes toward a good will increases demand for that good and shifts its Demand (D) curve to the right. i. Ex. Atkins diet became popular in 90’s caused an increase in demand for eggs,shifted the egg curve to right.Summary: variables that influence buyers chart here. ii. Supply1. Supply represents the behavior of sellers.2. Def.: Quantity supplied: Amount of a good that sellers are wiling and able to sell.a. Many things determine the quantity supplied of any good. b. Ex. If the price of ice cream is low, the business is less profitable than when price is highlow supply when price is low and high supply when price is high3. Def.: Law of supply: The claim that the quantity supplied (Qs) of a good rises when theprice of the good