Supply and DemandMarketsHow Broadly Should We Define The MarketDefining Macroeconomic MarketsDefining Microeconomic MarketsBuyers and SellersCompetition in MarketsUsing Supply and DemandDemandThe Law of DemandThe Demand Schedule and The Demand CurveFigure 1: The Demand CurveShifts vs. Movements Along The Demand CurveFigure 2: A Shift of The Demand CurveDangerous Curves: “Change in Quantity Demanded” vs. “Change in Demand”Income: Factors That Shift The Demand CurveWealth: Factors That Shift The Demand CurvePrices of Related Goods: Factors that Shift the Demand CurveOther Factors That Shift the Demand CurveFigure 3(a): Movements Along and Shifts of The Demand CurveFigure 3(b): Movements Along and Shifts of The Demand CurveFigure 3(c): Movements Along and Shifts of The Demand CurveSupplyThe Law of SupplyThe Supply Schedule and The Supply CurveFigure 4: The Supply CurveShifts vs. Movements Along the Supply CurveFigure 5: A Shift of The Supply CurveFactors That Shift the Supply CurveSlide 30Slide 31Figure 6(a): Changes in Supply and in Quantity SuppliedFigure 6(b): Changes in Supply and in Quantity SuppliedFigure 6(c): Changes in Supply and in Quantity SuppliedIn Summary: Factors That Shift The Supply CurveEquilibrium: Putting Supply and Demand TogetherFigure 7: Market EquilibriumExcess Demand: Putting Supply and Demand TogetherFigure 8: Excess Supply and Price AdjustmentExcess Supply: Putting Supply and Demand TogetherIncome Rises: What Happens When Things ChangeFigure 9An Ice Storm Hits: What Happens When Things ChangeFigure 10: A Shift of Supply and A New EquilibriumFigure 11: Changes in the Market for Handheld PCsBoth Curves ShiftThe Three Step ProcessUsing Supply and Demand: The Invasion of KuwaitFigure 12: The Market For OilSlide 50Figure 13: The Market For Natural GasSupply and DemandSupply and demand is an economic modelDesigned to explain how prices are determined in certain types of marketsWhat you will learn in this chapterHow the model of supply and demand works and how to use itStrengths and limitations of modelMarketsSpecific location where buying and selling takes place, such asSupermarket or a flea marketIn economics, a market is not a place but ratherA group of buyers and sellers with the potential to trade with each otherEconomists think of the economy as a collection of individual marketsFirst step in an economic analysis is to define and characterize the market or collection of markets to analyzeHow Broadly Should We Define The MarketDefining the market often requires economists to group things togetherAggregation is the combining of a group of distinct things into a single wholeMarkets can be defined broadly or narrowly, depending on our purposeHow broadly or narrowly markets are defined is one of the most important differences between Macroeconomics and MicroeconomicsDefining Macroeconomic MarketsGoods and services are aggregated to the highest levelsMacro models lump all consumer goods into the single category “consumption goods”Macro models will also analyze all capital goods(??) as one marketMacroeconomists take an overall view of the economy without getting bogged down in details (that’s why ‘Macro’.. right?)Defining Microeconomic MarketsMarkets are defined narrowlyFocus on models that define much more specific commoditiesAlways involves some aggregationThe process stops before it reaches the highest level of generalityBuyers and SellersBuyers and sellers in a market can beHouseholdsBusiness firmsGovernment agenciesAll three can be both buyers and sellers in the same market, but are not alwaysFor purposes of simplification this text will usually follow these guidelinesIn markets for consumer goods, we’ll view business firms as the only sellers, and households as only buyersIn most of our discussions, we’ll be leaving out the “middleman”Competition in MarketsIn imperfectly competitive markets, individual buyers or sellers can influence the price of the productIn perfectly competitive markets (or just competitive markets), each buyer and seller takes the market price as a givenWhat makes some markets imperfectly competitive and others perfectly competitive?Perfectly competitive markets have many small buyers or sellers Each is a small part of the market, and the product is standardizedImperfectly competitive markets have just a few large buyers or sellers or else the product of each seller is unique in some wayUsing Supply and DemandSupply and demand model is designed to explain how prices are determined in perfectly competitive marketsPerfect competition is rare but many markets come reasonably closePerfect competition is a matter of degree rather than an all or nothing characteristicSupply and demand is one of the most versatile and widely used models in the economist’s tool kitDemandA household’s quantity demanded of a goodSpecific amount household would choose to buy over some time period, givenA particular price that must be paid for the goodAll other constraints on the householdMarket quantity demanded (or quantity demanded) is the specific amount of a good that all buyers in the market would choose to buy over some time period, givenA particular price they must pay for the goodAll other constraints on householdsThe Law of DemandStates that when the price of a good rises and everything else remains the same, the quantity of the good demanded will fallThe words, “everything else remains the same” are importantIn the real world many variables change simultaneouslyHowever, in order to understand the economy we must first understand each variable separatelyThus we assume that, “everything else remains the same,” in order to understand how demand reacts to priceThe Demand Schedule and The Demand CurveDemand scheduleA list (price- quantity combination) showing the quantity of a good that consumers would choose to purchase at different prices, with all other variables held constantThe market demand curve (or just demand curve) shows the relationship between the price of a good and the quantity demanded , holding constant all other variables that influence demandEach point on the curve shows the total buyers would choose to buy at a specific priceLaw of demand tells us that demand curves virtually always slope downwardFigure 1: The Demand CurveNumber of