Prices Supply and Demand How Are Prices Formed and What Do They Do What is an Economy Consumers and producers Primary resources A system of property rights Technologies by which inputs are combined to produce outputs Institutions that facilitate trade Types of Economies Barter exchange Command Laissez faire leave it alone Mixed public and private sector Markets A market consists of buyers and sellers and rules for trading Markets coordinate flows of goods and services Types of Markets Perfectly competitive markets Many buyers many sellers full information Types of Markets Monopolized Market Just one seller Monopsonized Market Just one buyer Monopolistically Competitive Market Many similar but differentiated commodities each commodity sold by one seller Market Demand Curves Buyers who take as given the market price are price takers Market Demand Curves Buyers who take as given the market price are price takers Given price each buyer decides his quantity demanded Market Demand Curves Buyers who take as given the market price are price takers Given price each buyer decides his quantity demanded The sum over all buyers of individual quantities demanded is the market quantity demanded Market Demand Curves Higher given price smaller total quantity demanded This empirical fact is the Law of Demand Market Demand Curves Higher given price smaller total quantity demanded This empirical fact is the Law of Demand The graph of total quantity demanded of a commodity vs the commodity s own price is a market demand curve for the commodity Price of Coffee pound Figure 1 A Market Demand for Coffee Curve 10 6 4 0 170 230 Quantity Demanded of Coffee pounds Price of Coffee pound 10 Figure 1 A Market Demand for Coffee Curve An increase in the price of coffee from 4 to 6 lb causes 6 4 0 170 230 Quantity Demanded of Coffee pounds Price of Coffee pound 10 6 Figure 1 A Market Demand for Coffee Curve An increase in the price of coffee from 4 to 6 lb causes a decrease in quantity demanded from 230 lbs to 170 lbs 4 0 170 230 Quantity Demanded of Coffee pounds Price of Coffee pound 10 6 4 0 Figure 1 A Market Demand for Coffee Curve An increase in the price of coffee from 4 to 6 lb causes a decrease in quantity demanded from 230 lbs to 170 lbs A change to a commodity s own price can cannot shift the commodity s market demand curve 170 230 Quantity Demanded of Coffee pounds Price of Coffee pound 10 6 4 0 Figure 1 A Market Demand for Coffee Curve An increase in the price of coffee from 4 to 6 lb causes a decrease in quantity demanded from 230 lbs to 170 lbs A change to a commodity s own price cannot shift the commodity s market demand curve 170 230 Quantity Demanded of Coffee pounds Market Demand Curves Changes to a commodity s own price cause changes to the quantity demanded of the commodity These are movements along a demand curve not shifts of the curve Exercises on Market Demand Curves The quantity demanded of coffee is QD 400 40p lbs where p is the price of coffee per pound Graph the market demand curve for coffee Price lb 0 0 QD 400 40p lbs Quantity Demanded lbs Price lb 0 0 QD 400 40p lbs p 0 lb QD 400 lbs 400 Quantity Demanded lbs Price lb QD 400 40p lbs p 0 lb QD 400 lbs QD 0 lbs p 10 lb 10 0 0 400 Quantity Demanded lbs Price lb QD 400 40p lbs p 0 lb QD 400 lbs QD 0 lbs p 10 lb 10 0 0 400 Quantity Demanded lbs Price lb QD 400 40p lbs If p 3 lb then QD 10 3 0 0 400 Quantity Demanded lbs Price lb QD 400 40p lbs If p 3 lb then QD 400 40 3 280 lbs 10 3 0 0 280 400 Quantity Demanded lbs QD 400 40p lbs Price lb If p 3 lb then QD 400 40 3 280 lbs If QD 120 lbs then 120 400 40p so p 10 3 0 0 120 280 400 Quantity Demanded lbs QD 400 40p lbs Price lb If p 3 lb then QD 400 40 3 280 lbs If QD 120 lbs then 120 400 40p so p 400 120 40 280 40 7 lb 10 7 3 0 0 120 280 400 Quantity Demanded lbs Changes to Market Demand The quantity demanded of a commodity varies with changes to incomes tastes prices of other commodities buyers entering and exiting the market Such changes shift the commodity s market demand curve these shifts are changes in demand Changes to Market Demand A higher price for Diet Coke shifts outwards increases the market demand curve for Diet Pepsi If a higher price for commodity A increases the market demand for commodity B then A is a substitute for B Changes to Market Demand A higher price for software shifts inward decreases the market demand curve for computers If a higher price for commodity A decreases the market demand for commodity B then A is a complement for B Changes to Market Demand Higher buyers incomes the market demand for high quality food and the market demand for low quality food Changes to Market Demand Higher buyers incomes increase the market demand for high quality food and decrease the market demand for low quality food Changes to Market Demand Higher buyers incomes increase the market demand for high quality food and decrease the market demand for low quality food A commodity is NORMAL INCOME INFERIOR if its market demand increases decreases as buyers incomes rise Price of Coffee pound Figure 2 An Increase in the Market Demand for Coffee 10 What might have caused this increase in market demand 6 0 170 270 Quantity Demanded of Coffee pounds Price of Coffee pound Figure 2 An Increase in the Market Demand for Coffee 10 What might have caused this increase in market demand Higher incomes lower prices for sugar cream coffee makers higher prices for tea juice etc or entry by more consumers 6 0 170 270 Quantity Demanded of Coffee pounds Price of Coffee pound Figure 2 An Increase in the Market Demand for Coffee 10 What might have caused this increase in market demand Higher incomes lower prices for sugar cream coffee makers higher prices for tea juice etc or entry by more consumers 6 0 170 270 Quantity Demanded What could never cause this increase of Coffee pounds in market demand Price of Coffee pound Figure 2 An Increase in the Market Demand for Coffee 10 What might have caused this increase in market demand Higher incomes lower prices for sugar cream coffee makers higher prices for tea juice etc or entry by more consumers 6 0 170 270 Quantity Demanded What could never cause this increase of Coffee pounds in market demand Changes to the price of coffee Exercises on Changes to Market Demand 1 A decrease in the price of apples causes a of apples and a for oranges Exercises on Changes to Market Demand 1 A …