Slide 1What is an Economy?Types of EconomiesMarketsTypes of MarketsTypes of MarketsMarket Demand CurvesMarket Demand CurvesMarket Demand CurvesMarket Demand CurvesMarket Demand CurvesSlide 12Slide 13Slide 14Slide 15Slide 16Market Demand CurvesExercises on Market Demand CurvesSlide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Changes to Market DemandChanges to Market DemandChanges to Market DemandChanges to Market DemandChanges to Market DemandChanges to Market DemandSlide 33Slide 34Slide 35Slide 36Exercises on Changes to Market DemandExercises on Changes to Market DemandExercises on Changes to Market DemandExercises on Changes to Market DemandExercises on Changes to Market DemandExercises on Changes to Market DemandMarket Supply CurvesMarket Supply CurvesSlide 45Slide 46Slide 47Slide 48Market Supply CurvesExercises on Market Supply CurvesSlide 51Slide 52Slide 53Changes to Market SupplyChanges to Market SupplyChanges to Market SupplySlide 57Slide 58Slide 59Exercises on Changes to Market SupplyExercises on Changes to Market SupplyExercises on Changes to Market SupplyExercises on Changes to Market SupplyMarket ExcessesSlide 65Slide 66Slide 67Exercise on Market EquilibriumExercise on Market EquilibriumExercise on Market EquilibriumExercise on Market EquilibriumExercise on Market EquilibriumThe Coordination Role of Market PricesSlide 74Slide 75Slide 76The Coordination Role of Market PricesChanges to Market PricesSlide 79Slide 80Slide 81Slide 82Slide 83Slide 84Slide 85Slide 86Prices, Supply and DemandHow 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.Quantity Demandedof Coffee (pounds)Price of Coffee($/pound)10640170 230Figure 1A Market Demandfor Coffee CurveQuantity Demandedof Coffee (pounds)Price of Coffee($/pound)10640170 230Figure 1A Market Demandfor Coffee CurveAn increase in the price of coffeefrom $4 to $6/lb. causes ??Quantity Demandedof Coffee (pounds)Price of Coffee($/pound)10640170 230Figure 1A Market Demandfor Coffee CurveAn increase in the price of coffeefrom $4 to $6/lb. causes a decreasein quantity demanded from230 lbs. to 170 lbs.Quantity Demandedof Coffee (pounds)Price of Coffee($/pound)10640170 230Figure 1A Market Demandfor Coffee CurveAn increase in the price of coffeefrom $4 to $6/lb. causes a decreasein quantity demanded from230 lbs. to 170 lbs.A change to a commodity’s own price can/cannot shiftthe commodity’s market demand curve?Quantity Demandedof Coffee (pounds)Price of Coffee($/pound)10640170 230Figure 1A Market Demandfor Coffee CurveAn increase in the price of coffeefrom $4 to $6/lb. causes a decreasein quantity demanded from230 lbs. to 170 lbs.A change to a commodity’s own price cannot shiftthe commodity’s market demand curve.Market Demand CurvesChanges to a commodity’s own price cause changes to the quantity demanded of the commodity. These are movements along a demand curve, not shifts of the curve.Exercises on Market Demand CurvesThe quantity demanded of coffee is QD = 400 - 40p lbs.where p is the price of coffee per pound.Graph the market demand curve for coffee.Price ($/lb.)QuantityDemanded (lbs.)$00QD = 400 - 40p lbs.Price ($/lb.)QuantityDemanded (lbs.)$00 400QD = 400 - 40p lbs.p = $0/lb.  QD = 400 lbs.Price ($/lb.)QuantityDemanded (lbs.)$10$00 400QD = 400 - 40p lbs.p = $0/lb.  QD = 400 lbs.QD = 0 lbs.  p = $10/lb.Price ($/lb.)QuantityDemanded (lbs.)$10$00 400QD = 400 - 40p lbs.p = $0/lb.  QD = 400 lbs.QD = 0 lbs.  p ≥ $10/lb.Price ($/lb.)QuantityDemanded (lbs.)$10$00 400QD = 400 - 40p lbs.If p = $3/lb. then QD = ??$3??Price ($/lb.)QuantityDemanded (lbs.)$10$00 400QD = 400 - 40p lbs.If p = $3/lb. then QD = 400 - 403 = 280 lbs.$3280Price ($/lb.)QuantityDemanded (lbs.)$10$00 400QD = 400 - 40p lbs.If p = $3/lb. then QD = 400 - 403 = 280 lbs.If QD = 120 lbs. then 120 = 400 - 40p, so p = ??$3280120$??Price ($/lb.)QuantityDemanded (lbs.)$10$00 400QD = 400 - 40p lbs.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.$3280120$7Changes 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