Slide 1Markets and CompetitionDemandDemandDemandDemandSupplySupplySupplySupplyECON 203: Principles of MicroeconomicsClass 4: Demand and Supply1Markets and Competition•A market is a group of buyers and sellers of a particular good or service.•A perfectly competitive market is a market in which:–There is a large number of sellers and buyers.–All sellers offer exactly the same goods.–No single buyer or seller can influence the market price.•Demand and supply refer to the behavior of buyers and sellers as they interact in markets.2Demand•Quantity demanded: the amount of a good that buyers are willing and able to buy at a given price.•Law of demand: other things being equal, the quantity demanded of a good falls as the price rises.–Example: demand for computers.•Back in 1990 when computers were expensive only big companies and rich individuals would buy them.•Nowadays, computer are cheap and most people have one.3Demand•Demand schedule: a table that shows the relationship between price of a good and the quantity demanded.•Demand curve: a graph of the relationship between price of a good and the quantity demanded.–Example: demand for digital music albums in LA.4Price Quantity demanded$0.00 12 million$0.50 10 million$1.00 8 million$1.50 6 million$2.00 4 million$2.50 2 million$3.00 0Demand•Demand curve. – Shows how the quantity demanded of a good changes in response to a change in the price of that good.– Assumes all factors other than price remain constant (“ceteris paribus”).•Changes in price result in movements along the demand curve and a change in quantity demanded.•Changes in factors other than price (such as consumers’ tastes, income, or price of related goods) cause a shift in the demand curve. 5Demand•Examples of shifts in demand curve.–An increase in income.•Normal goods: increase in demand (shifts demand curve to the right).•Inferior goods: decrease in demand (shifts demand curve to the left).–Prices of related goods.•Substitutes: an increase in price of one good leads to an increase in demand of another good (shift to the right).•Complements: an increase in price of one good leads to a decrease in demand of another good.–Consumers’ tastes.–Number of buyers.6Supply•Quantity supplied: the amount of a good that sellers are willing and able to sell at a given price. •Law of supply: other things being equal, the quantity supplied of a good increases as the price rises.–Example: supply of gasoline.•When prices are low, only the producers with low costs can extract petroleum and supply of gasoline is low. •As prices increase, more producers extract petroleum and supply of gasoline rises.7Supply•Supply schedule: a table that shows the relationship between price of a good and the quantity supplied.•Supply curve: a graph of the relationship between price of a good and the quantity supplied.–Example: supply of digital music albums.8Price Quantity supplied$0.00 0$0.50 0$1.00 1 million$1.50 2 million$2.00 3 million$2.50 4 million$3.00 5 millionSupply•Supply curve. – Shows how the quantity supplied of a good changes in response to a change in the price of that good.– Assumes all factors other than price remain constant.• Changes in price result in movements along the supply curve and change in quantity supplied.•Changes in factors other than price (such as technology and input prices) cause a shift in the supply curve. 9Supply•Examples of shifts in supply curve.–A change in input prices.•An increase in prices of inputs increases costs of production and decreases the supply (shift of supply curve to the left).–Technology.•A technology improvement makes it possible to produce more of a good with given resources and increase the supply (shift to right).–Number of sellers.•More sellers increase the supply (shift to the
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