Lecture 3 Supply and DemandSupply and DemandMarketsBuyers and SellersCompetition in MarketsUsing Supply and DemandDemandQuantity DemandedThe Law of DemandThe Demand Schedule and The Demand CurveDemand Schedule for Maple Syrup in U.S.A.Figure 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 CurveSupplyQuantity SuppliedThe 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 31Slide 32Figure 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 51Figure 13: The Market For Natural Gas1Lecture 3 Supply and Demand•Market•The law of demand, shifts vs. movements along the demand curve, factors that shift the demand curve•The law of supply, shifts vs. movements along the supply curve, factors that shift the supply curve•Equilibrium: putting demand and supply together•What happens when demand curve or supply curve shifts?2Supply and Demand•Supply and demand is an economic model–Designed to explain how prices are determined in certain types of markets•The price of a good or service is what must be given in exchange for the good. Price measures the scarcity. Prices provide our economy with incentives to use scarce resources efficiently.3Markets•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 analyze, Markets can be defined broadly or narrowly, depending on our purpose.4Buyers 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”5Competition in Markets–Perfectly competitive markets have many small buyers and sellers, e.g., farmer’s market, big city hot dog market•Each is a small part of the market, and the product is standardized, and each buyer and seller takes the market price as a given–Imperfectly competitive markets have just a few large buyers and sellers, e.g., local electricity company •The product of each seller is unique in some way, each buyer or seller has some influence over the price.6Using 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 kit7Demand•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 households8Quantity Demanded•Implies a choice–How much households would like to buy when they take into account the opportunity cost of their decisions?•Is hypothetical–Makes no assumptions about availability of the good–How much would households want to buy, at a specific price, given real-world limits on their spending power?•Stresses price–Price of the good is one variable among many that influences quantity demanded–We’ll assume that all other influences on demand are held constant, so we can explore the relationship between price and quantity demanded9The 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 (e.g., air travel, magazines, education, etc)–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 price10The Demand Schedule and The Demand Curve•Demand schedule–A list 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 downward11Demand Schedule for Maple Syrup in U.S.A.Price(per bottle)Quantity
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