Chapter 3 Demand and Supply What is a COMPETITIVE MARKET Four characteristics of perfectly competitive markets Standardized good interchangeable Perfect Information Full information about price and features No transaction costs Free participation in exchange Participants are price takers No power to change price Cannot change the Market Each participant is so small compared to the whole market that they cannot affect the price Demand As a group consumers determine the demand for a product The quantity demanded is the amount of a particular good or service that buyers are willing and able to purchase at a given The law of demand states that the lower the price the higher the quantity demanded all other things equal Measuring and Conceptualizing Demand Quantity demanded At a particular price how many units do consumers want to price buy If a container of blueberries costs 3 how many will be purchased Marginal Bene t unit of a good How much bene t will a consumer receive from an additional If you already have two containers of blueberries what is the marginal bene t of a third container Willingness to pass How much is a consumer willing to pay for an additional unit of the good If you already have two containers of blueberries how much are you willing to pay for a third container Change in demand vs Change in quantity demanded Non price determinants of demand Number of consumers Consumer preferences including demographics Price of related goods Incomes Expectations What happens when one of the non price determinants changes If positive in uence demand increases If negative in uence demand decreases What about prices of other related goods Substitute goods you may use one in place of the other Complements you usually use them together Determinants of Demand Price of Related Goods Goods are Substitutes if swerve similar enough purposes that a consumer might purchase one in place of the other Two goods are substitutes if an increase in the price of one of the goods leads to an increase in the demand for the other good And a decrease in the price of one of the goods leads to an decrease in the demand for the other good Complements Complements are goods that are consumed together so that the price of one may affect the demand for the other Example Chips and salsa peanut butter and jelly If two goods are complements then an increase decrease in the price of one of the goods leads to a decrease increase in the demand for the other good Determinants of Demand Income Normal goods are goods for which demand increases as income increases And demand decreases when income decreases Inferior goods are goods for which demand decreases as income increases RECAP Demand Summary Law of Demand Quantity demanded rises falls as price falls rises Non Price Determinants of Demand Consumer preferences including demographics Prices of related goods Incomes Expectations Supply As a group producers determine the supply of a product The quantity supplied is the amount of a particular good that producers are willing and able to produce at a given price The law of supply states all else equal quantity supplied rises as price rises and vice versa quantity supplied falls as price falls Behind the law of supply is the assumption that producers are motivated by pro t Measuring Supply Quantity Supplied At a particular price how many units do producers want to sell Willingness to sell or Willingness to accept How much is a seller willing to accept in order to sell an additional unit of a good Marginal Cost What is the opportunity cost of producing an additional unit of a good Marginal Cost Increasing This may not be intuitive MArginal cost is eventually increasing as quantity increases Non price Determinants of Supply Prices of related goods Technology Prices of inputs Expectations Number of sellers RECAP SUPPLY Law of Supply quantity supplied rises as price rises Non Price Determinants of Supply Prices of related goods Technology Prices of inputs Expectations Number of Sellers CAREFUL Change in supply versus change in quantity supplied What changes an equilibrium Shifts of supply and demand Government regulations
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