Demand Supply and Market Equilibrium Chapter 3 I Markets II Demand a Bring together buyers demanders and sellers suppliers b New York Stock Exchange and Chicago Board of Trade help buyers and sellers from all over the world communicate with one another c Auctioneers bring together potential buyers and sellers d Labor markets new college graduates sell and employers buy specific labor services e Some markets are local or nationals or international f Highly personal or faceless g The most highly competitive markets are the ones with large numbers of independently acting buyers and sellers come together to buy and sell standardized products a Schedule curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time b Shows the quantities of a product that will be purchased at various possible prices other things equal c Easily be shown in table form aka demand schedule i Reveals the relationship between the various prices of corn and the quantity of corn a particular consumer would be willing and able to purchase at each of these prices ii Doesn t tell us which of the possible prices will actually exist in the market 1 Depends on the interaction between demand and supply d Willingness alone is not effective in the market e Law of Demand i Other things equal as price falls the quantity demanded rises and as price rises the quantity demanded falls 1 Inverse negative relationship between price and quantity demanded aka law of demand ii Other things equal assumption is critical here Erika Smitten Demand Supply and Market Equilibrium Chapter 3 If the relative price rises fewer will be bought iii iv Why the inverse relationship between price and quantity demanded 1 Consistent with common sense People buy more of a product at a low price than at a high price Price is an obstacle that deters consumers from buying 2 Consumption is subject to diminishing marginal utility because each successive units of a particular product will yield less and less marginal utility consumers will buy additional units only if the price of those units is progressively reduced Income effect indicates that a lower price increases the purchasing power o a buyer s money income enabling the buyer to purchase more of the product than before 3 4 A higher price has the opposite effect substitution effect suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive v Income and substitution effects combine to make consumers able and willing to buy more of a product at a low price than a high price f The Demand Curve i Inverse relationship between price and quantity demanded can be represented on a simple graph ii Graph measures quantity demanded on the horizontal axis and price on the vertical axis iii Downward slope reflects the law of demand iv Graph much more clear g Market Demand i By adding the quantities demanded by all consumers at each of the various possible prices we can get from individual demand to market demand ii Determinants of demand are assumed to be constant when a demand curve is drawn 1 When they change the demand curve shifts left or right iii Basic determinants of demand 1 Consumers tastes preferences 2 The number of buyers in the market 3 Consumers incomes 4 The price of related goods Erika Smitten Demand Supply and Market Equilibrium Chapter 3 5 Consumer expectations h Changes in Demand i Change in demand schedule shift in the demand curve ii Tastes 1 A change that makes the product more desirable increases demand and shift the graph rightward 2 Unfavorable change in consumer preferences will decrease demand shifting the curve leftward 3 New products may affect consumer taste a Digital cameras over film cameras iii Number of Buyers 1 Increase in buyers is likely to increase demand a International trade agreements that reduce foreign barriers to American farm commodities 2 Decrease in buyers is likely to decrease demand a Emigration from many small rural communities has reduced population and thus demand for housing home appliances etc 1 For most products a rise in income causes an increase in a Demand usually falls when income falls 2 Products whose demand varies directly with money income are called superior goods normal goods a Most products are normal goods 3 Goods whose demand varies inversely with money income iv Income demand are called inferior goods v Price of Related Goods 1 Substitute goods Erika Smitten Demand Supply and Market Equilibrium Chapter 3 a One that can be used in place of another good b Haagen Dazs and Ben Jerry s c When two goods are substitutes an increase in the price of one will increase the demand for the other d A decrease in price of one will decrease the demand for the other e Substitutes in consumption i Budweiser and Miller beer ii Chevrolets and Fords 2 Complementary goods a One that is used together with another good b Typically demanded jointly c Computers and software cell phones and cellular d service snowboards and lift tickets If the price of a complement goes up the demand for the related food will decline e However some are different If the price of a complement tuition falls the demand for a related good textbooks will increase a Vast majority of goods are unrelated b c Change in price of one has little or no effect on the Independent goods demand for the other 3 Unrelated goods 1 A newly formed expectation of higher future prices may cause consumers to buy now in order to beat the anticipated price rises thus increasing current demand Hot real estate markets a b Some buyers fear being prices out of the market vi Consumer Expectations Erika Smitten Demand Supply and Market Equilibrium Chapter 3 c Some buyers believe they will be able to sell the houses later at a higher price i Called Speculators 2 Change in expectations concerning future income may prompt consumers to change their current spending a NFL drafting b Workers afraid of losing their job vii Summary an increase in demand may be cause by Increase in the number of buyers 1 A favorable change in consumer tastes 2 3 Rising incomes if the product is a normal good 4 Falling incomes if the product is an inferior good 5 6 Decrease in the price of a complementary good 7 New consumer expectation that either prices or income will Increase in the price of a substitute good i Changes in Quantity