Slide 1Slide 2Demand, Supply, and Market EquilibriumDEMAND, SUPPLY, AND MARKET EQUILIBRIUMTHE DEMAND CURVESlide 6Slide 7Slide 8Slide 9THE SUPPLY CURVESlide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17MARKET EQUILIBRIUM: BRINGING DEMAND AND SUPPLY TOGETHERSlide 19MARKET EFFECTS OF CHANGES IN DEMANDSlide 21Slide 22Slide 23Slide 24Slide 25MARKET EFFECTS OF CHANGES IN SUPPLYSlide 27Slide 28Slide 29Slide 30Slide 31PREDICTING AND EXPLAINING MARKET CHANGESAPPLICATIONS OF DEMAND AND SUPPLYSlide 34Slide 35Slide 36Slide 37Slide 38K E Y T E R M SCopyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.1 of 401 of 40Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.2 of 402 of 40Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.3 of 40Demand, Supply, andMarket EquilibriumMacroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.3 of 40FERNANDO QUIJANO, YVONN QUIJANO, AND XIAO XUAN XUP R E P A R E D B YThe price of vanilla is bouncing.Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.C H A P T E R 4Demand, Supply, and Market Equilibrium4 of 40DEMAND, SUPPLY, AND MARKET EQUILIBRIUM4 of 40● perfectly competitive marketA market with so many buyers and sellers that no single buyer or seller can affect the market price.Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.C H A P T E R 4Demand, Supply, and Market Equilibrium5 of 40THE DEMAND CURVE4.1● quantity demandedThe amount of a product that consumers are willing and able to buy.● demand scheduleA table that shows the relationship between the price of a product and the quantity demanded, ceteris paribus.Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.C H A P T E R 4Demand, Supply, and Market Equilibrium6 of 40THE DEMAND CURVE4.1Here is a list of the variables that affect an individual consumer’s decision, using the pizza market as an example:•The price of the product (for example, the price of a pizza)•The consumer’s income•The price of substitute goods (for example, the prices of tacos or sandwiches or other goods that can be consumed instead of pizza)•The price of complementary goods (for example, the price of lemonade or other goods consumed with pizza)•The consumer’s preferences or tastes and advertising that may influence preferences•The consumer’s expectations about future pricesCopyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.C H A P T E R 4Demand, Supply, and Market Equilibrium7 of 40THE DEMAND CURVE4.1The Individual Demand Curve and the Law of Demand● law of demandThere is a negative relationship between price and quantity demanded, ceteris paribus.● change in quantity demandedA change in the quantity consumers are willing and able to buy when the price changes; represented graphically by movement along the demand curve.● individual demand curveA curve that shows the relationship between the price of a good and quantity demanded by an individual consumer, ceteris paribus.Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.C H A P T E R 4Demand, Supply, and Market Equilibrium8 of 40THE DEMAND CURVE4.1The Individual Demand Curve and the Law of Demand FIGURE 4.1The Individual Demand CurveAccording to the law of demand, the higher the price, the smaller the quantity demanded, everything else being equal. Therefore, the demand curve is negatively sloped: When the price increases from $6 to $8, the quantity demanded decreases from seven pizzas per month (point c) to four pizzas per month (point b).Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.C H A P T E R 4Demand, Supply, and Market Equilibrium9 of 40THE DEMAND CURVE4.1From Individual Demand to Market Demand● market demand curveA curve showing the relationship between price and quantity demanded by all consumers, ceteris paribus. FIGURE 4.2From Individual to Market DemandThe market demand equals the sum of the demands of all consumers. In this case, there are only two consumers, so at each price the market quantity demanded equals the quantity demanded by Al plus the quantity demanded by Bea. At a price of $8, Al’s quantity is four pizzas (point a) and Bea’s quantity is two pizzas (point b), so the market quantity demanded is six pizzas (point c). Each consumer obeys the law of demand, so the market demand curve is negatively sloped.Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.C H A P T E R 4Demand, Supply, and Market Equilibrium10 of 40THE SUPPLY CURVE4.2Suppose you ask the manager of a firm, “How much of your product are you willing to produce and sell?” The manager’s decision about how much to produce depends on many variables, including the following, using pizza as an example:•The price of the product (for example, the price per pizza)•The wage paid to workers•The price of materials (for example, the price of dough and cheese)•The cost of capital (for example, the cost of a pizza oven)•The state of production technology (for example, the knowledge used in making pizza)•Producers’ expectations about future prices•Taxes paid to the government or subsidies (payments from the government to firms to produce a product)Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.C H A P T E R 4Demand, Supply, and