Supply and DemandMarketsHow Broadly Should We Define The MarketDefining Macroeconomic MarketsDefining Microeconomic MarketsBuyers and SellersUsing Supply and DemandDemandQuantity DemandedThe Law of DemandThe Demand Schedule and The Demand CurveFigure 1: The Demand CurveShifts vs. Movements Along The Demand CurveFigure 2: A Shift of The Demand Curve“Change in Quantity Demanded” vs. “Change in Demand”Factors That Shift The Demand Curve: IncomeFactors That Shift The Demand Curve: WealthFactors that Shift the Demand Curve – Price of related goodsOther 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 SuppliedEquilibrium: 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 50Figure 13: The Market For Natural GasHall & Leiberman; Economics: Principles And Applications, 2004 1Supply and Demand•Supply and demand is an economic model–Designed to explain how prices are determined in certain types of marketsHall & Leiberman; Economics: Principles And Applications, 2004 2Markets•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 marketsHall & Leiberman; Economics: Principles And Applications, 2004 3How Broadly Should We Define The Market•Defining the market often requires economists to group things together–Aggregation is the combining of a group of distinct things into a single whole•Markets can be defined broadly or narrowly, depending on our purpose–How broadly or narrowly markets are defined is one of the most important differences between Macroeconomics and MicroeconomicsHall & Leiberman; Economics: Principles And Applications, 2004 4Defining Macroeconomic Markets•Goods and services are aggregated to the highest levels–Macro models lump all consumer goods into the single category “consumption goods”–Macro models will also analyze all capital goods as one market–Macroeconomists take an overall view of the economy without getting bogged down in detailsHall & Leiberman; Economics: Principles And Applications, 2004 5Defining Microeconomic Markets•Markets are defined narrowly–Focus on models that define much more specific commodities•Always involves some aggregation–Stops short of the broad levels of generality that macroeconomics investigatesHall & Leiberman; Economics: Principles And Applications, 2004 6Buyers and Sellers•Buyers and sellers in a market can be–Households–Business firms–Government agencies•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”Hall & Leiberman; Economics: Principles And Applications, 2004 7Using Supply and Demand•Supply and demand model is designed to explain how prices are determined in perfectly competitive markets•Supply and demand is one of the most versatile and widely used models in the economist’s tool kitHall & Leiberman; Economics: Principles And Applications, 2004 8Demand•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 householdsHall & Leiberman; Economics: Principles And Applications, 2004 9Quantity 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•Stresses price–Price of the good is one variable among many that influences quantity demanded–We assume that all other influences on demand are held constantHall & Leiberman; Economics: Principles And Applications, 2004 10The Law of Demand•When the price of a good rises and everything else remains the same, the quantity of the good demanded will fall•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 priceHall & Leiberman; Economics: Principles And Applications, 2004 11The Demand Schedule and The Demand Curve•Demand schedule–A list showing the quantity demanded of a good at different prices, all else held constant•The market demand curve shows the relationship between price of a good and the quantity demanded, all else constant–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 downwardHall & Leiberman; Economics: Principles And Applications, 2004 12Figure 1: The Demand CurveNumber of Bottles per MonthPrice per BottleAB$4.002.00D40,000 60,000At $2.00 per bottle, 60,000 bottles are demanded (point B).When the price is $4.00 per bottle, 40,000 bottles are demanded (point A).Hall & Leiberman; Economics:
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