Chapter 4 PART 1

1. The Market Forces of Supply and Demand Chapter 4 PART 1

2. Markets and Competition • Market – a group of buyers and sellers of a particular good or service. • The buyers as a group determine the demand for the product • Markets can be highly organized or not very organized

3. Competitive Market • Describes a market in which there are so many buyers and sellers that each has a negligible impact on the market price • In this chapter we assume that markets are perfectly competitive – the highest form of competition. In order to have perfect competition, a market must have 2 characteristics:

4. 1. the goods offered for sale are identical • 2. the buyers and sellers are so numerous that no one has any influence over price (called “price takers”) • Example: wheat market • Most markets are NOT perfectly competitive and fall between perfect competition and monopoly

5. DEMAND • Quantity Demanded – the amount of a good buyers are willing and able to buy. • Quanitity demanded and Price are negatively related • Law of Demand – the quantity demanded falls as price rises • Demand schedule – table that shows the relationship b/t the price of a good and the Qd.

6. Catherine’s Demand Schedule

7. 1. A decrease in price ... 2. ... increases quantity of cones demanded. Figure 1 Catherine’s Demand Schedule and Demand Curve Price of Ice-Cream Cone $3.00 2.50 2.00 1.50 1.00 0.50 Quantity of 0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream Cones

8. Individual vs. Market Demand • The market demand is the sum of all the individual demands for a particular good or service • *****THE ONLY THING THAT CHANGES THE Qd IS CHANGES IN PRICE!*****

9. The Market Demand Curve The market demand at $2.00 will be 7 ice-cream cones. When the price is $2.00, Nicholas will demand 3 ice-cream cones. When the price is $2.00, Catherine will demand 4 ice-cream cones. The market demand curve is the horizontal sum of the individual demand curves! + = Nicholas’s Demand Catherine’s Demand Market Demand Price of Ice-Cream Cone Price of Ice-Cream Cone Price of Ice-Cream Cone 2.00 2.00 2.00 1.00 1.00 1.00 13 7 3 5 4 8 Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones When the price is $1.00, Catherine will demand 8 ice-cream cones. The market demand at $1.00, will be 13 ice-cream cones. When the price is $1.00, Nicholas will demand 5 ice-cream cones.

10. B $2.00 4 Changes in Quantity Demanded A tax on sellers of ice-cream cones raises the price of ice-cream cones and results in a movement along the demand curve. Price of Ice-Cream Cones A 1.00 D 0 8 Quantity of Ice-Cream Cones

11. Change in Demand: Shifts in the Demand Curve • Many things can cause a shift, here are the most important: • Income – If the D for a good falls when income falls, it is a normal good; if the D for a good rises when income falls, it is an inferior good • Prices of Related Goods: Substitutes – an increase in the P of one causes an increase in the D of the other Complements – an increase in the P of one causes an decrease in the D of the other

12. Examples • Butter and margarine? • PB and J? • Razor handles, razor blades? • Cereal and milk? • Apples and oranges?

13. Tastes – can change over time • Expectations – about the future may affect your demand today. Ex: expecting a raise • # of buyers – fewer or more buyers in market

14. Consumer Income Normal Good Price of Ice-Cream Cone $3.00 An increase in income... 2.50 Increase in demand 2.00 1.50 1.00 0.50 D2 D1 Quantity of Ice-Cream Cones 0 1 2 3 4 5 6 7 8 9 10 11 12

15. Consumer Income Inferior Good Price of Ice-Cream Cone $3.00 2.50 An increase in income... 2.00 Decrease in demand 1.50 1.00 0.50 D2 D1 Quantity of Ice-Cream Cones 0 1 2 3 4 5 6 7 8 9 10 11 12

16. Increase in demand Decrease in demand Demand curve, D 2 Demand curve, D 1 Demand curve, D 3 Figure 3 Shifts in the Demand Curve Price of Ice-Cream Cone Quantity of 0 Ice-Cream Cones