Microeconomics

1. Microeconomics Introduction to Demand

2. The Market The term market has 4 distinct, but related meanings: • 1. A physical place where a product is bought or sold. • 2. Can be used in a collective sense to refer to all buyers and sellers of a particular good or service. • 3. Can be the demand that exists for a specific good or service. • 4. The process by which a buyer and seller arrive at an agreement on price and quantity.

3. Demand • The quantity of a good or service that buyers (the consumer) will purchase at various prices over a given time. Law of Demand: The quantity demanded varies inversely with price as long as things do not change.

4. How it Works • Demand exists in your head or heart and in your wallet. • Demand is: for the goods (stuff) that you both want and can afford.

5. Change in Demand • As the price of a particular good rises we tend to substitute similar goods for it.

6. Demand Schedule • As price increases demand falls, however demand will exist until the price exceeds what consumers will pay • Demand will exist but the quantity demanded will decrease. • Therefore the lower the price the more product will be bought.

7. Demand Curve • This graph illustrates the trend in demand. People buy less at higher prices and more at lower prices.

8. Market Demand Schedule • The total of what everyone in a ‘market’ demands. • Add up all the consumers (buyers).

9. Plotting the Schedule • Plot the following demand schedule and draw the demand curve.

10. Introduction to Supply Supply • The quantity that sellers will offer for sale at various prices during a given period of time. • Controlled by Sellers. • They want to sell their goods at the highest price the consumer will pay. Law of Supply: The quantity supplied will increase if price increases and fall if price falls, as long as other things do not change.

11. A Supply Schedule • The higher the price • = more supplied • = more profit • A seller’s goal is to make the most profit. At what price do sellers want people to buy? At what price do consumers want to buy? What is the difference?

12. Supply and Quantity Supplied • As with demand supply still exists until the price is too low. Quantity supplied will increase or decrease depending on price. • Quantity supplied rises or falls but supply still exists.

13. Supply Schedule • On the same graph that you created your demand schedule, plot the supply schedule for cans of soda shown here.

14. Equilibrium Price • This is a battle between what the seller will sell their product for and what the consumer will pay. • The resulting compromise is the Equilibrium Price. This is the actual price ‘we’ pay for an item.

15. Plotting the Equilibrium • Mark theEquilibriumfor Sodas then note the price below your graph.. - You and see using the graph that the place where demand and supply intersect is the equilibrium price. - This is the price paid by consumers price sold by sellers.

16. Surplus and Shortage • A Market Surplus occurs when there is excess supply- that is quantity supplied is greater than quantity demanded • In this situation, some producers won't be able to sell all their goods.  This will induce them to lower their price to make their product more appealing. n order to stay competitive many firms will lower their prices thus lowering the market price for the product.  In response to the lower price, consumers will increase their quantity demanded, moving the market toward an equilibrium price and quantity.

17. Shortage • A Market Shortage occurs when there is excess demand- that is quantity demanded is greater than quantity supplied.  • In this situation, consumers won't be able to buy as much of a good as they would like.  In response to the demand of the consumers, producers will raise both the price of their product and the quantity they are willing to supply.  The increase in price will be too much for some consumers and they will no longer demand the product. 

18. Shortage and Surplus Graph

19. Comprehension #1 • Suppose there is a change in culture and more people decide to hold meetings at coffee shops. If the price of coffee was 5$ answer the following questions. • Would there be a surplus or shortage of coffee? • Would the coffee price rise or fall as a result? Why?

20. Comprehension #2 • Suppose there was a new book published in Canada about the dangers of coffee to people’s health. As a result, a number of Canadians stop drinking coffee. Answer the following questions. a) Would there be a surplus in coffee or shortage? b) What would happen to the price of coffee? Why?

21. Draw It • Draw a small free hand graph to illustrate each situation.

22. Changes in Demand • There are 5 Causes in change in demand. • We will discuss NON – PRICE FACTORS in change in demand. These cause the whole curve to shift by affecting the product’s demand or supply as opposed to its quantity demanded or quantity supplied.

23. More income will shift the demand curve to the right, increasing demand and therefore the equilibrium price will shift upward. Therefore demand moves and supply stays the same. 1.Income Why does an increase in income shift the curve to the right? What happens if say a factory shuts down and people lose their jobs?

24. More people to consume = more buying power • Less people to consume = less buying power. • The more buying power the more demand. • This is why corporations study things like age and income to determine buying power (demographics). 2. Population Therefore, in theory if you live in an area with less demand, less will be supplied and prices should be lower. Why is this not the case in reality?

25. 3. Taste and Preference • There are both Push and Pull Factors that change people’s taste: • Push: Trends Change • Pull: Advertising Campaigns • As these things change so does demand.

26. Expectations Speculation can fuel markets. Demand will increase if it is perceived that something will increase in the future and decrease if it is thought prices will decrease in the future.

27. Substitute Goods • It is clear as we have already seen that if the price of Coke is too high people will buy no name brands. • Complement Goods:Goods that people buy with other goods.

28. Determination of Price (Cetris Paribus) In a Competitive Market (Pure Competition): • 1. Has many producers with no one single dominate the market • 2. Has many buyers with no large one to dictate price • 3. All products are the same. Nothing is of higher quality. • 4. All sellers and buyers know prices and conditions of the market.

29. 1. Costs A change in cost can decrease or increase supply. • Variable: If the cost of cotton decreases supply might remain the same if then the seller passes the savings onto the consumer. • Fixed:If rent increases for the building you have, then costs of Taylor’s College CPU Tuition will also have to increase.

30. 2. Number of Sellers • More sellers = increase in supply • Less sellers = decrease in supply • The number of sellers has a serious effect on the amount of product available to consumers and therefore the prices that is charged.

31. Drought, natural disasters all can cause the supply of goods to decrease. This drives prices up. Why? Nature and the Environment

32. Prices of Related Outputs • Production of one item can affect the supply of another item. • A market with only Gucci Sunglasses introduces s Prada. Less Gucci’s are supplied and price will increase.

33. A Crash Course! • To review and summarize what you have learned, watch the following video.

34. Practice and Application • Copy the following Chart

35. Practice • A) Calculate the surpluses and shortages that would occur depending on the price change. What price should be charged? • B) Draw a demand and supply graph and plot these figures • C) On the graph, indicate the equilibrium price. Shade the surplus area and shortage area.

36. Application 1. Refer to the information on the hot dog seller. Determine the effect each of the following developments will have on the business. How will demand or supply change in each case? 2. Draw a small freehand graph to illustrate each change and determine how equilibrium price will be affected • A competing vendor on the next corner goes out of business • The wholesale price of hot dogs falls • The city experiences a tourist boom • A new hamburger outlet opens for business on the same street.