Demand and Supply

1. Demand and Supply Market and the Economy Demand The Demand Curve Demand versus Quantity Demanded Supply Supply versus Quantity Supplied Market Equilibrium Changes in Market Equilibrium

2. Specialization and Trade In a market economy people can trade what they have (or have produced) for economic resources or goods they would like to have. Places, institutions, or mechanisms at or through which these trades take palace are called markets. • Money as a medium of exchange, standard of value, and store of vale facilitates trade. • Trade allows people to specialize, resulting in greater efficiency in production.

3. The Circular Flow Model Markets and Prices Input Markets > Inputs Inputs Exp Income V Firms Households A Rev Exp Product Markets Products Products <

4. The Role of Price in the Market Price is in essence the means of communication in the market. By offering higher prices buyers signal their desire to buy more of a good or a resource to sellers. Sellers, on the other hand, communicate the information about the cost of a good or a resource to buyers through price. • If too much of a good is produced => Price • If not enough of a good is produced => Price

5. A Network of Markets A market economy functions through a vast network of individual markets bringing together buyers and sellers of various goods and services as well as resources; e.g., the corner grocery store, the McDonald's restaurant, the New York Stock Exchange, The Chicago Mercantile Exchange In each market it is the interaction of demand and supply that determines the price.

6. Competitive Markets A competitive market is characterized by: • Many sellers and many buyers • Free (unhindered) entry and free exit • Full information • Homogenous products No individual buyer or seller’s decisions would have a noticeable impact on the market price.

7. DEMAND Demand and its Determinants: A General Definition: Demand is the quantity of a good or resource that buyers (or demanders) are willing and able to buy under a given set of conditions over a given period of time. Conditions: price, income, taste, prices of related goods, expected prices, number of buyers, etc.

8. Demand and Price Demand and Price, Ceteris Paribus: A Narrower (More Specific) Definition Demand is a schedule or a curve showing the various amounts of a good or a service consumers (buyers) are willing and able to buy at various prices, ceteris paribus, over a specified period of time.

10. Law of Demand Other things unchanged, as price rises, the quantity demanded decreases, and as price falls, the quantity demanded increases; the relationship between price and the quantity demanded is negative.

11. The Demand Curve:A graphical representation of the demand schedule The demand curve is a line or a curve showing the relationship between price and quantity demanded; it is a curve plotted in a two-dimensional space with price measured along the vertical axis and the quantitydemanded measured along the horizontal axis. A demand curve shows the relationship between price and quantity demandedonly; all (other) factors affecting demand are assumed to remain unchanged along a demand curve.

13. The Reasons Behind the Law of Demand • The price a consumer pays for a good is, in fact, the opportunity cost of having it • The principle of diminishing marginal utility • Income and substitution effects

14. Individual Demand and Market Demand An individual demand curve reflects the quantities of a good a consumer is willing and able to purchase at a range of possible prices, ceteris paribus, during a given period of time. A market demand (curve) is the (horizontal) sum of individual demands.

15. Demand (Curve) versus Quantity Demanded By “demand”or “demand curve” we mean a range of quantities corresponding to various prices reflected along a line or a curve. By “quantity demanded” we mean a specific quantity demanded corresponding to a specific price.

16. Changes in Demand versus Changes in Quantity Demanded • A change in price, ceteris paribus, results in a change in quantity demanded; that is a movement along the curve nota change in demand. • A change in demand (curve) results from changes in factors other than price. Such changes cause shiftsof the demand curve.

17. Factors causing changes (shifts) in demand (curve): • Changes in income • taste • prices of related goods (substitutes or complementary goods) • expectations about future prices, • number of buyers • Other non-self-price factors

18. An increase in income D2 A decrease in income D2

19. Supply A General Definition: Supply is the quantity of a good or resource that sellers (or suppliers) are willing and able to offer to the market for sale under a given set of conditions over a specific period of time.

20. Determinants of Supply Factors affecting supply of a good include price, prices of inputs, technology, prices of related goods, taxes, expectations, number of firms, etc.

21. Supply and Price: A Narrower Definition Supply (or a supply curve) is a schedule or curve showing the quantities of a product a firm (or firms) is (are) willing and able to produce and offer to the market for sale at a range of possible prices, ceteris paribus, over a certain period of time.

22. Supply Curve The supply curve is a line or a curve showing the relationship between price and quantity supplied; it is a curve plotted in a two-dimensional space with price measured along the vertical axis and the quantity supplied measured along the horizontal axis. A supply curve shows the relationship between price and quantity supplied only; all (other) factors affecting supply are assumed to remain unchanged along a supply curve.

24. Law of Supply Other things remaining constant, as the price of a good rises, the corresponding quantity supplied increases, and as the price falls the quantity supplied decreases; the relationship between price and the quantity supplied is positive.

25. The Reason Behind the Law of Supply As more and more of a good is produced, beyond some production level, the costs of producing additional units begin to rise. In order for a firm to produce more of that good it has to charge (or be offered) higher prices.

26. Individual Supply and Market Supply An individual supply curve reflects the quantities of a good a producer (a firm) is willing and able to produce and offer for sale at a range of possible prices, ceteris paribus, during a given period of time. A market supply (curve) is the (horizontal) sum of individual supply curves.

27. Supply (Curve) versus Quantity Supplied By Supply or supply curve we mean a range of quantities corresponding to various prices reflected along a line or a curve. By quantity supplied we mean a specific quantity supplied corresponding to a specific price.

28. Supply and Quantity supplied • A change in price (ceteris paribus) results in a change in quantity supplied ( a movement along the curve), not a change in supply. • A change in supply (or the supply curve) is caused by changes in factors other than price. Such changes cause shifts of the supply curve. • Changes in resource prices, technology, prices of related goods (substitutes or accompanying products), expectations, number of firms, etc. will result in changes in (market) supply or shifts of the supply curve.

31. Market Equilibrium Market equilibrium is a condition under which the quantity supplied is equal to the quantity demanded; when a market is in equilibrium, there is no tendency for change. The equilibrium price is the price at which the quantity demanded is equal to the quantity supplied. Shortages occur when price is below the equilibrium price; shortages cause the price to rise. Surpluses occur when price is above the equilibrium price; surpluses cause the price to fall.

32. (i$ - iY) = p

36. Changes in the Market Equilibrium Changes (shifts) in the market supply and/or the market demand result in changes in the market equilibrium.

37. Using the S&D Tool to Address Some Policy Questions • Who pays the excise taxes? • Rent control • Subsidies for farmers • Minimum wage

40. The Minimum Wage Controversy Wage Surplus S 7.00 6.00 5.25 D Labor 0