In a perfectly competitive market: All goods exactly the same Buyers & sellers so numerous that no one can
affect market price each is a price taker
Demand
2
Demand
The quantity demanded of any good is the
amount of the good that buyers are willing and able to purchase.
Example: p
Helens demand for lattes.
Market Demand versus Individual Demand Th quantity d The i demanded i the market i the sum of the d d in h k is h f h
quantities demanded by all buyers at each price.
16 14 12 10 8 6 4
Helens Qd 16 14 12 10 8 6 4
Qd (Market) 24 21 18 15 12 9 6
=
Price of IceCream Cone
2.00 2 00
2.00 1.00
2.00 2 00 1.00
1.00
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The market demand curve is the horizontal sum of the individual demand 2007 Thomson South-Western curves!
$2.00 $2 00
A tax on sellers of icecream cones raises the price of ice-cream cones and results in a movement along the t l th demand curve.
A
1.00
D
0
Increase in demand
Decrease in demand Demand curve, D2 Demand curve, D1 Demand curve D3 curve, 0 Quantity of Ice-Cream Cones
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Suppose the number of buyers increases. Then, at each P, Qd will increase (by 5 in this example).
An increase in income...
D1
THE MARKET FORCES OF SUPPLY AND DEMAND
16
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
An increase in income... i i
D2
0 1
THE MARKET FORCES OF SUPPLY AND DEMAND
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D1
2 3 4 5 6 7 8 9 10 11 12
Demand Curve Shifters: Prices of Related G d R l t d Goods Two goods are substitutes if
an i increase i th price of one in the i f causes an increase in demand for the other.
Demand Curve Shifters: Prices of Related G d R l t d Goods Two goods are complements if
an i increase i th price of one in the i f causes a fall in demand for the other.
Example:
The Atkins diet became popular in the 90s, gg , caused an increase in demand for eggs, shifted the egg demand curve to the right.
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ACTIVE LEARNING
Draw a demand curve for music downloads. What h Wh t happens to it in each of t i h f the following scenarios? Why?
A. The price of iPods falls B. The price of music downloads falls C. The price of CDs falls
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ACTIVE LEARNING
ACTIVE LEARNING
The Th D curve does not shift. Move down along curve to a point with lower P, higher Q.
P1
P1 P2 D1 Q1
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D1 Q1 Q2
D2 Q2
ACTIVE LEARNING
CDs and music downloads are substitutes. A fall in price of CDs shifts demand for music downloads to the left.
D2 Q2 Q1 D1
Quantity of y music downloads
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P1
Supply
Supply
The quantity supplied of any good is the
amount that sellers are willing and able to sell.
Example: p
Starbucks supply of lattes.
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Th quantity supplied iin th market iis th sum of The tit li d the k t the f
the quantities supplied by all sellers at each price.
Starbucks 0 3 6 9 12 15 18
Q
0 5 10 15
6.00
P
$6.00 $6 00 $5.00 $4.00 $ $3.00 $2.00 $1.00 $1 00 $0.00 0 5 10 15 20 25 30 35
QS (Market) 0 5 10 15 20 25 30
Q
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S
C A rise in the price of ice cream cones results in a movement along the supply curve.
$3.00
1.00
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Decrease in supply pp y
Increase in supply
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Suppose the price of milk falls falls. At each price, q y the quantity of Lattes supplied will increase (by in this (b 5 i thi example). Q
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ACTIVE LEARNING
Draw a supply curve for tax return preparation software. What happens to it in each of the following scenarios?
A. Retailers cut the price of the software. software B. A technological advance allows the software to be produced at lower cost. C. Professional tax return preparers raise the price of the services they provide.
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ACTIVE LEARNING
ACTIVE LEARNING
S1
S curve does not shift. Move down along the curve to a lower P and lower Q.
S1
S2
P1 P2
P1
Q2 Q1
Q1
Q2 Quantity of tax y
return software
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ACTIVE LEARNING
S1
This shifts the demand curve for tax preparation software, not the supply curve curve.
Equilibrium price:
the price that equates quantity supplied with quantity demanded
P
$6.00 $5.00 $4.00 $3.00 $3 00 $2.00 $1.00
Equilibrium: P has reached the level where quantity supplied q equals quantity demanded
P $ $0 1 2 3 4 5
QD 24 21 18 15 12 9 6
QS 0 5 10 15 20 25 30
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$0.00 0 5 10 15 20 25 30 35
Equilibrium quantity:
the quantity supplied and quantity demanded at the equilibrium price
P
$6.00 $5.00 $4.00 $3.00 $3 00 $2.00 $1.00 $0.00 0 5 10 15 20 25 30 35
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Excess demand
P $ $0 1 2 3 4 5
QD 24 21 18 15 12 9 6
QS 0 5 10 15 20 25 30
THE MARKET FORCES OF SUPPLY AND DEMAND
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Facing F i a shortage, h t sellers raise the price, causing QD to fall and QS to rise, which reduces the which shortage.
Shortage
Shortage
10 15 20 25 30 35
Q
5 10 15 20 25 30 35
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Facing F i a shortage, h t sellers raise the price, causing QD to fall and QS to rise. Prices continue to rise until market reaches equilibrium. q
Shortage
Q
THE MARKET FORCES OF SUPPLY AND DEMAND
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Surplus
Surplus
Facing F i a surplus, l sellers try to increase sales by cutting price. This causes QD to rise and QS to fall which reduces the surplus. Q
Surplus
Facing F i a surplus, l sellers try to increase sales by cutting price. This causes QD to rise and QS to fall. Prices continue to fall until market reaches equilibrium. Q
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EXAMPLE 1:
EVENT TO BE ANALYZED:
A Shift in Demand
P S1 P2 P1
P1
D curve shifts because price of gas STEP 2: affects demand for D shifts right hybrids. because high gas STEP 3: S curve doeshybrids price makes not The shift, because price shift shift causes an more attractive increase in not of gas doespricecars. relative to other and quantity affect cost of of hybrid cars. producing hybrids.
D1 Q1 Q2
D2 Q
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EXAMPLE 1:
A Shift in Demand
P S1 P2 P1
Notice: When P rises, producers supply d l a larger quantity of hybrids, even hybrids though the S curve has not shifted. Always be careful to distinguish b/w a shift in a curve and a movement along the curve curve.
Terms for Shift vs. Movement Along Curve Change in supply: a shift in the S curve
occurs when a non-price determinant of supply changes (like technology or costs)
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EXAMPLE 2:
A Shift in Supply
S1 S2
EXAMPLE 3:
EVENTS: price of gas rises AND new technology reduces production costs
STEP 1:
S curve shifts because event affects P1 STEP 2: cost of production. P2 S shifts right D curve does not because event STEP 3: shift, because reduces cost, The shift causes production technology makes production price one of is not to fall theat more profitable and quantity to rise. factors that affect any given price price. demand.
P2 P1
Q rises, b t effect i but ff t on P is ambiguous: If demand increases more than supply, P rises.
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D1 Q1 Q2
D2 Q
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EXAMPLE 3:
EVENTS: price of gas rises AND new technology reduces production costs
STEP 3, cont. t
P1 P2 D1 Q1 Q2 D2 Q
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ACTIVE LEARNING
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ACTIVE LEARNING
ACTIVE LEARNING
1. S curve shifts (Royalties are part 2. S shifts right of sellers costs) P1 3. falls, 3 P falls P2 Q rises.
D2 Q2 Q1
D1 Q
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D1 Q1 Q2 Q
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ACTIVE LEARNING
CONCLUSION:
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