Transcript
MicroeconomicsChapter 4
The Market Forces ofSupply and Demand
ReviewExam 1
Average 76Range 32 - 92
Number TotalUtility
Marginal UtilityChange in Total
Utility
Average UtilityTotal Utility ÷
Number
1 10 10 10.00
2 15 5 7.50
3 19 4 6.33
4 23 4 5.75
5 25 2 5.00
marketcompetitive marketquantity demandedlaw of demanddemand scheduledemand curvenormal goodinferior goodsubstitutes complements
Key Termsquantity supplied law of supplysupply schedulesupply curveequilibriumequilibrium priceequilibrium quantitysurplusshortagelaw of supply and demand
Marketwhere
buyers and sellers interact
Supply and Demand
sellers supplybuyers demand
CompetitiveMarket
many buyers and sellersno one has power to
change price
Ceteris Paribus
“all else equal”
Quantity DemandedQD
amount people are willing and able
to buy
Law of Demandwhen price goes up
quantity demand goes down
when price goes downquantity demand goes up
Law of Demandinverse relationship
price up - QD downprice down - QD up
Price Quantity
90 1
80 2
70 3
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40 6
30 7
20 8
10 90
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Price
Quantity
Demand Schedule
Demand Curve
If I have a scheduleI can make a curve
If I have a curve I can make a schedule
Individual DemandMarket Demand
add up all of the individual demand curves
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Price
Quantity
Movement along the Demand Curve
Price changes
demand curve does not change
quantity demandedchanges
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Price
Quantity
Shift in the Demand Curve
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Price
Quantity
Shift in the Demand CurvePrice does not
change
demand curve shifts
quantity demandedchanges
Shift in DemandIncome
Prices of Related GoodsTastes
Population & DemographicsExpected Future Prices
Why does the demand curve slope
downwards?
Substitution EffectIncome Effect
Substitution Effect
the good is more or less expensive relative to other goods that are
substitutes.
Income Effect
the effect of a price change on consumer’s
purchasing power.
Complementsgoods or services
that are used together
Complements
Substitutes
goods or services that can be used for the same purpose
Normal Good
Demand increases as income rises and
decreases as income falls
Inferior Good
Demand decreases as income rises and
increases as income falls
Quantity SuppliedQS
amount people are willing and able
to sell
Law of Supplywhen price goes up
quantity supplied goes up
when price goes downquantity supplied goes down
Law of Supplydirect relationship
price up - QS upprice down - QS down
Price Quantity
90 9
80 8
70 7
60 6
50 5
40 4
30 3
20 2
10 10
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Price
Quantity
Supply Schedule
Supply Curve
If I have a scheduleI can make a curveIf I have a curve I
can make a schedule
Individual SupplyMarket Supply
add up all of the individual supply curves
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Movement along the Supply Curve
Price changes
supply curve does not change
quantity suppliedchanges
Shift in SupplyInput pricesTechnology
Number of SellersExpected Future Prices
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Price
Quantity
Shift in the Supply Curve
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Price
Quantity
Equilibriumwhere market price is at a level where
Quantity Demanded = Quantity Supplied
Supply
Demand
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Price
Quantity
Surpluswhere market price is above equilibrium price
Quantity Demanded < Quantity Supplied
Supply
Demand
QD QS
QS - QD = 7 - 3 = 4
Price is too hightoo many pizzas
lower price
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Price
Quantity
Shortagewhere market price is below equilibrium price
Quantity Demanded > Quantity Supplied
Supply
Demand
QD QS
QS - QD = 2 - 8 = -6
Price is too lownot enough pizzas
raise price
Three Steps1. Does the event shift supply or demand or both?
2. Which direction is the shift?
3. Diagram new equilibrium
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