Microeconomics Chapter 4 The Market Forces of Supply and Demand market competitive market quantity demanded law of demand demand schedule demand curve normal good inferior good substitutes complements Key Terms quantity supplied law of supply supply schedule supply curve equilibrium equilibrium price equilibrium quantity surplus shortage law of supply and demand Number Total Utility Marginal Utility Change in Total Utility Average Utility Total 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 Market where buyers and sellers interact 101 Lecture 4 Supply and Demand - September 14, 2014
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Microeconomics Chapter 4
!
The Market Forces of Supply and Demand
market!competitive market!quantity demanded!law of demand!demand schedule!demand curve!normal good!inferior good!substitutes !complements!
Key Termsquantity supplied !law of supply!supply schedule!supply curve!equilibrium!equilibrium price!equilibrium quantity!surplus!shortage!law of supply and demand!
Number Total!Utility
Marginal Utility!Change in Total
Utility
Average Utility!Total 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
Marketwhere !
buyers and sellers interact
101 Lecture 4 Supply and Demand - September 14, 2014
Supply and Demand
sellers supply!buyers demand!
Competitive Market
many buyers and sellers!no one has power to
change price
Ceteris Paribus
“all else equal”
Quantity Demanded QD
amount people are !willing and able !
to buy
101 Lecture 4 Supply and Demand - September 14, 2014
Law of Demandwhen price goes up!
quantity demand goes down
when price goes down!quantity demand goes up
Law of Demandinverse relationship!
!
price up - QD down!price down - QD up
Price Quantity
90 1
80 2
70 3
60 4
50 5
40 6
30 7
20 8
10 90
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
If I have a schedule!I can make a curve!
!If I have a curve I
can make a schedule
Individual Demand Market Demand
add up all of the individual demand curves
101 Lecture 4 Supply and Demand - September 14, 2014
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Movement along the !Demand Curve
Price changes!!
demand curve does not change!
!quantity demanded!
changes
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shift in the Demand Curve
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shift in the Demand CurvePrice does not
change!!
demand curve shifts!!
quantity demanded!changes
Shift in DemandIncome
Prices of Related Goods Tastes
Population & Demographics Expected Future Prices
101 Lecture 4 Supply and Demand - September 14, 2014
Why does the demand curve slope
downwards?
Substitution Effect!Income 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
101 Lecture 4 Supply and Demand - September 14, 2014
Complements
Substitutes
goods or services that can be used for the same purpose
101 Lecture 4 Supply and Demand - September 14, 2014
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 Supplied QS
amount people are !willing and able !
to sell
101 Lecture 4 Supply and Demand - September 14, 2014
Law of Supplywhen price goes up!
quantity supplied goes up
when price goes down!quantity supplied goes down
Law of Supplydirect relationship!
!
price up - QS up!price down - QS down
Price Quantity
90 9
80 8
70 7
60 6
50 5
40 4
30 3
20 2
10 10
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Supply Schedule
Supply Curve
If I have a schedule!I can make a curve!If I have a curve I
can make a schedule
Individual Supply Market Supply
add up all of the individual supply curves
101 Lecture 4 Supply and Demand - September 14, 2014
0
10
20
30
40
50
60
70
80
90
100
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 supplied!
changes
Shift in SupplyInput prices Technology
Number of Sellers Expected Future Prices
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shift in the Supply Curve
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Equilibriumwhere market price is at a level where !
Quantity Demanded = Quantity Supplied
Supply
Demand
101 Lecture 4 Supply and Demand - September 14, 2014
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
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 high!too many pizzas
lower price
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shortagewhere market price is below equilibrium price!
Quantity Demanded > Quantity Supplied
Supply
Demand
QS QD
QS - QD = 2 - 8 = -6
Price is too low!not 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
101 Lecture 4 Supply and Demand - September 14, 2014
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