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In this chapter, look for the answers to these questions: What factors affect buyers demand for goods?
What factors affect sellers supply of goods? How do supply and demand determine the price
of a good and the quantity sold?
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
The quantity demanded of any good is the
amount of the good that buyers are willing and able to purchase.
Example:
Helens demand for lattes.
Quantity 15 of Lattes
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Market Demand versus Individual Demand The quantity demanded in the market is the sum of the
quantities demanded by all buyers at each price.
Helens Qd
$0.00
1.00 2.00 3.00 4.00 5.00 6.00
16
14 12 10 8 6 4
+
+ + + + + +
8
7 6 5 4 3 2
=
= = = = = =
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21 18 15 12 9 6
8
Qd (Market) 24 21 18 15
4.00
5.00 6.00
12
9 6
10
Increase in # of buyers
increases quantity demanded at each price, shifts D curve to the right.
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Suppose the number of buyers increases. Then, at each P, Qd will increase (by 5 in this example).
Q
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Demand Curve Shifters: Prices of Related Goods Two goods are substitutes if
an increase in the price of one causes an increase in demand for the other.
Demand Curve Shifters: Prices of Related Goods Two goods are complements if
an increase in the price of one causes a fall in demand for the other.
Example:
The Atkins diet became popular in the 90s, caused an increase in demand for eggs, shifted the egg demand curve to the right.
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# of buyers
Income Price of related goods Tastes
Expectations
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Music downloads and iPods are complements. A fall in price of iPods shifts the demand curve for music downloads to the right.
P1
D1 Q1 Q2
D2
P1 P2 D1 Q1 Q2
ACTIVE LEARNING 1
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 music downloads
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P1
Supply
The quantity supplied of any good is the
amount that sellers are willing and able to sell.
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Example:
Starbucks supply of lattes.
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Q
0 5 10 15
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$0.00
1.00 2.00 3.00 4.00 5.00 6.00
0
3 6 9 12 15 18
+
+ + + + + +
0
2 4 6 8 10 12
=
= = = = = =
0
5 10 15 20 25 30
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P
$6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 0 5 10 15 20 25 30 35
QS (Market)
$0.00
1.00 2.00
0
5 10
3.00
4.00 5.00
15
20 25
6.00
30
Q
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Suppose the price of milk falls. At each price, the quantity of Lattes supplied will increase (by 5 in this example). Q
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Technology
# of Sellers
Expectations
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S1
P1 P2
Q2 Q1
S1
S2
P1
Q1
Q2 Quantity of tax
return software
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S1
This shifts the demand curve for tax preparation software, not the supply curve.
Equilibrium: P has reached the level where quantity supplied equals quantity demanded
Equilibrium price:
the price that equates quantity supplied with quantity demanded
P
$6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 0 5 10 15 20 25 30 35
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P $0 1 2 3 4
QD 24 21 18 15 12
QS 0 5 10 15 20
9
6
25
30
Equilibrium quantity:
the quantity supplied and quantity demanded at the equilibrium price
P
$6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 0 5 10 15 20 25 30 35
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P $0 1 2 3 4
QD 24 21 18 15 12
QS 0 5 10 15 20
9
6
25
30
Surplus
Example: If P = $5,
then QD = 9 lattes
and QS = 25 lattes resulting in a surplus of 16 lattes Q
Surplus
Surplus
Shortage
10 15 20 25 30 35
Facing a shortage, sellers raise the price, causing QD to fall and QS to rise, which reduces the shortage.
Shortage
Facing a shortage, sellers raise the price, causing QD to fall and QS to rise. Prices continue to rise until market reaches equilibrium.
Shortage
D curve, or both.
2. Decide in which direction curve shifts.
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P1
D1 Q1
Q
quantity of hybrid cars
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EXAMPLE 1:
EVENT TO BE ANALYZED:
A Shift in Demand
P S1 P2 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 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
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EXAMPLE 1:
Notice: When P rises, producers supply a larger quantity of hybrids, even 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.
A Shift in Demand
P S1 P2 P1
D1 Q1 Q2
D2
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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)
EXAMPLE 2:
A Shift in Supply
S1 S2
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. demand.
D1 Q1 Q2
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S1
S2
P2 P1
Q rises, but effect on P is ambiguous: If demand increases more than supply, P rises.
D1 Q1 Q2
D2
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S1
S2
P1 P2 D1 Q1 Q2 D2
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ACTIVE LEARNING 3
1. D curve shifts
2. D shifts left
3. P and Q both fall.
P1 P2
D2
D1
Q2 Q1
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Q
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ACTIVE LEARNING 3
1. S curve shifts 2. S shifts right P1 (Royalties are part of sellers costs) P2 3. P falls, Q rises.
D1
Q1 Q2
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Q
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ACTIVE LEARNING 3
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CHAPTER SUMMARY
A competitive market has many buyers and sellers,
each of whom has little or no influence on the market price.
CHAPTER SUMMARY
Besides price, demand depends on buyers
incomes, tastes, expectations, the prices of substitutes and complements, and number of buyers. If one of these factors changes, the D curve shifts.
CHAPTER SUMMARY
Besides price, demand depends on buyers
incomes, tastes, expectations, the prices of substitutes and complements, and number of buyers. If one of these factors changes, the D curve shifts.
CHAPTER SUMMARY
The intersection of S and D curves determines the
market equilibrium. At the equilibrium price, quantity supplied equals quantity demanded.
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CHAPTER SUMMARY
We can use the supply-demand diagram to analyze
the effects of any event on a market: First, determine whether the event shifts one or both curves. Second, determine the direction of the shifts. Third, compare the new equilibrium to the initial one.
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