In This Lecture…..

Demand Absolute Price and Relative Price Supply The Market

In This Lecture…..
Consumers’ Surplus, Producers’ Surplus, and Total Surplus Price Ceilings Price Floors

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Theory
Economists build theories to answer questions that do not have obvious answers. Cause Effect

Theory is an abstract representation of the real world designed with the intent to better understand the world.

Market
Any place people come together to trade Trade or exchange may take place at a physical or virtual location

Demand
A Definition
The willingness and ability of buyers: to purchase different quantities of a good at different prices during a specific time period.

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Law of Demand
As the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises, ceteris paribus

Price

Quantity

Ceteris Paribus
A Latin term meaning “all other things constant” or “nothing else changes.” Ceteris paribus is an assumption used to examine the effect of one influence on an outcome while holding all other influences Constant.

Demand Schedule
The numerical tabulation of the quantity demanded of a good at different prices. A demand schedule is the numerical representation of the law of demand.

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Downward Slopping Demand Curve
The graphical representation of the demand schedule and law of demand.

Prices
Absolute (Money) Price - The price of a good in money terms. Relative Price (opportunity cost) - The price of a good in terms of another good.

Demand
Schedule and Graph

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Why does the price of one more day at Disney World cost less than the cost of the first day?

Law of Diminishing Marginal Utility
For a given time period, the marginal (additional) utility or satisfaction gained by consuming equal successive units of a good will decline as the amount consumed increases.

Derivation of Market Demand Schedule

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Derivation of Market Demand Curve

Change in Quantity Demanded

Change in Demand

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Increase in Demand

Decrease in Demand

Factors Causing a Shift in the Demand Curve
Income Preferences Prices of substitute goods Prices of complementary goods Number of buyers Expectations of future prices

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Factors Causing a Shift in the Demand Curve - Income
Normal Good - A good the demand for which rises (falls) as income rises (falls). Inferior Good - A good the demand for which falls (rises) as income rises (falls). Neutral Good – A good the demand for which does not change as income rises or falls.

Factors Causing a Shift in the Demand Curve - Substitutes
Substitutes Two goods that satisfy similar needs or desires. If two goods are substitutes, the demand for one rises as the price of the other rises (or the demand for one falls as the price of the other falls).

Factors Causing a Shift in the Demand Curve - Complements
Complements Two goods that are used jointly in consumption. If two goods are complements, the demand for one rises as the price of the other falls (or the demand for one falls as the price of the other rises).

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Effect on Demand if Price Increases on a Substitute Good

Effect on Demand if Price Increases on a Complementary Good

Self Test Questions
1. As Sandi’s income rises, her demand for popcorn rises. As Mark’s income falls, his demand for prepaid telephone cards rises. What kinds of goods are popcorn and telephone cards for the people who demand each? 2. Why are demand curves downward sloping? 3. Give an example that illustrates how to derive a market demand curve. 4. What factors can change demand? What factors can change quantity demanded?

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Supply
The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period.

Law of Supply
As the price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of the good falls, ceteris paribus.

Price

Quantity

Supply Curve
The graphical representation of the law of supply, which states that price and quantity supplied are directly related, ceteris paribus.

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Fixed Supply

Supply Schedule
The numerical tabulation of the quantity supplied of a good at different prices. A supply schedule is the numerical representation of the law of supply.

Deriving a Market Supply Schedule

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Deriving a Market Supply Curve

Factors that Cause the Supply Curve to Shift
Prices of relevant resources Technology Number of sellers Expectation of future prices Taxes and subsidies Government restrictions

Change in Supply

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Change in Supply

Change in Quantity Supplied
A change in quantity supplied refers to a movement along a supply curve. The only factor that can directly cause a change in the quantity supplied of a good is a change in the price of the good, or own price.

Change in Quantity Supplied

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Self Test Questions
1. What would the supply curve for houses (in a given city) look like for a time period of (a) the next ten hours and (b) the next three months? 2. What happens to the supply curve if each of the following occurs? a. There is a decrease in the number of sellers. b. A per-unit tax is placed on the production of a good. c. The price of a relevant resource falls. 3. “If the price of apples rises, the supply of apples will rise.” True or false? Explain your answer.

Putting Supply and Demand Together

Market Equilibrium
Equilibrium in a market is the price Quantity combination from which there is no tendency for buyers or sellers to move away. Graphically, equilibrium is the intersection point of the supply and demand curves.

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Auction at Work in a Market
Supply and Demand at Work The auctioneer calls out different prices, and buyers record how much they are willing and able to buy. At prices of $6.00, $5.00, and $4.00, quantity supplied is greater than quantity demanded. At prices of $1.25 and $2.25, quantity demanded is greater than quantity supplied.

Auction at Work in a Market

At a price of $3.10, quantity demanded equals quantity supplied.

Equilibrium
Equilibrium Price (Market- Clearing Price) The price at which quantity demanded of the good equals quantity supplied

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Surplus and Shortage
Surplus (Excess Supply) A condition in which quantity supplied is Greater than quantity demanded. Surpluses occur only at prices above equilibrium price. Shortage (Excess Demand) A condition in which quantity demanded is greater than quantity supplied. Shortages occur only at prices below equilibrium price.

Move to Market Equilibrium

Market Demand and Supply

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Moving to Equilibrium

Equilibrium

Consumer, Producer and Total Surplus
Consumers’ Surplus (CS) CS= Maximum buying price - Price paid The difference between the maximum price a buyer is willing and able to pay for a good or service and the price actually paid. Producers’ (Sellers’) Surplus (PS) PS = Price received - Minimum Selling price The difference between the price sellers receive for a good and the minimum or lowest price for which they would have sold the good. Total Surplus (TS) TS _ CS _ PS The sum of consumers’ surplus and producers’ surplus.

Consumer Surplus

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Producer Surplus

Total Surplus

Equilibrium

Equilibrium Price and Quantity Effects of Supply and Demand Curve Shifts

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Self-Test Questions
1. When a person goes to the grocery store to buy food, there is no auctioneer calling out prices for bread, milk, and other items. Therefore, supply and demand cannot be operative. Do you agree or disagree? Explain your answer. 2. The price of a given-quality personal computer is lower today than it was five years ago. Is this necessarily the result of a lower demand for computers? Explain your answer.

Self-Test Questions
(continued)

3. What is the effect on equilibrium price and quantity of the following? a. A decrease in demand that is greater than the increase in supply b. An increase in supply c. A decrease in supply that is greater than the increase in demand d. A decrease in demand

Self-Test Questions
(continued)

4. At equilibrium quantity, what is the relationship between the maximum buying price and the minimum selling price? 5. If the price paid is $40 and the consumers’ surplus is $4, then what is the maximum buying price? If the minimum selling price is $30 and producers’ surplus is $4, then what is the price received by the seller?

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Price Controls
Price Ceiling A government-mandated maximum price above which legal trades cannot be made. Price Floor A government-mandated minimum price below which legal trades cannot be made.

Price Ceiling

Price Floor

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Self Test Questions
1. Do buyers prefer lower prices to higher prices? 2. “When there are long-lasting shortages, there are long lines of people waiting to buy goods. It follows that the shortages cause the long lines.” Do you agree or disagree? Explain your answer. 3. Who might argue for a price ceiling? a price floor?

Next

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