ECO2011 Basic Microeconomics

Fall 2020
Emily Zheng
What Is a Market?
• A market is a group of buyers and sellers of a particular good or
service.

• The terms supply and demand refer to the behavior of people . . .

as they interact with one another in markets.
What Is a Market?
• Buyers determine demand.

• Sellers determine supply.

What Is Competition?
• A competitive market is a market in which there are many buyers
and sellers so that each has a negligible impact on the market
price.
What Is Competition?
• Competition: Perfect and Otherwise
• Perfect Competition
• Products are the same
• Numerous buyers and sellers so that each has no influence over price
• Buyers and Sellers are price takers
• Monopoly
• One seller, and seller controls price
Demand

Demand Schedule:
A table that shows the
relationship between
the price of a product
and the quantity of the
product demanded.

Quantity Demanded:
The amount of a
product or service that
consumers are willing
and able to purchase
at a given price.
Demand

Demand Schedule:
A table that shows the
relationship between
the price of a product
and the quantity of the
product demanded.

Demand Curve:
Graphical
representation of
demand schedule.
Price on y-axis.
Quantity demanded on
x-axis.
Demand

When drawing the

demand curve, we
assume ceteris paribus.

Ceteris Paribus:
Latin phrase meaning
“all else equal”. The
requirement that when
we analyzing the
relationship between
two variables---such
as price and quantity
demanded---other
variables must be held
constant.
Demand

Law of Demand:
As price changes,
quantity demanded
changes in opposite
direction, ceteris
paribus.

Implication:
Demand curve slopes
downward
Market Demand versus Individual Demand
• Market demand refers to the sum of all individual demands for a
particular good or service.
• Graphically, individual demand curves are summed horizontally to
obtain the market demand curve.
 The Market Demand Curve
When the price is $2.00, When the price is $2.00, The market demand at
Catherine will demand 4 Nicholas will demand 3 $2.00 will be 7 ice-cream
ice-cream cones. ice-cream cones. cones.

Catherine’s Demand + Nicholas’s Demand = Market Demand

Price of Ice- Price of Ice- Price of Ice-

Cream Cone Cream Cone Cream Cone

2.00 2.00 2.00

1.00 1.00 1.00

7 13
4 8 3 5

Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

When the price is $1.00, When the price is $1.00, The market demand at
Catherine will demand 8 Nicholas will demand 5 $1.00, will be 13 ice-cream
ice-cream cones. ice-cream cones. cones.
Changes in demand

A change in
something other than
price that affects
demand causes the
entire demand curve
to shift.

A shift to the right (D1

to D2) is an increase in
demand.

A shift to the left (D1

to D3) is a decrease in
demand.
Changes in demand

As the demand curve

shifts, the quantity
demanded is likely to
change, even if the
price doesn’t change.

P1
The quantity
demanded changes at
every possible price.

Q3 Q1 Q2
What would cause a change in demand?

Income of consumers
Increase in income increases demand if product is normal,
decreases demand if product is inferior.

Price of related goods

Increase in price of related good increases demand if products
are substitutes, decreases demand if products are
complements

Tastes and preferences

Population and demographics

Expected future prices

Changes in demand: consumer incomes

Normal goods:
Goods for which the demand increases as
income rises, and decreases as income falls
Examples: Designer Clothing
Restaurant meals
Vacations Effect of increase in income,
if good is normal
Inferior goods:
Goods for which the demand decreases as
income rises, and increases as income falls
Examples: Second-hand clothing
Fast food
Are tablet computers normal or inferior goods?
Effect of increase in income,
Probably normal if good is inferior
Changes in demand: Price of related goods

Substitutes:
Goods and services that can be used for
the same purpose
Examples: Apple juice and orange juice
Ice cream and frozen yogurt
Sweaters and sweatshirts Effect on demand for Big
Macs, if price of Whopper
increases

Complements:
Goods and services that are consumed together
Examples: Big Mac and McDonald’s fries
Hot dogs and hot dog buns
Left shoes and right shoes Effect on demand for Big
Macs, if price of McDonald’s
fries increases
Changes in demand: Tastes and preferences

If consumers’ tastes or preferences change,

they may buy more or less of the product
Example:
If consumers become more concerned about
eating healthily, they might decrease their Effect on demand for fast food, if
demand for fast food consumers want to eat healthy

Changes in demand: Population and demographics

Increases in the number of people buying

something will increase the amount
demanded
Example: An increase in the elderly
population increases the Effect on demand for medical
care, as the population ages
demand for medical care
Changes in demand: Expected future prices

Consumers decide which products to buy

and when to buy them.
• Future products are substitutes for current
products
• An expected increase in the price
tomorrow increases demand today. Effect on today’s gasoline demand,
if price will rise tomorrow
• An expected decrease in the price
tomorrow decreases demand today.

Example: If you found out the price of

gasoline would go up
tomorrow, you would
increase your demand today.
Change in demand vs. change in quantity demanded

A change in the price

of the product being
examined causes a
movement along the
demand curve.
This is a change in
quantity demanded.

Any other change

affecting demand
causes the entire
demand curve to
shift.
This is a change in
demand.
Supply schedule and supply curve

Supply Schedule: Supply Curve:

Table showing how Graphical representation of supply
many of a product will schedule.
be available for Price on y-axis.
purchase at various Quantity demanded on x-axis.
prices.
Law of supply

Law of Supply:
As price changes, quantity supplied
changes in the same direction, ceteris
paribus.

Implication:
supply curve slopes upward
Market Supply versus Individual Supply
• Market supply refers to the sum of all individual supplies for all
sellers of a particular good or service.
• Graphically, individual supply curves are summed horizontally to
obtain the market supply curve.
Changes in supply

A change in something
other than price that
affects supply causes the
entire supply curve to
shift.

A shift to the right (S1 to

S3) is an increase in
supply.

A shift to the left (S1 to

S2) is a decrease in
supply.
Changes in supply

As the supply curve

shifts, the quantity
supplied is likely to
change, even if the
price doesn’t
change. P1

The quantity
supplied changes at
every possible price.
Q2 Q1 Q3
What would cause a change in supply?

Price of inputs

Technological change

Prices of substitutes in production

Number of firms in the market

Expected future prices

Changes in supply: Price of inputs
Inputs are things used in the production
of a good or service.

Examples of inputs for tablet computers:

Computer processor
Labor
Effect of an increase in the
price of input goods

An increase in the price of an input

decreases the profitability of selling the
good, causing a decrease in supply.

A decrease in the price of an input

increases the profitability of selling the Effect of a decrease in the
good, causing an increase in supply. price of input goods
Changes in supply: Technological change

A firm may experience a positive or

negative change in its ability to produce
output given a fixed amount of inputs.

Examples:
A new, more productive variety of Effect of a positive change in
technology
wheat would increase the supply of
wheat.
Governmental restrictions on land use
for agriculture might decrease the
supply of wheat.

Effect of a negative change

Changes raise or lower firms’ costs, hence in technology
their supply of the good.
Changes in supply: Prices of substitutes in production

Many firms can produce and sell more

than one product.

Example:
An Illinois farmer can plant corn or
soybeans. If the price of soybeans rises, he
will plant (supply) less corn.
Effect on the supply of corn,
of an increase in the price of
soybeans

Changes in supply: Number of firms in the market

More firms in the market will result in
more product available at a given price
(greater supply).

Fewer firms → supply decreases. Effect of a increase in the

number of firms
Changes in supply: Expected future prices

If a firm anticipates the price of its product

will be higher in the future, it might
decrease its supply today in order to
increase it in the future.

What types of products could be “stored” Effect of an increase in future

like this? expected price of a good

Non-perishable products
Change in supply vs. change in quantity supplied

A change in the price of

the product being
examined causes a
movement along the
supply curve.
This is a change in quantity
supplied.

Any other change

affecting supply causes the
entire supply curve to shift.
This is a change in supply.
Exercises
1. Income ________ along the demand curve.
A) increases
B) decreases
C) is held constant
D) either increases or decreases
Exercises
2. Which of the following will NOT cause a shift in the demand
curve for DVDs?
A) a change in income
B) a change in wealth
C) a change in the price of prerecorded VHS tapes
D) a change in the price of DVDs
Exercises
3. Which of the following would be most likely to cause the
demand for Dr. Pepper to shift from D0 to D1?
A) an increase in income, assuming that Dr. Pepper is a normal
good
B) a decrease in the price of 7-UP, assuming 7-UP is a substitute
for Dr. Pepper
C) an increase in the price of Dr. Pepper
D) an increase in the price of sugar used to
make Dr. Pepper
Exercises
4. If consumer income increases, the demand for tuna fish
sandwiches shifts from D0 to D1. This implies that tuna fish
sandwiches are a(n)
A) normal good.
B) inferior good.
C) substitute good.
D) complementary good.