Lect 3 & 4: demand, supply, and price

a market

• consists of any situation where buyers (consumers) and seller (producers) can negotiate the exchange of a good or service

  • markets can be:

    • confined to a single specific time and location (ex: local farmers market or grocery store)

    • span vast geographic territories (ex: amazon, ebay, or most online stores)

• 3 important characteristics:

  • reciprocity

  • voluntary participation

  • competition

a market is a way of transferring goods and services from one person to another

what is a market?

reciprocity, voluntary participation, and competition

what are the 3 important characteristics of a market?

reciprocity

• the transfer of a good on a market is reciprocated

  • one person’s transfer is directly matched by a transfer in the other direction

  • ex) transfer of a good from a seller to a buyer is matched by a transfer of money from the seller to the buyer

voluntary participation

• because both the buyer and seller benefit

  • ex) buyer gets good and seller gets compensation for the good

competition

• buyers and sellers are limited in the prices they set

  • ex) consumer will choose to buy from a seller with a lower price if another seller charges a price too high

seller earnings = price - cost

equation for seller earnings:

price should not be below cost for seller earnings

price should not be below cost for seller earnings

buyer earnings = value - price

equation for buyer earnings:

price should not be above value for buyer earnings

price should not be above value for buyer earnings

quantity demand

• the total amount that consumers desire to purchase in some time period

the total amount that consumers desire to purchase in some time period

what is quantity demand?

demand schedule

identify this:

demand curve

Identify this:

Law of demand

• the empirical observation that when the price of a product falls, people demand larger quantities of it

  • ex) as a product gets cheaper the more people want of that product

consumer’s income, price of other goods, tastes, population

what variables other than price can change to shift the demand curve to a new position:

an increase in demand

• a rightward shift in the demand curve indicates ____

a decrease in demand

• a leftward shift in the demand curve indicates _____

a change in demand

• ______ is a change in quantity demanded at every price

  • a shift of the entire curve

a change in quantity

• _______ refers to a movement from one point on a demand curve to another point (either on the same demand curve or on a new one)

decreases

if price increases, quantity demand _____

increases

if quantity demand increases, price _____

Normal goods

• the quantity demanded rises with a rise in income

  • ex) more expensive/ good quality food

Inferior goods

• the quantity demanded falls with a rise in income

  • ex) cheap/bad quality food

complements

• an increase in the price of one good decreases demand for the other good

  • ex) hot dogs and buns → if price of hot dogs goes up then the demand for buns will do down because ppl will stop buying dogs and no one eats a bun without a dog

substitutes

• an increase in the price of one will tend to increase the demand for the other

  • ex) tank air → increase in price of shirt, increases the demand for other cheaper shirts that look just like the expensive shirt (dupes)

quantity supplied

• the amount of a product that firms desire to sell in some time period

• the amount that firms are willing to offer for sale and NOT necessarily the actual quantity sold

supply schedule

Identify this:

supply curve

Identify this:

law of supply

• the empirical observation that when the price of a product rises, firms offer more of it for sale

• as the price of a product increases, firms offer a bigger supply of it

change in any variable other than price will shift the supply curve to a new position

how to shift a supply curve?

prices of inputs, tech, government taxes, price of other products, and the number of suppliers

what variables getting changes will shift the supply curve?

a change in supply

• a change in the quantity that will be supplied at every price

  • a shift of the entire curve

a change in quantity

• a movement from one point on a supply curve to another point (on the same supply curve or on a new one)

perfect competition

• when none of the buyers and sellers have any appreciable influence on the market price

  • large number of consumers

  • large number of producers

  • producers sell identical or homogenous versions of the product

the market clears when every buyer finds a seller and every seller finds a buyer

when does the market “clear”?

at the equilibrium price

when does every buyer find a seller and every seller find a buyer?

law #1 of supply and demand

an increase in demand causes an increase in both the equilibrium price and equilibrium quantity

law #2 of supply and demand

a decrease in demand causes a decrease in both equilibrium price and equilibrium quantity

law #3 of supply and demand

an increase in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity

law #4 of supply and demand

a decrease in supply causes an increase in the equilibrium price and a decrease in the equilibrium quantity

P = 2 + 3Qs

supply schedule equation:

P = 10 - Qd

demand schedule equation: