Microeconomics
Chapter 4
The Market Forces of
Supply and Demand
Review
Exam 1
Average 76
Range 32 - 92
Number
Total
Utility
Marginal Utility
Change in Total
Utility
Average Utility
Total Utility ÷
Number
1 10 10 10.00
2 15 5 ...
market
competitive market
quantity demanded
law of demand
demand schedule
demand curve
normal good
inferior good
substitut...
Market
where
buyers and sellers
interact
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
Law of Demand
when price goes up
quantity demand goes down
when price goes down
quantity demand goes up
Law of Demand
inverse 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 9
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
...
Individual Demand
Market Demand
add up all of the
individual demand curves
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
deman...
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 Curve
Price does not
change
dem...
Shift in Demand
Income
Prices of Related Goods
Tastes
Population & Demographics
Expected Future Prices
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.
Complements
goods or services
that are
used together
Complements
Substitutes
goods or services
that can be used for
the same purpose
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
Law of Supply
when price goes up
quantity supplied goes up
when price goes down
quantity supplied goes down
Law of Supply
direct 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 1
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
...
Individual Supply
Market Supply
add up all of the
individual supply curves
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
suppl...
Shift in Supply
Input 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
Equilibrium
where market price is at a level where
...
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Surplus
where market price is above equilibrium pri...
0
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shortage
where market price is below equilibrium pr...
Three Steps
1. Does the event shift supply or
demand or both?
2. Which direction is the shift?
3. Diagram new equilibrium
101 lecture 4
101 lecture 4
101 lecture 4
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101 lecture 4

  1. 1. Microeconomics Chapter 4 The Market Forces of Supply and Demand
  2. 2. Review Exam 1 Average 76 Range 32 - 92
  3. 3. 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
  4. 4. 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
  5. 5. Market where buyers and sellers interact
  6. 6. Supply and Demand sellers supply buyers demand
  7. 7. Competitive Market many buyers and sellers no one has power to change price
  8. 8. Ceteris Paribus “all else equal”
  9. 9. Quantity Demanded QD amount people are willing and able to buy
  10. 10. Law of Demand when price goes up quantity demand goes down when price goes down quantity demand goes up
  11. 11. Law of Demand inverse relationship price up - QD down price down - QD up
  12. 12. Price Quantity 90 1 80 2 70 3 60 4 50 5 40 6 30 7 20 8 10 9 0 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
  13. 13. Individual Demand Market Demand add up all of the individual demand curves
  14. 14. 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
  15. 15. 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
  16. 16. 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 Price does not change demand curve shifts quantity demanded changes
  17. 17. Shift in Demand Income Prices of Related Goods Tastes Population & Demographics Expected Future Prices
  18. 18. Why does the demand curve slope downwards? Substitution Effect Income Effect
  19. 19. Substitution Effect the good is more or less expensive relative to other goods that are substitutes.
  20. 20. Income Effect the effect of a price change on consumer’s purchasing power.
  21. 21. Complements goods or services that are used together
  22. 22. Complements
  23. 23. Substitutes goods or services that can be used for the same purpose
  24. 24. Normal Good Demand increases as income rises and decreases as income falls
  25. 25. Inferior Good Demand decreases as income rises and increases as income falls
  26. 26. Quantity Supplied QS amount people are willing and able to sell
  27. 27. Law of Supply when price goes up quantity supplied goes up when price goes down quantity supplied goes down
  28. 28. Law of Supply direct relationship price up - QS up price down - QS down
  29. 29. Price Quantity 90 9 80 8 70 7 60 6 50 5 40 4 30 3 20 2 10 1 0 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
  30. 30. Individual Supply Market Supply add up all of the individual supply curves
  31. 31. 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
  32. 32. Shift in Supply Input prices Technology Number of Sellers Expected Future Prices
  33. 33. 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
  34. 34. 0 10 20 30 40 50 60 70 80 90 100 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Equilibrium where market price is at a level where Quantity Demanded = Quantity Supplied Supply Demand
  35. 35. 0 10 20 30 40 50 60 70 80 90 100 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Surplus where 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
  36. 36. 0 10 20 30 40 50 60 70 80 90 100 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Shortage where market price is below equilibrium price Quantity Demanded > Quantity Supplied Supply Demand QD QS QS - QD = 2 - 8 = -6 Price is too low not enough pizzas raise price
  37. 37. Three Steps 1. Does the event shift supply or demand or both? 2. Which direction is the shift? 3. Diagram new equilibrium

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