2. 3.1 Supply and Demand and Markets
• Markets are the institutions that bring together buyers and sellers.
• We will model what happens inside markets with a workhorse model
in economics, the model of demand and supply.
3. 3.2 Assumptions of the Model
1. Many competing sellers and buyers
2. Price takers, and prices are flexible
3. All products in a market are identical
4. No barriers to entry or exit—anyone can join the market or leave it.
4. 3.2 Prices and the Demand Curve
• The quantity demanded is the quantity buyers are willing and able to
buy of a good or service at a particular price during a particular
period, all other things unchanged.
• A demand schedule is a table that shows the quantities of a good or
service demanded at different prices during a particular period, all
other things unchanged.
• A demand curve is a graphical representation of a demand
schedule.
6. 3.2 Price and the Demand Curve
• A change in quantity demanded is a movement along a demand
curve that results from a change in price.
• All other things unchanged, the law of demand states that for
virtually all goods and services, a higher price leads to a reduction in
quantity demanded and a lower price leads an increase in quantity
demanded.
7. Figure 3.2: An Increase in Demand
A change in demand is characterized by a shift in a demand curve.
8. 3.2 Nonprice Determinants of Demand
• Income
• A good for which demand increases when income
increases is called a normal good.
• A good for which demand decreases when
income increases is called an inferior good.
9. 3.2 Nonprice Determinants of Demand
• Prices of related goods and services
• If a decrease in the price of one good increases the demand for another, the
two goods are called complements.
• If a decrease in the price of one good reduces the demand for another, the
two goods are called substitutes.
10. 3.2 Nonprice Determinants of Demand
• Preferences & Information
• Demographic characteristics, number of buyers
• Buyer expectations (about future prices)
11. 3.3 Price and the Supply Curve
• The quantity supplied is the quantity sellers are willing to sell of a
good or service at a particular price during a particular period, all
other things unchanged.
• For most goods and services, a higher price leads to an increase in the quantity
supplied.
• A supply schedule is a table that shows quantities supplied at
different prices during a particular period, all other things unchanged.
• A supply curve is a graphical representation of a supply schedule.
• A change in quantity supplied is characterized by movement along
the supply curve caused by a change in price.
13. 3.3 Nonprice Determinants of Supply
• A change in supply is a shift in the supply curve.
• A supply shifter is a variable that can change the quantity of a good
or service supplied at each price.
• The cost of inputs
14. 3.3 Nonprice Determinants of Supply
• Technology
• Returns from alternative activities (opportunity costs)
• Natural events
• The number of sellers (firms in the market)
• Seller expectations
15. 3.4 The Determination of Price and Quantity
• The model of demand and supply uses
demand and supply curves to explain the
determination of price and quantity in a
market.
• The equilibrium price is the price at
which quantity demanded equals quantity
supplied.
• The equilibrium quantity is the quantity
demanded and supplied at the equilibrium
price.
17. Figure 3.9: A Surplus in the Market for Coffee
• A surplus is the amount by which the
quantity supplied exceeds the quantity
demanded at the current price.
18. Figure 3.10: A Shortage in the Market for Coffee
• A shortage is the amount by which the quantity
demanded exceeds the quantity supplied at the
current price.
19. 3.4 Equilibrium
• When the price is below equilibrium, the resulting shortage
puts upward pressure on the price.
• As price rises, the shortage shrinks
• When the price is above equilibrium, the resulting surplus
puts downward pressure on the price.
• As price falls, the surplus shrinks.
• Price gravitates to level where no surplus or shortage
exists—the equilibrium price.
24. 3.4 Analyzing the Impact of Events
• Increases in demand reflect increases in the desirability of
goods, pushing up prices because people want the good
more.
• Decreases in supply reflect increased scarcity of goods,
again pushing up prices.
• Both effects increase price by making goods more scarce,
either because there is absolutely less of the good, or
because more people desire it.
