This document discusses microeconomic concepts related to supply and demand. It defines key terms like market, demand, supply, competitive market, and equilibrium. It explains the laws of supply and demand - as price increases, quantity demanded decreases and quantity supplied increases. Graphs and diagrams are used to illustrate demand and supply schedules and curves, and how equilibrium price and quantity are determined by the intersection of the demand and supply curves. Shifts in demand and supply are also explained.

2. Microeconomics
Lecture 5
Supply and Demand
The Market System

3. Questions?

4. It’s not what you are,
but what you don’t
become that hurts.
-Oscar Levant

5. Why would going
to a two-hour
movie cost you $28,
not $8?

6. Opportunity Cost
What else could I
be doing?

7. Opportunity Cost
implicit cost
time cost

8. Cash Cost
explicit cost
out-of-pocket cost
money cost

9. Total Cost
cash cost
+ opportunity cost
= total cost

10. Key Terms
market
competitive market
quantity demanded
law of demand
demand schedule
demand curve
normal good
inferior good
substitutes
complements
quantity supplied
law of supply
supply schedule
supply curve
equilibrium
equilibrium price
equilibrium quantity
surplus
shortage
law of supply and demand

11. Market
where buyers and
sellers make trades

12. Demand
what buyers would
like
Desires

13. Supply
what seller would
like to sell

14. Buyers buy
Buyers demand
Sellers sell
Sellers supply

15. Competitive Market
many buyers and
sellers
no one has power to
change price

16. Ceteris Paribus
“all else equal”

17. Consumer
Highest Price
Willing to Pay
Austin $10
Brittany $9
Carl $8
Duane $7
Ed $6
Market Demand for Pizza

18. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
1 Austin 2 Brittany 3 Carl 4 Duane 5 Ed
Price

19. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
1 Austin 2 Brittany 3 Carl 4 Duane 5 Ed
Price

20. Consumer
Highest Price
Willing to Pay
Price
Consumer
Surplus
Austin $10 $5 $5
Brittany $9 $5 $4
Carl $8 $5 $3
Duane $7 $5 $2
Ed $6 $5 $1
Summary $40 $25 $15
Market Demand for Pizza

21. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
1 Austin 2 Brittany 3 Carl 4 Duane 5 Ed
Price

22. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
1 Austin 2 Brittany 3 Carl 4 Duane 5 Ed
Price

23. Consumer
Highest Price
Willing to Pay
Price
Consumer
Surplus
Austin $10 $7.50 $2.50
Brittany $9 $7.50 $1.50
Carl $8 $7.50 $0.50
Duane $7 $7.50 -$0.50
Ed $6 $7.50 -$1.50
Summary
Market Demand for Pizza

24. Consumer
Highest Price
Willing to Pay
Price
Consumer
Surplus
Austin $10 $7.50 $2.50
Brittany $9 $7.50 $1.50
Carl $8 $7.50 $0.50
Duane $7 $7.50 -$0.50
Ed $6 $7.50 -$1.50
Summary $27 $22.50 $4.50
Market Demand for Pizza

25. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
1 Austin 2 Brittany 3 Carl 4 Duane 5 Ed

26. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
1 2 3 4 5

27. Law of Demand
when price goes up
quantity demand goes down
when price goes down
quantity demand goes up

28. Quantity Demanded
QD
amount people are
willing and able
to buy

29. Law of Demand
inverse relationship
price up - QD down
price down - QD up

30. Producer
Cost
1 $3
2 $4
3 $6
4 $8
5 $10
Market Supply for Pizza

31. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
1 2 3 4 5
Price

32. Pizza Cost Price
Producer
Surplus
1 $3 $5 $2
2 $4 $5 $1
3 $5 $5 $0
4 $6 $5 -$1
5 $7 $5 -$2
Summary
Market Supply for Pizza

33. Pizza Cost Price
Producer
Surplus
1 $3 $5 $2
2 $4 $5 $1
3 $5 $5 $0
4 $6 $5 -$1
5 $7 $5 -$2
Summary $12 $15 $3
Market Supply for Pizza

34. $0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
1 2 3 4 5

35. Monthly Cell Phone
Service Rate

36. Individual Demand
Market Demand
add up all of the
individual demand
curves

37. Demand

38. 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

39. 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

40. 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

41. 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

42. Shift in Demand
Income
Prices of Related Goods
Tastes
Population & Demographics
Expected Future Prices

43. Supply

44. 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

45. Individual Supply
Market Supply
add up all of the
individual supply curves

46. 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

47. Shift in Supply
Input prices
Technology
Number of Sellers
Expected Future Prices

48. 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

49. Quantity Supplied
QS
amount people are
willing and able
to sell

50. Law of Supply
when price goes up
quantity supplied goes up
when price goes down
quantity supplied goes down

51. Law of Supply
direct relationship
price up - QS up
price down - QS down