Chapter 4Supply & Demand

Supply & Demand is really a theory on how buyers and sellers interact with one another, and how prices are determined

Basic Principle of Economics

Organized or not, markets are a grouping of buyers & sellers

We are going to assume in this chapter that we have “competitive markets” meaning there are many buyers & many sellers – each has a very small impact on market price

Competitive Markets

Two characteristics:1. Good being offered for sale are all the

same2. Buyers & sellers are so numerous no single

buyer can influence the market price

We’ll discuss other markets later such as monopolies, oligopolies, etc…

Perfect Competition

Quantity Demanded = amount of a good that buyers are willing and able to purchase

What is the biggest determinant of demand?

Demand

What is the relationship between price & demand?

Law of Demand: Other things being equal, the quantity demanded of a product is negatively related to the price; if the price rises, the quantity demanded falls

Price

These are things that can shift Demand1. Income- Normal Good vs. Inferior Good2. Prices of Related Goods- Substitutes & Complements3. Tastes4. Future expectations

*** YOU MUST KNOW THESE ***

Other Determinants of Demand

Market Demand is the sum of all individual demands for a good/service

- They are summed horizontally

Market vs. Individual Demand

Fancy Latin term that means “other things being equal”

Ceteris paribus

Price changes cause a change in Quantity Demanded while other determinants (Income, Tastes, Related Goods, Expectations) cause a change or shift in Demand

Therefore, when price changes we move along the demand curve, but other determinants cause the entire curve to shift at all prices

Vocab is important

Quantity demanded is defined as:

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87%

4%0%

4%4%

1. The amount of a good willing to be purchased at a given price

2. The amount of a good willing to be produced at a given price

3. The amount of a good willing to be purchased if prices of that good are kept constant

4. The amount of a good willing to be purchased if income can vary

5. The relationship that exists between price and demand at a variety of purchases

In markets, what is the signal that allocates decisions between buyers and sellers?

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64%

36%

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1. Price2. Demand3. Supply4. Quantity5. Elasticity

Of the following which would most likely increase demand for apple pies?

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24%

0%4%

72%

0%

1. A change in the price of apples grown in Washington state

2. A drastic reduction in the incomes of people living in the U.S.

3. An article in the NY Times stating that an apple a day may lead to cancer

4. A drastic increase in the incomes of people living in the U.S.

5. A hurricane that destroys all apple orchards on the East Coast

If Staypuff marshmallows are an inferior good, which of the following is true?

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13%

83%

4%0%0%

1. An increase in the price of marshmallows will decrease the demand for this good

2. An increase in consumer incomes will decrease the demand for this good

3. A decrease in consumer incomes will decrease the demand for this good

4. An increase in consumer incomes will increase the quantity demanded of this good

5. A change in income will have no effect on the demand or quantity demanded of this good