CHAPTER 4:DEMAND AND SUPPLY

Markets – communication among buyers and sellers for the purpose of trading

Demand Definition – various amount of a good people are

willing and able to buy at various prices Needs – must have Wants - optional

Law of Demand – Price increases, Qd decreases Diminishing marginal utility – as you consume

additional units of the same item you enjoy them less Demand Curve Market Demand – sum of the individual demand

curves  

Determinants of Demand – shift the demand (New Tip or Wet Pin) Willingness

Tastes and Preferences Fads and Fashions Advertising Technology – new and replacement products

Number and composition of buyers Population Demographics

Prices of related goods Substitutes – Pa rises Qda falls, Demand for b rises Complements - Pa rises Qda falls, Demand for b falls

Expectations Ability

Income Normal – income rises, demand rises Inferior - income rises, demand falls

Wealth

Demand vs. Quantity Demanded Demand is the whole curve Quantity demanded is one price and point on the curve

Supply Definition – various amounts of a good sellers are

willing and able to sell at various prices Law of Supply – Price rises, Qs rises

Example: Qoil rigs = 1021.35 + 21.82 Poil Supply Curve Market Supply – sum of the individual supply

curves

Determinants of Supply Resource prices – costs of production Technology Taxes and subsidies Prices of related goods – other produced goods

Substitutes - If the price of a substitute good rises you will produce more of that and less of the other good Diamond Brands – produces Toothpicks and Matches Green Giant – Corn, peas and green beans

Jointly produced goods – Price of Beef rises, the Qs of Beef rise, the supply of leather rises Beef and leather

Expectations Number of Sellers Production Restrictions

Government

Changes in supply and quantity supplied Supply is the whole curve Quantity supplied is one price and point on the curve

Market equilibrium: Qs = Qd Where the market clears Transactions costs

Costs of Information

Search Convenience – hours, service, location and payment methods Time

If transactions costs were zero all prices would be the same Non equilibrium situations – if left alone they will eliminate

themselves Surplus: Qs>Qd

Price floor – cheating Shortage: Qd> Qs

Price ceiling - scalping

Changes in Demand and Supply: Magic Box