All Rights Reserved Dr. David P Echevarria 1
LECTURE #3: MICROECONOMICSCHAPTER 4
MarketsDemand Supply
Equilibrium
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Markets and Competition
Market: buyers and sellers for a particular good or service
Competition: several sellers of a good or servicePerfect competition = all goods same, no single
buyer or seller can dominate price.Must accept the price determined in the
marketPrice takers
At the market priceBuyers - buy all they wantSellers - sell all they want
Monopoly = one seller who sets the price
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Demand (the Buyers)
Demand: the quantity of goods buyers are willing and able to buy
Law of DemandThe quantity demanded is a function of priceThe lower the price, the greater the demand
for a good Demand Schedule: the combinations of price
and quantity demanded – downward sloping to right.
G. Mankiw Dr. David P Echevarria 4
Demand curve
Catherine’s Demand Schedule and Demand Curve
The demand curve illustrates how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward.
Price ofIce-cream
cone
QD
Cones demanded
$0.000.501.001.502.002.503.00
121086420
0 1210 1191 2 3 4 5 6 7 8Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice-Cream
Cones 1. A decreasein price . . .
2. . . . increases quantityof cones demanded.
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Demand (the Buyers)
Market vs. Individual DemandIndividual demand is a function of income,
prices of related goods, expectations and tastes
Market demand is the sum of individual demands
Increases (decreases) in aggregate demand move the demand curve to the right (left)
G. Mankiw 6
Market Demand as the Sum of Individual Demands
(Demand Schedule)
6
Price of ice-cream cone
Catherine
Nicholas
Market
$0.000.501.001.502.002.503.00
121086420
+ 7654321
= 19161310741
The quantity demanded in a market is the sum of the quantities demanded by all thebuyers at each price: e.g., If price = $2.00, then Catherine demands 4 ice-creamcones, and Nicholas demands 3 ice-cream cones. The total quantity demanded in themarket at this price is 7 cones.
G. Mankiw 7
Market Demand as the Sum of Individual Demands
7
DCatherine
0 1210 1191 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Catherine’sdemand
DNicholas
0 1 2 3 4 5 6 7
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Nicholas’s demand+ =
DMarket
0 182 4 6 8 10 12 14 16
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Market demand
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Demand (the Buyers)
Prices of Related GoodsSubstitutes - two goods
An increase in the price of one leads to an increase in the demand for the other
Complements – two goodsAn increase in the price of one
leads to a decrease in the demand for the other
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BREAK TIME
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Supply (the Sellers)
Supply: the quantity of goods offered for sale
Law of SupplyThe quantity supplied is a function of priceThe greater the price, the more quantity is
offered for saleSupply Schedule: the combinations of
price and quantity supplied – upward sloping to right.
G. Mankiw 11
Ben’s Supply Schedule and Supply Curve
Supply curve
The supply schedule is a table that shows the quantity supplied at each price. Because a higher price increases the quantity supplied, the supply curve slopes upward.
Price ofIce-cream
cone
Quantity ofCones
supplied
$0.000.501.001.502.002.503.00
0 cones012345
0 1210 1191 2 3 4 5 6 7 8Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice-Cream
Cones
1. An increasein price . . .
2. . . . increases quantityof cones supplied.
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Supply (the Sellers)
Market vs. Individual SupplyIndividual supply is a function of input
costs, productive capacity, market prices, technology, expectations, competition
Market supply is the sum of individual supplies
Increases (decreases) in aggregate supply move the supply curve to the right (left)
G. Mankiw 13
Market Supply as the Sum of Individual Supplies
(Supply Schedule)Price of ice-cream
coneBen Jerry Marke
t
$0.000.501.001.502.002.503.00
0012345
+ 0002468
= 001471013
The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. If price = $2.00, then Ben supplies 3 ice-cream cones, and Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this price is 7 cones
G. Mankiw 14
Market Supply as the Sum of Individual Supplies
14
SBen
0 1210 1191 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Ben’ssupply
SJerry
0 1 2 3 4 5 6 7
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Jerry’ssupply+ =
SMarket
0 182 4 6 8 10 12 14 16
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Marketsupply
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Matching Demand and Supply
Equilibrium (ϵ): when the quantity demanded is equal to the quantity supplied
No excess supply and no excess demandThe markets clear at equilibrium.
G. Mankiw 16
The Equilibrium of Supply and Demand
Supply
0 1210 1191 2 3 4 5 6 7 8Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice-Cream
Cones
Equilibrium
Demand
Equilibriumprice
Equilibriumquantity
Equilibrium = where the supply and demand curves intersect. Here the equilibrium price is $2.00: At this price, 7 cones supplied, and 7 cones are demanded.
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Changes in Demand and Supply
What happens when there is a change in Demand?An increase in demand moves the
demand curve to the right – ϵ price increases
A decrease in demand moves the demand curve to the left – ϵ price decrease
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Changes in Demand and Supply
What happens when there is a change in Supply?
An increase in supply moves the supply curve to the right – ϵ price decreases
A decrease in supply moves the demand curve to the left – ϵ price increases
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Changes in Demand and Supply
What happens when supply exceeds demand?Surplus condition exists.In order to clear the markets, price must be reducedThe opposite is true if demand exceeds supply
(shortage) – prices must rise.
Allocation of Resources and PriceResources will be allocated to goods obtaining the
best prices for producersConsumers will allocate resources (time and labor or
income) for the best outcome
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HOMEWORK: Chapter 4
Questions for Review: 1, 2, 3 (2nd part), 5
Problems and Applications: 1 (a, b), 2, 10, 13