Chapter 3 Demand, supply and the marketDavid Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 8th Edition, McGraw-Hill, 2005 PowerPoint presentation by Alex Tackie and Damian WardSome key terms Market a set of arrangements by which buyers and sellers are in contact to exchange goods or services Demand the quantity of a good buyers wish to purchase at each conceivable price Supply the quantity of a good sellers wish to sell at each conceivable price Equilibrium price price at which quantity supplied = quantity demanded2Catherines Demand ScheduleThe demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. Figure 1 Catherines Demand Schedule and Demand Curve (The demand curve is a graph of the relationship between the price of a good and the quantity demanded.)Copyright 2004 South-WesternPrice of Ice-Cream Cone02.502.001.501.000.50123456789 10 11Quantity of Ice-Cream Cones$3.00121. A decrease in price .2. . increases quantity of cones demanded.0DPrice of Ice- Cream ConesQuantity of Ice-Cream ConesA tax that raises the price of ice-cream cones results in a movement along the demand curve.AB81.00$2.004Changes in Quantity Demanded Movement along the demand curve caused by a change in the price of the product.Market Demand versus Individual Demand Market demand refers to the sum of all individual demands for a particular good or service. Graphically, individual demand curves are summed horizontally to obtain the market demand curve.The Demand curve shows the relation between price and quantity demanded holding other things constant“Other things” include: the price of related goods consumer incomes consumer preferences Changes in these other things affect the position of the demand curve7DQuantityPricePrices of related goods and Effect on DemandSubstitute Goods: coffee for tea; train ride for driving your own auto; coal for natural gasIf Price of coffee increases then Demand for tea increases Complimentary Goods: tea and sugar; coffee and milk; gas and car; coal and coal heatersIf Price of gas increases, then Demand for automobiles decreases8Effect of Consumer Income on Demand: Normal Goods versus Inferior GoodsNormal Goods: For normal goods, demand increases when consumer income increases.Most goods are normal goods. Inferior Goods:For inferior goods, demand decreases when consumer income increases.Second-hand cars, second-hand clothing, bus rides (versus driving your own auto or cab rides)9Bens Supply Schedule (The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.)Figure 5 Bens Supply Schedule and Supply Curve(The supply curve is the graph of the relationship between the price of a good and the quantity supplied.)Copyright2003 Southwestern/Thomson LearningPrice of Ice-Cream Cone02.502.001.501.0012345678910 11Quantity of Ice-Cream Cones$3.00120.501. An increasein price .2. . increases quantity of cones supplied.Market Supply versus Individual Supply Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve.The Supply curve shows the relation between price and quantity supplied holding other things constant“Other things” include: technology input costs government regulations Changes in these other things affect the position of the demand curve13QuantityPriceSAt $2.00, the quantity demanded is equal to the quantity supplied!SUPPLY AND DEMAND TOGETHERDemand ScheduleSupply ScheduleMarket equilibrium (1)Market equilibrium is at E0 where quantity demanded equals quantity supplied15D0D0SSPriceQuantityQ0P0E0 with price P0 and quantity Q0Market equilibrium and disequilibriumIf price were below P0 there would be excess demand consumers wish to purchase more than producers wish to supply16DDSSQ0P0EPriceQuantityP1excess supplyP2 excess demand If price were above P0 there would be excess supply producers wish to supply more than consumers wish to purchaseA shift in demand17SSE1PriceQuantityIf the price of a substitute good decreases .less will be demanded at each price.D0D0E0Q0P0The demand curve shifts from D0D0 to D1D1.D1D1Q1P1So the market moves to a new equilibrium at E1.If price stayed at P0 there would be excess supply.A shift in supply18DDQ0P0E0PriceQuantitySuppose safety regulations are tightened, increasing producers costsS0S0S1S1The supply curve shifts to S1S1If price stayed at P0 there would be excess demandQ1P1E2So the market moves to a new equilibrium at E2Two ways in which demand may increase (1)(1) A movement along the demand curve from A to B represents consumer reaction to a price change could follow a supply shift19A P0Q0QuantityPriceDBP1Q1Two ways in which demand may increase (2)(2) A movement of the deman