101 lecture 3 supply and demand handout
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This document summarizes key concepts in microeconomics related to supply and demand. It defines important terms like market, demand curve, supply curve, and equilibrium. It explains the laws of supply and demand - that quantity demanded increases when price decreases and quantity supplied increases when price increases. It also discusses factors that can cause shifts in the supply and demand curves, resulting in a new equilibrium price and quantity where supply and demand are equal. The interactions of supply and demand determine the equilibrium in a competitive market.
101 lecture 3 supply and demand handout
- 1. Microeconomics Chapter 4 ! The Market Forces of Supply and Demand 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! Number Total! Utility Marginal Utility! Change in Total Utility Average Utility! Total Utility ÷ Number 1 10 10 10.00 2 15 5 7.50 3 19 4 6.33 4 23 4 5.75 5 25 2 5.00 Market where ! buyers and sellers interact 101 Lecture 4 Supply and Demand - September 14, 2014
- 2. Supply and Demand sellers supply! buyers demand! Competitive Market many buyers and sellers! no one has power to change price Ceteris Paribus “all else equal” Quantity Demanded QD amount people are ! willing and able ! to buy 101 Lecture 4 Supply and Demand - September 14, 2014
- 3. Law of Demand when price goes up! quantity demand goes down when price goes down! quantity demand goes up Law of Demand inverse relationship! ! price up - QD down! price down - QD up Price Quantity 90 1 80 2 70 3 60 4 50 5 40 6 30 7 20 8 10 9 100 90 80 70 60 50 40 30 20 10 0 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 Individual Demand Market Demand add up all of the individual demand curves 101 Lecture 4 Supply and Demand - September 14, 2014
- 4. 100 90 80 70 60 50 40 30 20 10 0 Movement along the ! Demand Curve 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Price changes! ! demand curve does not change! ! quantity demanded! changes Shift in the Demand Curve 100 90 80 70 60 50 40 30 20 10 0 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Shift in the Demand Curve 100 90 80 70 60 50 40 30 20 10 0 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Price does not change! ! demand curve shifts! ! quantity demanded! changes Shift in Demand Income Prices of Related Goods Tastes Population & Demographics Expected Future Prices 101 Lecture 4 Supply and Demand - September 14, 2014
- 5. Why does the demand curve slope downwards? Substitution Effect! Income Effect Substitution Effect the good is more or less expensive relative to other goods that are substitutes. Income Effect the effect of a price change on consumer’s purchasing power. Complements goods or services that are used together 101 Lecture 4 Supply and Demand - September 14, 2014
- 6. Complements Substitutes goods or services that can be used for the same purpose 101 Lecture 4 Supply and Demand - September 14, 2014
- 7. Normal Good Demand increases as income rises and decreases as income falls Inferior Good Demand decreases as income rises and increases as income falls Quantity Supplied QS amount people are ! willing and able ! to sell 101 Lecture 4 Supply and Demand - September 14, 2014
- 8. Law of Supply when price goes up! quantity supplied goes up when price goes down! quantity supplied goes down Law of Supply direct relationship! ! price up - QS up! price down - QS down Price Quantity 90 9 80 8 70 7 60 6 50 5 40 4 30 3 20 2 10 1 100 90 80 70 60 50 40 30 20 10 0 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 Individual Supply Market Supply add up all of the individual supply curves 101 Lecture 4 Supply and Demand - September 14, 2014
- 9. 100 90 80 70 60 50 40 30 20 10 0 Movement along the ! Supply Curve 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Price changes! ! supply curve does not change! ! quantity supplied! changes Shift in Supply Input prices Technology Number of Sellers Expected Future Prices 100 90 80 70 60 50 40 30 20 10 0 Shift in the Supply Curve 0 1 2 3 4 5 6 7 8 9 10 Price Quantity 100 90 80 70 60 50 40 30 20 10 0 Equilibrium where market price is at a level where ! Quantity Demanded = Quantity Supplied 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Supply Demand 101 Lecture 4 Supply and Demand - September 14, 2014
- 10. 100 90 80 70 60 50 40 30 20 10 0 Surplus where market price is above equilibrium price! Quantity Demanded < Quantity Supplied Price is too high! too many pizzas 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Supply Demand QD QS QS - QD = 7 - 3 = 4 lower price 100 90 80 70 60 50 40 30 20 10 0 Shortage where market price is below equilibrium price! Quantity Demanded > Quantity Supplied Price is too low! not enough pizzas 0 1 2 3 4 5 6 7 8 9 10 Price Quantity Supply Demand QS QD QS - QD = 2 - 8 = -6 raise price Three Steps 1. Does the event shift supply or demand or both?! ! 2. Which direction is the shift? ! ! 3. Diagram new equilibrium 101 Lecture 4 Supply and Demand - September 14, 2014