Lecture 3 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