Transcript Increase in demand

Chapter 3: Individual
Markets: Demand & Supply
Market: An institution or mechanism that
brings together buyers (“demanders”) and
sellers (“suppliers”) of particular goods,
services, or resources.
All situations that link potential buyers with
potential sellers are markets.
Purely competitive markets with a large
number of independent buyers and sellers.
Demand
Demand is a schedule or a curve that shows the various
amounts of a product that consumers are willing and able
to purchase at each of a series of possible prices during a
specific period of time
Demand shows the quantities of a product that will be
purchased at various possible prices, other things equal
A demand schedule shows price and quantity demanded
for a particular good.
The demand schedule alone does not indicate the price of
the good in the market because that price will depend on
demand AND supply.
Law of Demand
All else equal, as price falls, the
quantity demanded rises, and as price
rises, the quantity demanded falls.
There is a negative (inverse)
relationship between price and quantity
demanded.
Inverse Relationship between
Price and Quantity Demanded
People buy more of a product at a low price
than at a high price. Think: Sales.
Consumption is subject to diminishing
marginal utility (MU).
As successive units of a particular product
yield less MU, consumers will buy additional
units ONLY if the price of those units is
progressively reduced.
Income & Substitution Effects
The income effect indicates that a lower price
increases the purchasing power of a buyer’s
money income, enabling the buyer to purchase
more of the product that she or he could buy
before.
The substitution effect suggests that at a lower
price buyers have the incentive to substitute
what is now a less expensive product for similar
products that are now relatively more expensive.
The income & substitution effects combine to
make consumers able & willing to buy more of a
product at a low price than at a high price.
The Demand Curve (Fig 3.1)
Quantity demanded on the horizontal axis
Price on the vertical axis.
Downward (-) slope reflects the law of
demand.
Consumers buy more of a product, service, or
resource as its price falls.
Market Demand
Competition requires that more than one
buyer be present in each market.
Add the quantities demanded by ALL
consumers at each possible price to get from
individual demand to market demand.
To simplify, we assume that all buyers in a
market are willing & able to buy the same
amounts at each of the possible prices.
Multiply quantity demanded of a single buyer
by the number of buyers to obtain market
demand.
Determinants of Demand
Consumers’ tastes/preferences
Number of consumers in the market
Consumers’ incomes
Price of related goods
Consumer expectations about future
prices and incomes
Change in Demand
A change in one or more of the
determinants of demand will change the
demand curve
Increase in demand is shown as a
shift of the demand curve to the right
Decrease in demand is shown as a
shift of the demand curve to the left
Income
A rise in income causes an increase in
demand
Products whose demand varies directly
with income are called superior goods,
or normal goods.
Goods whose demand varies inversely
with money income are called inferior
goods.
Prices of Related Goods
A change in the price of a related good may
either increase or decrease the demand for a
product.
A substitute good can be used in place of
another. The price of one and the demand
for the other move in the same direction.
A complimentary good is used together with
another good and are usually demanded
together. The price of one good and the
demand for the other good move in opposite
directions.
What causes an increase in
demand?
Favorable change in consumer tastes
Increase in number of buyers
Rising incomes causes demand for normal
goods to rise
Falling incomes causes demand for inferior
goods to rise
Increase in price of a substitute good
Decrease in the price of a complementary
good
New consumer expectations that either prices
or income will be higher in the future.
Changes in Quantity
Demanded
Change in demand is a shift of the
ENTIRE demand curve
Change in quantity demanded is a
movement from one point to another
point, from one price-quantity
combination to another, on a demand
curve  caused by an increase or
decrease in the price of the product.
Supply
A schedule or curve showing the
amounts of a product that producers
are willing and able to make available
for sale at each of a series of possible
prices during a specific period
Law of Supply
As price rises the quantity supplied rises
As price falls, the quantity supplied falls
Firms will produce and offer more of their
product at a high price than at a low price.
To a supplier, price represent REVENUE,
which serves as an incentive to produce and
sell a product
The higher the price, the greater the
incentive, the greater the quantity supplied
The Supply Curve
Quantity supplied on the horizontal axis
Price on the vertical axis.
Upward (+) slope reflects the law of
supply
Producers sell more of a product,
service, or resource as its price rises.
Determinants of Supply
Resource prices
Technology
Taxes & Subsidies
Prices of other goods
Price expectations
Number of sellers in the market
Taxes & Subsidies
Taxes are a cost
Taxes increase production costs,
reducing supply
Subsidies lowers production costs,
increasing supply
Price Expectations
Changes in expectations about future
price of a product may affect the
producer’s current willingness to supply
that product
Changes in Quantity Supplied
A change in supply means a change in
the entire schedule and a shift of the
entire curve
A change in quantity supplied is a
movement from one point to another on
a fixed supply curve, caused by a
change in the price of the product.
Market Equilibrium
Assumes a competitive market, neither
buyers nor sellers can set the price
Excess supply causes surpluses
Excess demand causes shortages
When there are no shortages or surpluses,
the price is at equilibrium  at the
intersection of the supply and demand curves
Equilibrium = “market-clearing” price
Equilibrium quantity: quantity supplied &
demanded are equal
Individual Markets
Demand & supply are schedules
Intuitive understanding of the downward slope of
demand and upward slope of supply curves
Determinants of demand & supply
Distinction between shift or change in demand and
change in quantity demanded
Distinction between shift or change in supply and
change in quantity supplied
Figure 3.6: Changes in Demand & Supply and the
Effects on Price and Quantity (p. 51)
Price Ceilings and Price Floors
A price ceiling sets the maximum legal price a
seller may charge for a product  Shortage
A price floor is a minimum price fixed by the
government  Surplus
Distort resource allocation and cause negative
side effects
Chapter 3 Study Questions
1: Law of Demand
2: Changes in Demand
4: Law of Supply
5: Changes in Supply
7a-c: Market Equilibrium
8: Changes in Demand &/or Supply
9: Changes in Supply