Transcript Lecture 4: Markets and Demand

Markets and Demand
Overheads
Markets
A market is a situation in which buyers and sellers can
negotiate the exchange of some product or products.
A market is a group of buyers and seller with the
potential to trade.
The economy is just a collection
of individual markets.
Separate, analyze, put back together
Examples of Markets
Farmer’s Market
Cattle auction
Tractor market
Used car market
Markets can be of many sizes
Some markets are local
Some markets are regional
Some markets are national
Some markets are global
The purpose of the analysis determines
the breadth of market we specify.
We often describe markets by the degree of
competition by which they are characterized.
Some markets are competitive ...
some are not.
Imperfectly competitive markets
When a buyer or seller has the power
to influence the price of a product,
we say that the market is
imperfectly competitive
Examples
Breakfast cereal
Heavy duty trucks
Aluminum
Oil
Purely competitive markets
When buyer or sellers in a market are
not able affect the price
of a product, we say that the market is
purely competitive, perfectly competitive
or just, competitive.
When there are many buyer or sellers in a market
they are usually not able affect the price
of their product.
When there are few buyer or sellers in a market
they are often able affect the price
of their product.
Examples
Wheat at the production level
Unskilled labor
Competitive agents
A buyer or seller (agent) is said to be competitive
if the agent assumes or believes that the
market price is given and that the agent's actions
do not influence the market price.
We call such an agent a price taker.
Demand for a competitive agent
The total amount of a good that a competitive agent
would choose to purchase at a given price
is called the quantity demand by that agent.
The market demand of a good is the total amount
that all buyers in a market
would choose to purchase at a given price.
Supply for a competitive agent
The total amount of a good that a
competitive agent would choose
to produce and sell at a given price
is called the quantity supplied by that agent.
The market supply of a good is the total amount
that all sellers in a market
would choose to produce and sell at a given price.
Supply and demand are specifically relevant
for competitive markets
The Demand Function
The demand function for a good is a rule
that specifies the quantity of the good
that will be demanded at a given price
holding all other factors that affect the
quantity demanded of the good constant.
The Demand Function
D = h(P, ZD)
D = quantity demanded
P = price of the good
ZD = other factors that affect demand
ZD = (z1, z2, z3, . . . , zr )
The Law of Demand
The law of demand states that when
the price of a good rises,
and everything else remains the same,
the quantity of the good demanded will fall.
The Demand Schedule
The demand schedule is a list showing
the quantities of a good that consumers
will choose to purchase at different prices,
with all other variables held constant.
Demand for Hamburger
Price (per lb) Quantity demanded
.25
0.5
10000
9000
0.75
8000
1
1.25
1.5
1.75
2
2.25
2.5
7000
6000
5000
4000
3000
2000
1000
The Demand Curve
The demand curve is a
graphical depiction of a demand schedule;
a line showing the quantity of a good or service
demanded at various prices,
with all other variables held constant.
The Law of Demand
The law of demand says that the
demand curve has a negative slope
(slopes downward)
Price
Demand for Hamburger Patties
3
2.5
2
1.5
1
0.5
0
D0
0
2000
4000
6000
8000
10000
12000
Quantity
Other factors in the demand function
Household income and wealth
Prices of other goods
Population or market size
Expectations
Tastes
Demand depends on many things
D = h(P, ZD)
D = h (P, income, other prices, population, expectations, tastes )
Changes in Demand
A change in demand is a change
in the entire relationship between price
and quantity demanded.
An increase in demand means that buyers
would choose to buy more at any price.
A decrease in demand means that they
would choose to buy less at any price.
Example change in demand
Price (per lb)
.25
0.5
.75
1
1.25
1.5
1.75
2
2.25
2.5
Quantity
Demanded
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
New Quantity
Demanded
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Changes in demand are represented by
a shift in the demand curve.
Price
Demand for Hamburger Patties
Salmonella Threat
3
2.5
2
1.5
1
0.5
0
D0
D1
0
2000
4000
6000
8000
10000
12000
Quantity
Changes in demand are represented by a
shift in the demand curve.
When demand increases,
the demand curve shifts to the right;
when demand decreases,
the demand curve shifts to the left.
Changes in demand as compared to
changes in the quantity demanded
Along a fixed demand curve, as price changes
the quantity demanded will change.
This is called a
change in the quantity demanded
in contrast to a change in demand
that shifts the whole curve
Change in quantity demanded
Movement along a fixed schedule or curve
Change in demand
Change in the whole schedule or curve
Price
Demand for Hamburger Patties
Salmonella Threat
3
2.5
Change in quantity demanded
2
D1
D0
1.5
1
Change in demand
0.5
0
0
1000 2000 3000 4000 5000 6000 7000 8000 9000 10000
Quantity
Price
Demand for Hamburger Patties
Change in Price
3
2.5
Change in quantity demanded
2
D0
1.5
1
0.5
0
0
2000
4000
6000
8000
10000 12000
Quantity
Price
Demand for Hamburger Patties
Salmonella Threat
3
2.5
2
D0
D1
1.5
1
Change in demand
0.5
0
0
2000
4000
6000
8000
10000 12000
Quantity
Factors causing changes in demand
Household income and wealth
Prices of other goods
Population or market size
Expectations
Tastes
Income and Wealth
Income is a flow variable
and represents the amount that a person or firm
earns over a particular period.
Wealth is a stock variable and represents the total value
of everything a person or firm owns, at a point in time,
minus the total value of everything owed.
Effect of income and wealth on demand
Normal goods
The demand for most goods (normal goods) is
positively related to income or wealth.
A rise in either income or wealth will
increase the demand
and shift the demand curve to the right.
Effect of income and wealth on demand
Inferior goods
The demand for inferior goods is
negatively related to income or wealth.
A rise in either income or wealth will
decrease the demand
and shift the demand curve to the left.
Effect of prices of related goods on demand
Substitute goods
A substitute is a good that can be used
in place of some other good
and that fulfills more or less the same purpose.
A rise in the price of a substitute good will cause
an increase in the demand for the good,
shifting the demand curve to the right.
Examples
Big Macs and Whoppers
Revlon and Maybelline eyeshadow
Dodge Caravan and Ford Winstar
Effect of prices of related goods on demand
Complementary goods
A complement is a good that is used
together with some other good.
A rise in the price of a complementary good will cause
a decrease in the demand for the good,
shifting the demand curve to the left.
Examples
Hamburgers and French Fries
Running shoes and running socks
Skis and ski poles
Population and Demand
A larger population means a larger demand.
Expectations and Demand
If individuals anticipate the price of a product
will rise in the near future,
they may choose to buy more of the product now,
thus increasing the demand.
Expectations and Demand
If individuals anticipate the price of a product
will fall in the near future,
they may choose to buy less of the product now
and wait until later to buy,
thus decreasing the current demand.
The Effect of Tastes on Demand
If individuals develop a stronger taste for product
the demand will increase
and the demand curve will shift to the right.
If individual’s taste for product declines,
the demand will decrease
and the demand curve will shift to the left.
Examples
Healthy food leads to a longer life
Herbal tea makes you think more clearly
Smoking causes you to die young
You lose your teeth in an accident
Your new spouse hates vegetables