Where Prices Come From: The Interaction of Demand and Supply

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Where Prices Come From: The Interaction of Demand and Supply. The Demand Side of the Market. 1. LEARNING OBJECTIVE. 3 - 1. Plotting a Price-Quantity Combination on a Graph. The Demand of an Individual Buyer.

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### Where Prices Come From:The Interaction of Demand and Supply

The Demand Side of the Market

1

LEARNING OBJECTIVE

3 - 1

Plotting a Price-Quantity Combination on a Graph

• The Demand of an Individual Buyer

Quantity demandedThe quantity of a good or service that a consumer is willing and able to purchase at a given price.

The Demand Side of the Market

3 - 2

Kate’s Demand Schedule and Demand Curve

Demand Schedules and Demand Curves

Demand curve A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Demand schedule A table showing the relationship between the price of a product and the quantity of the product demanded.

The Demand Side of the Market

Demand Schedules and Demand Curves

The Demand Side of the Market

Individual Demand and Market Demand

Market demand The demand by all the consumers of a given good or service.

The Law of Demand

The Law of Demand Holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

The Demand Side of the Market
• What Explains the Law of Demand?

Substitution effectThe change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes.

Income effect The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumer purchasing power.

The Demand Side of the Market
• Holding Everything Else Constant:The Ceteris Paribus Condition

Ceteris paribus(“all else equal”) The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.

The Demand Side of the Market

3 - 4

Shifting the Demand Curve

Holding Everything Else Constant:The Ceteris Paribus Condition

The Demand Side of the Market

Variables That Shift Market Demand

• Price of related goods

SubstitutesGoods and services that can be used for the same purpose.ComplementsGoods that are used together.

• Income

Normal goodA good for which the demand increases as income rises and decreases as income falls.Inferior goodA good for which the demand increases as income falls, and decreases as income rises.

• Tastes
• Population and demographics

DemographicsThe characteristics of a population with respect to age, race, and gender.

• Expected future prices
The Demand Side of the Market

3 - 1

Variables That Shift MarketDemand Curves

• Variables That Shift Market Demand
The Demand Side of the Market

Variables That Shift MarketDemand Curves

3 - 1 (continued)

• Variables That Shift Market Demand
The Demand Side of the Market

3 - 5

A Change in Demand versus a Change in the Quantity Demanded

• A Change in Demand versus a Change in Quantity Demanded
The Supply Side of the Market

2

LEARNING OBJECTIVE

• Quantity suppliedThe quantity of a good or service that a firm is willing and able to supply at a given price.

Supply Schedules and Supply Curves

Supply schedule A table that shows the relationship between the price of a product and the quantity of the product supplied.

Supply curve A curve that shows the relationship between the price of a product and the quantity of the product demanded.

The Supply Side of the Market

3 - 6

Hewlett-Packard’s SupplySchedule and Supply Curve

Supply Schedules and Supply Curves

The Supply Side of the Market
• The Law of Supply

Law of supplyHolding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

The Supply Side of the Market

3 - 8

Shifting the Supply Curve

Variables That Shift Supply

The Supply Side of the Market

Variables That Shift Supply

• Price of inputs
• Technological change

A positive or negative change in the ability of a firm to produce a given level of output with a given amount of inputs.

• Prices of substitutes in production
• Expected future prices
• Number of firms in the market
The Supply Side of the Market

3 - 2

Variables That Shift MarketSupply Curves

• Variables That Shift Supply
The Supply Side of the Market

Variables That Shift MarketSupply Curves

3 - 2 (continued)

• Variables That Shift Supply
The Supply Side of the Market

3 - 9

A Change in Supply versus a Change in the Quantity Supplied

• A Change in Supply versus a Change in Quantity Supplied
Market Equilibrium: Putting Demand and Supply Together

3

LEARNING OBJECTIVE

3 - 10

Market Equilibrium

Market equilibriumA situation in which quantity demanded equals quantity supplied.

Competitive market equilibrium A market equilibrium with many buyers and many sellers.

Market Equilibrium: Putting Demand and Supply Together

3 - 11

The Effect of Surpluses and Shortages on the Market Price

• How Markets Eliminate Surpluses and Shortages

SurplusA situation in which the quantity supplied is greater than the quantity demanded.

Shortage A situation in which the quantity demanded is greater than the quantity supplied.

The Effect of Demand and Supply Shifts on Equilibrium

4

LEARNING OBJECTIVE

3 - 12

The Effect of a Decreasein Supply on Equilibrium

• The Effect of Shifts in Supply on Equilibrium

3 - 4

• The Falling Price of LargeFlat-Screen Televisions

Corning’s breakthrough spurred the manufacture of LCD televisions in Taiwan, South Korea, and Japan, and an eventual decline in price.

The Effect of Demand and Supply Shifts on Equilibrium

3 - 13

The Effect of an Increase in Demand on Equilibrium

• The Effect of Shifts in Demand on Equilibrium

4

LEARNING OBJECTIVE

3 - 2

• High Demand and Low Prices in the Lobster Market?

Supply and demand for lobster both increase during the summer, but the increase in supply is greater than the increase in demand, therefore, equilibrium price falls.

Market equilibrium

Normal good

Quantity demanded

Quantity supplied

Shortage

Substitutes

Substitution effect

Supply curve

Supply schedule

Surplus

Technological change

• Ceteris paribus (“all else equal”)
• Competitive marketequilibrium
• Complements
• Demand curve
• Demand schedule
• Demographics
• Income effect
• Inferior good
• Law of demand
• Law of supply
• Market demand