Demand & Supply: A First Look
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Laissez-Faire: The Free Market
The behavior of buyers and sellers in a laissez-faire economy determines what gets produced, how it is produced, and who gets it.
In fact, pure market systems do not exist in the world; all real systems are in some sense mixed.
Markets and Competition
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A competitive market is one with many buyers and sellers, each has a negligible effect on price. In a perfectly competitive market:
All goods exactly the same Buyers & sellers so numerous that no one can affect market price each is a price taker
In the discussion that follows we will assume markets are perfectly competitive.
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Demand
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The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase. Law of demand: the claim that the quantity demanded of a good falls when the price of the good rises and vice versa, other things equal.
Income Effect Substitution Effect
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The Demand Schedule
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Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded Example: Helens demand for lattes.
Price Quantity of of lattes lattes demanded $0.0016 1.0014 2.0012 3.0010 4.008 5.006 6.004
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Notice that Helens
preferences obey the Law of Demand.
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0 Helens Demand Schedule & Curve
Price of Lattes
$000 . $000 . $000 . $000 . $000 . $000 . $000 . 0
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Price Quantity of of lattes lattes demanded $0.0016 1.0014 2.0012 3.0010 4.008 5.006 6.004 Quantity 0 of Lattes 0
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Market Demand versus Individual 0 The quantity demanded in the market is the sum Demand of the
quantities demanded by all buyers at each price. Suppose Helen and Ken are the only two buyers in the Latte market. (Q d = quantity demanded) Price $0.00 1.00 2.00 3.00 4.00 5.00 6.00
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Helens Qd 16 14 12 10 8 6 4 + + + + + + +
Kens Qd 8 7 6 5 4 3 2 = = = = = = =
Market Qd 24 21 18 15 12 9 6
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The Market Demand Curve for 0 Lattes
P
$000 . $000 . $000 . $000 . $000 . $000 . $000 . 0
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Qd (Market)
P
$0.0024 1.0021 2.0018 3.0015 4.0012 5.009 6.006
Q
0 0 0 0 0 0 0 0 0
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Demand Curve Shifters
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The demand curve shows how price affects quantity demanded, other things equal. These other things are things, other than price, that affect demand. Changes in these other things cause the entire D curve to shift.
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Terms for Shift vs. Movement Along Curve
Change in the quantity demanded: a movement along a fixed D curve which occurs when P changes Change in demand: a shift in the D curve when other things change (like income or number of buyers)
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Demand Curve Shifters: Number of Buyers
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An increase in the number of buyers increases quantity demanded at each price, and shifts the D curve to the right; and vice versa.
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Demand Curve Shifters: Number of Buyers
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P
$000 . $000 . $000 . $000 . $000 . $000 . $000 . 0
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Suppose the number of buyers increases. Then, at each P, Qd will increase (by 5 in this example).
Q
0 0 0 0 0 0 0 0 0 0 0
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Demand Curve Shifters: Income
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Demand for a normal good is positively related to income.
An increase in income causes an increase in quantity demanded at each price, shifts D curve to the right.
Demand for an inferior good is negatively related to income.
An increase in income shifts D curves for inferior goods to the left.
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Demand Curve Shifters: Prices of Related Goods
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Two goods are substitutes if an increase in the price of one causes an increase in demand for the other. Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right.
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Demand Curve Shifters: Prices of Related Goods
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Two goods are complements if an increase in the price of one causes a fall in demand for the other. Example: computers and software. If the price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.
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Demand Curve Shifters: Tastes & Preferences
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Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right. Example: The Atkins diet became popular in the 90s, caused an increase in demand for eggs, shifted the egg demand curve to the right.
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Demand Curve Shifters: Expectations
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Expectations affect consumers buying decisions. Prices: If people expect home prices to increase in the near future, they will move quickly to purchase a new home Income: If the economy sours and people worry about their future job security, demand for new autos may fall now.
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Summary: Variables that Influence Buyers
Variable Price Income Price of related goods Tastes Expectations A change in this variable causes a movement along the D curve shifts the D curve shifts the D curve shifts the D curve shifts the D curve
Number of buyers shifts the D curve
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