Chapter 3 Markets, Demand and Supply, and the Price System

ECN 211 Fall, 2007 ELEL-HADJ BAH

Allocation Systems:

Different ways to allocate scarce goods and resources

First-come-first-serve Prices Government Random

No allocation mechanism is fair Each mechanism has different incentives-Only a market system creates incentives for higher living standard The market determines at which point on the PPC an economy locates

Markets and Exchange

What is a market? A market is a place or service that enables buyers and sellers to exchange goods and services. Examples:

Types of Markets

Barter is the exchange of goods and services directly, without the involvement of money. Examples: Monetary exchanges involve exchanging money for goods and services. Examples:
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Demand vs. Quantity Demanded

Law of Demand
1. 2. 3. 4. 5.

Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time, everything else (but price) held constant (ceteris paribus).

It is a relationship between prices and quantities.

The quantity of a well-defined good or service that People are willing and able to purchase During a particular period of time Decreases as the price of the good or services rises and increases as the price falls, Everything else held constant.

The quantity demand is the amount of a product that people are willing and able to purchase at one specific price.

Example: If price of CDs go up, do you buy more or less CDs ?

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It is a quantity.
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Representations of Demand

Demand Schedule and Demand Curve for Videos

Price $5 $4 $3 $2 $1
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Demand Schedule: A table or list of the prices and corresponding quantities demanded of a particular good or service. It is the price-quantity relationship presented in tabular form. Demand Curve: A graph of the demand schedule with price on the vertical axis and quantity demanded on the horizontal axis.

Quantity 10 20 30 40 50
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Aggregation of Demand (I)

Aggregation of Demand (II)

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Changes in Demand and Quantity Demanded

Change in Demand vs. Change in the Quantity Demanded

Change in Quantity Demanded movement along the same demand curve in response to a price change.

Results from a price change

Change in Demand - shift of the entire demand curve.

Results from a change in a determinant of demand (a ceteris paribus variable)

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Concepts

Concepts
Substitute goods: goods that can be used in place of each other. Complementary goods: goods that are used together. Examples:


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Normal goods: goods for which demand increases as income increases. Inferior goods: goods for which demand decreases as income increases Examples: Cars are ..goods Ramon noodles are..goods Potato ships are.goods Laptops are.goods

Tennis rackets and tennis balls are: . Butter and margarine are: . CDs and CD players are: ..
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Determinants of demand-factors that shift demand

Demand Shift

The determinants of demand (or ceteris paribus variables) are factors other than price that influence demand: income Tastes and preferences prices of related goods expectations number of buyers
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Recap

Test question

Demand vs. quantity demanded Law of demand Determinants of demand . Normal vs. inferior good Complements vs. supplements
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If the price of movie rentals increases then:

The demand for movie rentals would decrease. The quantity demanded of movie rentals would increase. The quantity demanded of movie rentals would decrease.
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Test question: True or False ?

If the price of Coke goes up then the quantity demanded for Pepsi will go down. If the price of Coke goes up then the demand for Coke will go up. If there is new improved type DVD players in the market, the demand for DVDs will increase.

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Supply and Quantity Supplied

Supply is the amount of a good or service that producers are willing and able to offer for sale at each possible price during a period of time, all else constant.

It is a price-quantity relationship.

The quantity supplied is the amount sellers are willing and able to offer for sale during a period of time at a specific price, all else constant.

Its a quantity.
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Law of Supply
1. 2. 3. 4.

Representations of Supply

5.

The quantity of a well-defined good or service that Producers are willing and able to offer for sale During a particular period time Increases as the price of the good or service increases and decreases as the price decreases, Everything else held constant.

Example: If the price of DVDs go up, you supply more DVDs

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Supply Schedule: A table or list of the prices and corresponding quantities supplied of a particular good or service. It is the price-quantity relationship presented in tabular form. Supply Curve: A graph of the supply schedule with price on the vertical axis and quantity demanded on the horizontal axis.
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Supply Curve for Videos

Price per Video A B C D E $5.00 $4.00 $3.00 $2.00 $1.00 Quantity supplied 60 50 40 30 20

Aggregation of Supply (I)

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Aggregation of Supply (II)

Changes in Supply

Change in Quantity Supplied movement along the same supply curve in response to a price change.

Results from a change in price

Change in Supply - shift of the entire supply curve.

Results from a change in the determinants of supply (a ceteris paribus variable).

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Change in Supply vs. a Change in the Quantity Supplied

Determinants of Supply-Factors that shift Supply

Factors other than price that influence supply: Technology and productivity Price of resources Expectations of producers Number of producers Price of related goods

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Decrease in Supply

Increase in Supply

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Test question: True or False?

If there is a change in the price of a good, then the supply of that good will change. An improvement in the education level of computer engineers will result to:

Equilibrium : Putting demand and Supply together

Equilibrium is the price and quantity at which the quantity supplied and the quantity demanded are equal. A market is said to be in disequilibrium at all points at which the quantities demanded and supplied are not equal.

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An increase of the supply of computers A decrease in the price of computers

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Surplus and Shortage

A surplus occurs whenever quantity supplied is greater than quantity demanded (QS>QD) A shortage occurs whenever QD>QS. Surpluses and shortages can be resolved with price changes. Can you prices to resolve scarcity?

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Equilibrium (Table)
Price Per Video $5 $4 $3 $2 $1 Quantity Demanded 30 48 66 84 102 Quantity Supplied 102 84 66 48 30 Status Surplus Surplus EQUILIBRIUM Shortage Shortage Price Change Price Falls Price Falls No Change Price Rises Price Rises

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Equilibrium (Graph)

The Effects of a Shift of the Demand Curve and Supply curves

When demand changes, equilibrium price and quantity change in the same direction. When supply changes, equilibrium price and quantity change in opposite directions.

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The Effects of a Shift of the Demand Curve

The Effects of a Shift of the Supply Curve

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Price Floors and Ceilings

A Price Floor

Price Floor: price is not allowed to decrease below a certain level.

Examples: minimum wage, agricultural price supports. If the floor is above the equilibrium price, then it results in a surplus.

Price Ceiling: price is not allowed to increase above a certain level.

Example: rent controls. If the ceiling is below the equilibrium price, then it results in a shortage.
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Price ceiling: rent controls

Effect of rent controls

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Test question

If price is below the equilibrium price:

Quantity demanded exceed quantity supplied and a shortage exists Demand will increase Quantity supplied is below quantity demanded and a surplus exists

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