Barter – goods are traded directly for other goods Problem: › requires double coincidence of...
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Transcript of Barter – goods are traded directly for other goods Problem: › requires double coincidence of...
Barter – goods are traded directly for other goods
Problem:› requires double coincidence of wants
(have to find someone who has what I want and who also wants what I have)
Monetary economy solves this problem
A market is a group of buyers and sellers of a particular good or service.
The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets.
Buyers determine demand.
Sellers determine supply
The forces that make market economies work!
Quantity demanded is the amount of a good that buyers are willing and able to purchase.
Law of Demand› The law of demand states that, other
things being equal, the quantity demanded of a good falls when the price of the good rises.
Demand Curve › The demand curve is a graph of the
relationship between the price of a good and the quantity demanded.
Demand Schedule › The demand schedule is a table that shows
the relationship between the price of the good and the quantity demanded.
Copyright © 2004 South-Western
Price ofIce-Cream Cone
0
2.50
2.00
1.50
1.00
0.50
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
1. A decrease in price ...
2. ... increases quantity of cones demanded.
Always called a Change in Quantity Demanded
› Only caused by a change in the price of the product. Remember change in price always equals a
change in QUANTITY demanded Change in quantity demanded always
indicates movement along an existing demand curve
Movement along an existing demand curve
0
D
Price of Ice-Cream Cones
Quantity of Ice-Cream Cones
A rise in the price of ice-cream cones results
in a movement along the demand curve.
A
B
8
1.00
$2.00
4
Consumer income changes- less money for treats
Change in Demand– Creates an entirely new demand curve
› As income increases the demand for a normal good will increase.
- steak, designer clothes, restaurant meals
› As income increases the demand for an inferior good will decrease.
- hot dogs, Ramen noodles, fast food› As income increases the demand for a
neutral good will remain the same - gasoline, toothpaste, deodorant
Changes in income = Shifts in the demand curve
Consumer income changes- less money for treats
Prices of related goods- price change - sugar,
cream, cones
Change in Demand– Creates an entirely new demand curve
› When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.
- coke and Pepsi, coffee and tea› When a fall in the price of one good
increases the demand for another good, the two goods are called complements.
- tennis racket and tennis ball, cars and tires
Changes prices of related goods = Shifts in the demand curve
Consumer income changes- less money for treats
Prices of related goods- price change - sugar,
cream, cones Tastes/Preferences
- South Beach Diet (ice cream is bad)
- ice cream cures cancer Number of buyers
- Immigrants love ice cream Future Price
- Expectations for changes in price
Change in Demand– Creates an entirely new demand curve
› A shift in the demand curve, either to the left or right.
› Caused by any change that alters the quantity demanded at every price.
› This occurs when there is a change in a determinant of demand other than price.
Change (Shift) in Demand– Creates an entirely new curve
Copyright©2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
Quantity ofIce-Cream Cones
Increasein demand
Decreasein demand
Demand curve, D3
Demandcurve, D1
Demandcurve, D2
0
Fig. 2.8
Quantity supplied is the amount of a good that sellers are willing and able to sell.
Law of Supply› The law of supply states that, other things
equal, the quantity supplied of a good rises when the price of the good rises.
Supply Curve› The supply curve is the graph of the
relationship between the price of a good and the quantity supplied.
Supply Schedule› The supply schedule is a table that shows
the relationship between the price of the good and the quantity supplied.
Copyright©2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
0
2.50
2.00
1.50
1.00
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
0.50
1. Anincrease in price ...
2. ... increases quantity of cones supplied.
Always called a Change in Quantity Supplied
› Only caused by a change in the price of the product. Remember change in price always equals a
change in QUANTITY supplied Change in quantity supplied always indicates
movement along an existing supply curve
Movement along an existing supply curve
1 5
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones0
S
1.00A
C$3.00 A rise in the price
of ice cream cones results in a movement along the supply curve.
› A shift in the supply curve, either to the left or right.
› Caused by any change that alters the quantity supplied at every price
› This occurs when there is a change in a determinant of supply other than price.
Subsidies – government paymentsex. targeted incentives to produce (corn, milk)
Quotas – government limits to importsex. protect national industries (auto)
Resource prices – land, labor, capital prices increase or decrease
ex. change in cost of production, oil prices up
Technology – skills, knowledge, increased efficiencyex. New machines make production more
profitable
Taxes – government imposed increase in price, less profit for sellers
ex. sin tax (cigarettes), gas, etc.
Number of sellers – Successful markets attract new sellers to open
ex. increase in competition
Future Price – changes supplier expectations ex. Gas prices will go up, suppliers hold back
to make more money later
Weather – nice or bad weather can change supply. ex. a hurricane wipes out tomato crops
Copyright©2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
Quantity ofIce-Cream Cones
0
Increasein supply
Decreasein supply
Supply curve, S3
curve, Supply
S1Supply
curve, S2
Fig. 2.9
A situation in which the supply of an item is exactly equal to its demand.
Price tends to remain stable in this situation.
D S
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
0 5 10 15 20 25 30 35
P
Q
P QD QS
$0 24 0
1 21 5
2 18 10
3 15 15
4 12 20
5 9 25
6 6 30
A situation in which the supply of an item is exactly equal to its demand.
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
0 5 10 15 20 25 30 35
P
Q
D S
when quantity supplied is greater than quantity demanded
SurplusExample: If P = $5,
then QD = 9 lattes
and QS = 25 lattes
resulting in a surplus of 16 lattes
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
0 5 10 15 20 25 30 35
P
Q
D S
when quantity demanded is greater than quantity supplied
Example: If P = $1,
then QD = 21 lattes
and QS = 5 lattes
resulting in a shortage of 16 lattes
Shortage
