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7 Learning Goals
Chapter
p
3
Supply, Demand, and the
Market Process
1) Investigate and describe consumer behavior
2) Distinguish a change in demand from a
change in quantity demanded
3) Investigate and describe firm behavior
4) Distinguish a change in supply from a change
in quantity supplied
5) Build a market model and illustrate how
equilibrium is reached
6) Demonstrate how markets respond to changes
in demand and supply
7) Recognize how prices and the invisible hand
principle create market order
Please note:
Chapter heading: Consumer Choice and the
Law of Demand
– Skip 2 sections: Consumer Surplus; Responsiveness
of Quantity Demanded to Price Changes: Elastic and
I l ti D
Inelastic
Demand
dC
Curves
Consumer Choice and
the Law of Demand
Chapter heading: Producer Choice and the Law
of Supply
– Skip 2 sections: Producer Surplus; Responsiveness
of Quantity Supplied to Price Changes: Elastic and
Inelastic Supply Curves
The Law of Demand:
The inverse relationship between price
and quantity demanded; when price rises,
quantity demanded falls
Quantity demanded is a number; it’s how
many units of a good you bought
We usually draw a picture of this
relationship
Graph:
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Changes in Demand
Versus Changes in
Quantityy Demanded
Q
Another way to think about the
difference between demand and
quantity demanded
Other variables besides price
determine what you buy
Changes:
(1) When price changes, quantity demanded
changes but demand does NOT change
– This is movement along a demand curve
(2) When something else changes, demand
changes (i.e., the relationship changes)
– This is movement of the entire curve
Graphs:
Why is the consumer buying more (or
less)?
If price is the reason
reason, then quantity
demanded changes; move along the
demand curve
If any variable besides price is the reason,
then demand changes; shift the demand
curve
Goal: Explain and Predict Firm
Behavior
Producer Choice and the
Law of Supply
pp y
The Law of Supply:
– The positive relationship between price and
quantity supplied; when price rises, quantity
supplied
pp
rises
– Quantity supplied is a number; it’s how many
units of a good you made
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We usually draw a picture of this
relationship
Graph:
Other variables determine how
much firms are willing to make
Changes:
(1) When price changes, quantity supplied
changes but supply does NOT change
– This
a supply
Thi iis movementt along
l
l curve
(2) When something else changes, supply
changes (i.e., the relationship changes)
– This is movement of the entire curve
Changes in Supply
Versus Changes in
Quantity Supplied
Another way to think about the
difference between supply and quantity
supplied
Why is the firm producing more (or less)?
If price is the reason, then quantity
supplied changes; move along the supply
curve
If any variable besides price is the reason,
then supply changes; shift the supply
curve
Graphs:
How Market Prices are
Determined: Supply and
Demand Interact
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Graph:
Key points:
– (1) Excess supply and excess demand are NOT
unique points
– (2) Equilibrium IS a unique point
This is called supply and demand
analysis
How Markets Respond to
Ch
Changes
in
i Demand
D
d and
d
Supply
Graph:: Decrease in Supply
Graph
You don’t have to use graphs but it’s
helpful
Use this 3 step procedure:
– (1) Identify
Id tif the
th change
h
– (2) Determine if Supply or Demand is
affected and how
– (3) Draw and read graph (or reason through
the change)
What if supply and demand shift
at the same time?
Suppose supply and demand both
decrease
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Invisible Hand Principle
Adam SmithSmith- An Inquiry into the Nature
and Causes of the Wealth of Nations
Personal selfself-interest directed by market
prices is a powerful force promoting
economic progress
“Every individual is continually exerting himself to
find out the most advantageous employment for
whatever [income] he can command. It is his own
advantage, indeed, and not that of the society
which he has in view. But the study of his own
advantage naturally, or rather necessarily, leads
him to prefer that employment which is most
advantageous to society…He
society He intends only his own
gain, and he is in this, as in many other cases, led
by an invisible hand to promote an end which was
not part of his intention. By pursuing his own
interest he frequently promotes that of the society
more effectually than when he really intends to
promote it.”
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