Download Chapter 3 / Individual Markets: Demand and Supply

Chapter 3 / Individual Markets: Demand and Supply
1. A market is any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or
service. Chapter 3 makes the assumption with all of their examples that markets are highly competitive, which they are not but we will
talk about that later.
2. Demand is a schedule of prices and the quantities that buyers would purchase at each of these prices during a selected period of
time.
a. As price rises, other things being equal, buyers will purchase smaller quantities, as price falls they will purchase larger
quantities; this is the LAW OF DEMAND.
b. The demand curve is a graphic representation of demand and the law of demand.
c. Market (or total) demand for a good or service is a summation of the demands of all individuals in the market for that good
or service.
d. The demand for a good depends on the tastes, income, and expectations of buyers; the number of buyers in the market;
and the prices of related goods. These are the so-called determinants of demand.
e. A change (increase or decrease) in the entire demand schedule and the demand curve is referred to as a change in demand.
It is a result of a change in one or more of the determinants of demand. For example, an increase in the demand for a good
or service may result in an increase in:
1) tastes or preferences for the good or service;
2) the number of buyers for the good or service;
3) income if it is a normal good, but if it is an inferior good it results from a decrease in income;
4) the price of a substitute good, but if they are compliments it results from a decrease in prices;
5) expectations of a price increase.
f. A change in demand and a change in the quantity demanded are not the same thing. Price affects quantity demanded,
determinants affect demand.
3. Supply is a schedule of prices and the quantities that sellers will sell at each of these prices during some period of time.
a. The supply schedule shows, other things equal, that as the price of the good or service rises larger quantities will be
offered for sale, and as the price of the good or service falls, smaller quantities will be offered for sale. This is the LAW OF
SUPPLY.
b. The supply curve is a graphic representation of supply and the law of supply; the market supply of a good or service is the
sum of the supplies of all sellers of the good or service.
c. The supply of a good or service depends on the techniques used to produce it, the prices of the resources employed in its
production, the extent to which it is taxed or subsidized, the prices of other goods or services that might be produced, the
price expectations of sellers, and the number of sellers of that product. These are the so-called determinants of supply.
d. A change (increase or decrease) in the entire supply schedule and the supply curve is referred to as a change in supply. It
is the result of a change in one or more of the determinants of supply. For example, an increase in supply for a good or
service may result from:
1) a decrease in the prices of resources used to make it;
2) an improvement in the technology used to produce it;
3) a fall in taxes on it, or an increase in subsidies for it;
4) an increase in the prices of other goods or services that could be produced by firms making them;
5) an increase or decrease (depending on the market in question) in expectations of its higher future prices;
6) an increase in the number of sellers of it.
e. A change in supply and a change in the quantity supplied are not the same thing. Price affects quantity supplied,
determinants affect supply.
4. The market or equilibrium price of a product is that price at which quantity demanded
exchanged in the market (the equilibrium quantity) is equal to the quantity demanded and
a. If the price of a product is above the market equilibrium price, there will be
quantity demanded is less than the quantity supplied at that price.
b. If the price of a product is below the market equilibrium price, there will be
the quantity demanded is greater than the quantity supplied at that price.
and quantity supplied are equal; the quantity
supplied at the equilibrium price.
a surplus or excess supply. In this case, the
a shortage or excess demand. In this case,
c. The rationing function of prices (the market adjustment mechanism) is the elimination of surpluses and shortages of a
product.
d. A change in demand, supply, or both, changes both the equilibrium price and the equilibrium quantity in specific ways.
e. When demand and supply schedules (or curves) are drawn up, it is assumed that all the nonprice determinants of demand
and supply remain unchanged. This assumption is often stated as “other-things-equal” or ceteris paribus.
In the last two decades, the supply of salmon has increased and the demand for salmon has decreased. As a result, the price of pink
salmon has declined, here from P1 to P2 a pound. Since supply has increased more than demand has declined, the equilibrium quantity of
salmon has increased, here from Q1 to Q2.