Download LECTURE #3: MICROECONOMICS CHAPTER 4

LECTURE #3: MICROECONOMICS
CHAPTER 4
Markets
Demand
Supply
Equilibrium
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Dr. David P Echevarria
1
Markets and Competition
Market: buyers and sellers for a particular good or
service
Competition: several sellers of a good or service
Perfect competition = all goods same, no single buyer or
seller can dominate price.
Must accept the price determined in the market
Price takers
At the market price
Buyers - buy all they want
Sellers - sell all they want
Monopoly = one seller who sets the price
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Dr. David P Echevarria
2
Demand (the Buyers)
Demand: the quantity of goods buyers are
willing and able to buy
Law of Demand
The quantity demanded is a function of price
The lower the price, the greater the demand for
a good
Demand Schedule: the combinations of price
and quantity demanded – downward sloping
to right.
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Dr. David P Echevarria
3
Catherine’s Demand Schedule and Demand Curve
Price of
Ice-cream
cone
QD
Cones
demanded
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
12
10
8
6
4
2
0
Price of
Ice-Cream
Cones
$3.00
2.50
2.00
2. . . . increases quantity
of cones demanded.
1.50
1.00
The demand curve illustrates how
0.50
the quantity demanded of the good
changes as its price varies.
0
Because a lower price increases the
quantity demanded, the demand
curve slopes downward.
G. Mankiw
1. A decrease
in price . . .
Demand curve
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
4
Demand (the Buyers)
Market vs. Individual Demand
Individual demand is a function of income,
prices of related goods, expectations and tastes
Market demand is the sum of individual
demands
Increases (decreases) in aggregate demand
move the demand curve to the right (left)
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Dr. David P Echevarria
5
Market Demand as the Sum of Individual Demands
(Demand Schedule)
Price of ice-cream
cone
Catherine
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
12
10
8
6
4
2
0
Nicholas
+
7
6
5
4
3
2
1
Market
=
19
16
13
10
7
4
1
The quantity demanded in a market is the sum of the quantities demanded by all the
buyers at each price: e.g., If price = $2.00, then Catherine demands 4 ice-cream
cones, and Nicholas demands 3 ice-cream cones. The total quantity demanded in the
market at this price is 7 cones.
G. Mankiw
6
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Market Demand as the Sum of Individual Demands
Catherine’s
demand
Price of
Ice
Cream
Cones
$3.00
Nicholas’s
demand
+
DCatherine
Price of
Ice
Cream
Cones
$3.00
Market
demand
=
Price of
Ice
Cream
Cones
$3.00
DNicholas
2.50
2.50
2.00
2.00
2.00
1.50
1.50
1.50
1.00
1.00
1.00
0.50
0.50
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
G. Mankiw
0
1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones
2.50
0
DMarket
2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones
7
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Demand (the Buyers)
Prices of Related Goods
Substitutes - two goods
An increase in the price of one leads to an
increase in the demand for the other
Complements – two goods
An increase in the price of one leads to a
decrease in the demand for the other
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Dr. David P Echevarria
8
BREAK TIME
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Dr. David P Echevarria
9
Supply (the Sellers)
Supply: the quantity of goods offered for sale
Law of Supply
The quantity supplied is a function of price
The greater the price, the more quantity is
offered for sale
Supply Schedule: the combinations of price and
quantity supplied – upward sloping to right.
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Dr. David P Echevarria
10
Ben’s Supply Schedule and Supply Curve
Price of
Ice-cream
cone
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Price of
Ice-Cream
Cones
Quantity of
$3.00
Cones supplied
2.50
0 cones
0
1
2
3
4
5
1. An increase
in price . . .
2.00
1.50
1.00
2. . . . increases quantity
of cones supplied.
0.50
The supply schedule is a table that
0
shows the quantity supplied at each
price. Because a higher price increases
the quantity supplied, the supply curve
slopes upward.
G. Mankiw
Supply curve
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
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Supply (the Sellers)
Market vs. Individual Supply
Individual supply is a function of input costs,
productive capacity, market prices, technology,
expectations, competition
Market supply is the sum of individual supplies
Increases (decreases) in aggregate supply move
the supply curve to the right (left)
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Dr. David P Echevarria
12
Market Supply as the Sum of Individual Supplies
(Supply Schedule)
Price of ice-cream
cone
Ben
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
0
0
1
2
3
4
5
Jerry
+
0
0
0
2
4
6
8
Market
=
0
0
1
4
7
10
13
The quantity supplied in a market is the sum of the quantities supplied by all the
sellers at each price. If price = $2.00, then Ben supplies 3 ice-cream cones, and
Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this
price is 7 cones
G. Mankiw
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Market Supply as the Sum of Individual Supplies
Ben’s
supply
Price of
Ice
Cream
Cones
$3.00
+
SBen
Price of
Ice
Cream
Cones
$3.00
Jerry’s
supply
=
Price of
Ice
Cream
Cones
SJerry
$3.00
2.50
2.50
2.50
2.00
2.00
2.00
1.50
1.50
1.50
1.00
1.00
1.00
0.50
0.50
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
G. Mankiw
0
1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones
0
Market
supply
SMarket
2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones
14
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Matching Demand and Supply
Equilibrium (ϵ): when the quantity
demanded is equal to the quantity
supplied
No excess supply and no excess demand
The markets clear at equilibrium.
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Dr. David P Echevarria
15
The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cones
$3.00
2.50
Supply
Equilibrium
price
Equilibrium
2.00
1.50
1.00
0.50
0
G. Mankiw
Equilibrium
quantity
Demand
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
Equilibrium = where the supply and demand curves
intersect. Here the equilibrium price is $2.00: At this price,
7 cones supplied, and 7 cones are demanded.
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Changes in Demand and Supply
What happens when there is a change in
Demand?
An increase in demand moves the demand
curve to the right – ϵ price increases
A decrease in demand moves the demand curve
to the left – ϵ price decrease
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Dr. David P Echevarria
17
Changes in Demand and Supply
What happens when there is a change in
Supply?
An increase in supply moves the supply curve to
the right – ϵ price decreases
A decrease in supply moves the demand curve
to the left – ϵ price increases
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Dr. David P Echevarria
18
Changes in Demand and Supply
What happens when supply exceeds demand?
Surplus condition exists.
In order to clear the markets, price must be reduced
The opposite is true if demand exceeds supply (shortage)
– prices must rise.
Allocation of Resources and Price
Resources will be allocated to goods obtaining the best
prices for producers
Consumers will allocate resources (time and labor or
income) for the best outcome
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Dr. David P Echevarria
19
HOMEWORK: Chapter 4
Questions for Review: 1, 2, 3 (2nd part), 5
Problems and Applications: 1 (a, b), 2, 10, 13
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Dr. David P Echevarria
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