Chapter 4 Supply & Demand

1. Chapter 4Supply & Demand

2. Basic Principle of Economics • Supply & Demand is really a theory on how buyers and sellers interact with one another, and how prices are determined

3. Competitive Markets • Organized or not, markets are a grouping of buyers & sellers • We are going to assume in this chapter that we have “competitive markets” meaning there are many buyers & many sellers – each has a very small impact on market price

4. Perfect Competition • Two characteristics: 1. Good being offered for sale are all the same 2. Buyers & sellers are so numerous no single buyer can influence the market price • We’ll discuss other markets later such as monopolies, oligopolies, etc…

5. Demand • Quantity Demanded = amount of a good that buyers are willing and able to purchase • What is the biggest determinant of demand?

6. Price • What is the relationship between price & demand? • Law of Demand: Other things being equal, the quantity demanded of a product is negatively related to the price; if the price rises, the quantity demanded falls

7. Other Determinants of Demand • These are things that can shift Demand 1. Income • Normal Good vs. Inferior Good 2. Prices of Related Goods • Substitutes & Complements 3. Tastes 4. Future expectations *** YOU MUST KNOW THESE ***

8. Market vs. Individual Demand • Market Demand is the sum of all individual demands for a good/service - They are summed horizontally

9. Ceteris paribus • Fancy Latin term that means “other things being equal”

10. Vocab is important • Price changes cause a change in Quantity Demanded while other determinants (Income, Tastes, Related Goods, Expectations) cause a change or shift in Demand • Therefore, when price changes we move along the demand curve, but other determinants cause the entire curve to shift at all prices

11. Quantity demanded is defined as: • The amount of a good willing to be purchased at a given price • The amount of a good willing to be produced at a given price • The amount of a good willing to be purchased if prices of that good are kept constant • The amount of a good willing to be purchased if income can vary • The relationship that exists between price and demand at a variety of purchases

12. In markets, what is the signal that allocates decisions between buyers and sellers? • Price • Demand • Supply • Quantity • Elasticity

13. Of the following which would most likely increase demand for apple pies? • A change in the price of apples grown in Washington state • A drastic reduction in the incomes of people living in the U.S. • An article in the NY Times stating that an apple a day may lead to cancer • A drastic increase in the incomes of people living in the U.S. • A hurricane that destroys all apple orchards on the East Coast

14. If Staypuff marshmallows are an inferior good, which of the following is true? • An increase in the price of marshmallows will decrease the demand for this good • An increase in consumer incomes will decrease the demand for this good • A decrease in consumer incomes will decrease the demand for this good • An increase in consumer incomes will increase the quantity demanded of this good • A change in income will have no effect on the demand or quantity demanded of this good