Supply and Demand

Supply and Demand

Trading Opportunities: The Price-Taking Model • Each buyer is a price taker. · He can buy as much (or as little) of the good as he wants at some price. · He cannot affect the price.

Trading Opportunities: The Price-Taking Model • Each seller is a price taker. · She can sell as much (or as little) of the good as he wants at some price. · She cannot affect the price.

Introduction to Demand • How many movies you see this month depends on many conditions. · The price—How much do movie tickets cost? · Your tastes—How much do you like movies? · Your income—Do you have enough money to pay for tickets? · Prices of other goods—How much would you have to spend to rent videos or attend concerts?

Demand Schedule for Tickets

Demand Curve for Movie Tickets $10 9 8 7 6 5 Price of Movie Tickets 4 3 2 1 0 1 2 3 4 5 6 7 8 Number of Movie Tickets per Month

Demand Curve for Movie Tickets $10 9 8 7 6 5 Price of Movie Tickets 4 3 B 2 A 1 0 1 2 3 4 5 6 7 8 Number of Movie Tickets per Month

Demand • A person’s quantity demanded of a good at some price is the amount she would buy at that price.

Demand • A demand curve graphs the relation between the price of a good and the quantity demanded.

Market Demand • The market quantity demanded of a good at some price is the total amount that all buyersin the market would buy at that price.

Market Demand • A market demand curve graphs the relation between the price of a good and the market quantity demanded.

Individual Demands and Market Demand

Market Demand for Sodas $1.20 1.10 1.00 0.90 0.80 0.70 Price per Soda 0.60 0.50 0.40 0.30 0.20 0.10 0 25 50 75 100 125 150 175 Sodas per Month

Market Demand for Sodas $1.20 1.10 ( ) Archie’s Demand 1.00 0.90 0.80 0.70 Price per Soda 0.60 0.50 0.40 0.30 0.20 0.10 0 25 50 75 100 125 150 175 Sodas per Month

Market Demand for Sodas $1.20 1.10 ( ) ( ) + Archie’s Demand Veronica’s Demand 1.00 0.90 0.80 0.70 Price per Soda 0.60 0.50 0.40 0.30 0.20 0.10 0 25 50 75 100 125 150 175 Sodas per Month

Market Demand for Sodas $1.20 1.10 ( ) ( ) ( ) Market Demand + = Archie’s Demand Veronica’s Demand 1.00 0.90 0.80 0.70 Price per Soda 0.60 0.50 0.40 0.30 0.20 0.10 0 25 50 75 100 125 150 175 Sodas per Month

Conditions Affecting the Quantity Demanded • Personal taste • Usefulness • Income and wealth • Prices of related goods

The Law of Demand • An increase in the price of a good, with no change in other conditions, generally reduces the quantity demanded. • Demand curves have negative (downward) slopes.

Why Demand Curves Slope Downward • Buyers can replace a good with another, cheaper substitute. • People cannot afford to buy as much after a price increase requiring them to turn to cheaper substitutes or less of the higher priced good.

Changes in Demand • A change in demand means a change in the numbers in the demand schedule and a shift in the demand curve.

Changes in Demand • An increase (or rise ) in demand means an increase in the quantity demanded at a given price—shifts the demand curve to the right.

Increase in Demand Price Quantity Demanded

Increase in Demand Price D1 Quantity Demanded

Price D2 D1 Quantity Demanded Increase in Demand

Changes in Demand • An decrease(or fall ) in demand means an decrease in the quantity demanded at a given price—shifts the demand curve to the left.

Decrease in Demand Price Quantity Demanded

Decrease in Demand Price D1 Quantity Demanded

Decrease in Demand Price D1 D2 Quantity Demanded

Changes in Quantity Demanded Versus Changes in Demand • A change in the quantity demanded means a movement along a demand curve due to a change in price. • The demand curve does not move when the quantity demanded changes.

Changes in Quantity Demanded Versus Changes in Demand • A change in price changes the quantity demanded but not demand. · A change in demand is caused by a change in conditions otherthan the price of the good.

Change in Quantity Demanded Price $10 $5 Quantity 10 20

Change in Quantity Demanded Price $10 $5 D Quantity 10 20

Change in Quantity Demanded Price $10 $5 D Quantity 20 10

Change in Quantity Demanded

Changes in Conditions That Cause Changes in Demand • Tastes • Usefulness • Income and Wealth • Prices of Related Goods • Number of Potential Buyers

Tastes • Tastes (or preferences) are people’s underlying likes and dislikes.

Usefulness • A good’s usefulness is its benefit in creating the products people ultimately want.

Income and Wealth • Income is the amount of money received each year from working, interest on savings, and other sources such as gifts. · A normal good is a good whose demand increases if income rises. · An inferior good is a good whose demand decreases if income rises.

Income and Wealth • Wealth is the value of accumulated past savings, including human wealth.

Supply and Demand