# Market Demand and Supply Chapter 3

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```					Market Demand
and Supply
Chapter 3

1
What is demand?
Demand represents
the choice making

2
What does “ceteris
paribus” mean?
All else remains the same

3
What is the law
of demand?
There is an inverse
relationship between the
price of a good and the
to purchase in a defined
time period, ceteris paribus
4
What is a
demand curve?
Depicts the relationship
between price and
quantity demanded

5
Individual’s Demand Curve for DVDs
P                          Individuals Buyer’s Demand Schedule for DVD’s

A           Point            Price
per compact disk
Quantity demanded
(per year)
\$20
A             \$20                    4
B        B             \$15                   6
\$15                         C             \$10                   10
C    D              \$5                   16
\$10                                                                         7

D
\$5
Demand Curve
4           8   12               16             Q         6
Why do demand curves
have a negative slope?
At a higher price buyers will
buy fewer units, and at a
more units
7
What is a
demand schedule?
Shows the quantities of a
good or service that
people are willing and able
8
What is
market demand?
The summation of the
individual demand
schedules in a market

9
Market Demand Schedule for DVDs
Price    Fred   Mary   Total Demanded

\$25       1 + 0 =           1
\$20       2   1              3
\$15       3   3              6
\$10       4   5              9
\$5        5   7             12
10
P
Fred’s Demand Curve
\$20

\$15

\$10

\$5
D1
1   2   3   4   5   6   7   8   9   Q
11
P         Mary’s Demand Curve

\$20

\$15

\$10

\$5                               D2
1   2   3   4   5   6   7   8    9   Q
12
P        Market Demand Curve
\$20

\$15

\$10
D3
\$5

Q
3   4   5   6   7   8   9 10 11 12
13
P                                    P
Fred’s Demand Curve                     Mary’s Demand Curve
\$20                               \$20
\$15                               \$15
\$10                               \$10
\$5                 D1                 \$5                         D2
1 2 3 4 5 6 7 8 9 Q        12
1 2 3 4 5 6 7 8 9 Q               13

P                Market Demand Curve

\$20
\$15
\$10                                 D3
\$5
Q
14
3 4 5 6 7 8 9 10 11 12            14
IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
DEMANDED AND A
CHANGE IN DEMAND
15
When price changes,
what happens?
The curve does not shift
- there is a change in
the quantity demanded

16
Change in
Quantity
Demanded

Change in
Price

17
A change in price causes a
P    change in the quantity demanded
\$20

\$15
A

\$10
B
D
\$5
Q
10     20     30     40       50
18
Decrease in
quantity
demanded

Upward
movement
along the
demand curve
Price
increases
19
Increase in
quantity
demanded

Downward
movement
along the
demand curve
Price
decreases
20
When a nonprice
determinant changes,
what happens?
The whole curve
shifts,there is a
change in demand

21
When the ceteris paribus assumption
is relaxed, the whole curve can shift
P
\$20
A             B
\$15

\$10
D2
\$5
D1
Q
10      20     30       40    50
22
Change in
demand

Change in
nonprice
determinant
23
What can cause a
demand curve to shift?
A change in:
• Number buyers in the market
• Tastes and preferences
• Income
• Expectations of consumers
• Prices of related goods
24
Decrease or
increase in
demand

Leftward or
rightward shift in
the demand curve

Change in a
Nonprice
determinant                            25
What is the
conclusion?
Changes in nonprice
determinants can
produce only a shift in a
demand curve and not
a movement along the
demand curve
26
What is a
normal good?
Any good for which
there is a direct
relationship between
changes in income
and its demand curve
27
What is an
inferior good?
Any good for which
there is an inverse
relationship between
changes in income
and its demand curve
28
What are
substitute goods?
Goods that compete
with one another for
consumer purchases

29
What happens when
the price increases for
a good that has a
substitute?
The demand curve for the
substitute good increases

30
What happens when
the price decreases for
a good that has a
substitute?
The demand curve for the
substitute good decreases

31
What are
complementary goods?
Goods that are
jointly consumed
with another good

32
What happens when the
price increases for a good
that has a complement?
The demand curve for the
complement good
decreases
33
What happens when the
price decreases for a
good that has a
complement?
The demand curve for the
complement good
increases
34
What is supply?
Supply represents the
choice making
behavior of sellers

35
What is the
law of supply?
There is a direct relationship
between the price of a
good and the quantity
sellers are willing to offer
for sale in a defined time
period, ceteris paribus
36
Why do supply curves
have a positive slope?
Only at a higher price will it
be profitable for sellers to
incur the higher opportunity
cost associated with
supplying a larger quantity
37
A company’s Supply Curve for DVD’s
P
\$20
A
\$15

\$10
B
C
\$5

10    20     30     40       Q
38
An Individual Seller’s Supply for DVD’s

Point         Price       Quantity

A            \$20            40
B             10            30
C              6            20

39
What is a market?
Any arrangement in
sellers interact to
determine the price and
quantity of goods and
services exchanged
40
What is market supply?
The horizontal summation of
all the quantities supplied at
various prices that might
prevail in the market

41
Market Supply Schedule for DVD’s
Price   Super Sound   High Vibes   Total

\$25         25 + 35 =              60
\$20         20   30                50
\$15         15   25                40
\$10         10   20                30
\$5          5    15                20
42
P    Super Entertain City Curve

\$25
S1
\$20

\$15

\$10

10    15     20   25        Q
43
P     High Vibes Supply Curve

\$25                          S2
\$20

\$15

\$10

20    25    30    35        Q
44
P    Market Supply Curve

\$25                       S total
\$20

\$15

\$10

40   45   55   60        Q
45
IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
SUPPLIED AND A
CHANGE IN SUPPLY
46
When price changes,
what happens?
The curve does not shift
- there is a change in
the quantity supplied

47
P             Supply Curve
C
\$20
A change in price
\$15    causes a change in
the quantity supplied
\$10
A               B
\$5

Q
10       20         30   40
48
Change in
Quantity
Supplied

Change in
Price

49
When a nonprice
determinant changes,
what happens?
The whole curve shifts -
there is a change in supply

50
P    Shift in the Supply Curve
\$20                       S1        S2
\$15

\$10

\$5

10     20     30        40
Q
51
Change in
supply

Change in
nonprice
determinant
52
What can cause a
supply curve to shift?
A change in:
• Number of sellers in the market
• Technology
• Resource prices
• Taxes and subsidies
• Expectations of producers
• Prices of other goods the firm
could produce                53
What is the
conclusion?
Changes in nonprice
determinants can
produce only a shift in a
supply curve and not a
movement along the
supply curve
54
What is the
equilibrium price?
The price towards which
the economy tends

55
Where is the
equilibrium price?
At the price where the
quantity demanded and
the quantity supplied
are equal

56
What is a surplus?
A market condition
existing at any price at
which the quantity
supplied is greater than
the quantity demanded
57
What is a shortage?
A market condition
existing at any price at
which the quantity
supplied is less than the
quantity demanded
58
P Supply & Demand for Tennis Shoes
\$120
S
\$90            Surplus

\$60
Shortage
\$30                           D
1,000    2,000     3,000 4,000   Q   59
Why will price decline
when above \$60 in the
previous graph?
Above \$60 there is a
surplus, producers will
lower price to get rid
of the surplus
60
Why will price increase
when below \$60?
Below \$60 there is a
shortage, price will
increase as people bid
against one another to
decide who gets
61
What is the
price system?
A mechanism that uses
the forces of supply
and demand to create
an equilibrium through
rising and falling prices
62
What is the
conclusion?
The intersection of the
supply and demand curve
is the market equilibrium
price-quantity point
63
END
64

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