Chapter 6: Demand, Supply, and Markets
What is a Market?
Ø Any network that brings buyers and sellers together so they can exchange goods and services
Ø Doesn’t have to be a physical place, but can be done over the internet, phone or fax
Ø Exists wherever supply and demand determine the price and quantity of goods and services sold
Demand
Ø Is the quantities of a good or service that buyers are willing and able to purchase at various prices
Ø Demand schedule shows the various prices and quantity demanded at each price
Ø Economists consistently will gather data and put it into a schedule and then to make it visually easier to understand put the schedule into graph form
Ø Law of Demand: P Ý à Qd ß and P ßà Qd Ý
Law of Diminishing Marginal Utility
Ø Each additional unit of a good or service that is consumed brings less satisfaction or utils than the previous unit consumed
Ø This helps explain why the demand curve is downward sloping
Elasticity of Demand
Ø Shows the responsiveness of the quantity demanded to a change in price
Ø Elastic Demand - %DP < %DQd (P Ý à TR ß)
Ø Inelastic Demand - %DP > %DQd (P Ý à TR Ý)
Ø Unitary Demand - %DP = %DQd (P Ý à TR -)
Factors Effecting Elasticity of Demand
1. # of substitutes (e.g. margarine and butter)
2. small items in a budget (e.g. salt)
3. essential items (e.g. water)
4. time (e.g. gasoline)
Applications of Elasticity of Demand
Ø the more inelastic an item the more heavily it can be successfully be used to raise tax revenue (e.g. cigarettes and alcohol)
Increases and Decreases in Demand and Supply
Ø when an external variable other than price and quantity of the product being examined causes the relationship between price and quantity demanded and quantity supplied to change at each and every price than the new schedule can be graphed showing a shift either left for a decrease or right for an increase
-2-
Causes For Demand Shifting
/Causes For Supply Shifting
1. Market Size / 1. Weather Conditions2. Income / 2. Production Resource Price
3. Price of Substitutes / Complements / 3. Technology
4. Tastes / 4. Productivity of Labour
5. Consumer Expectations / 5. Number of Producers
Supply
Ø The quantities of a good or service that sellers are willing and able to sell at various prices
Ø Similar to demand, supply can be shown as a schedule and then as a graph
Ø Law of Supply – P Ý à Qs Ý and P ß à Qs ß
Equilibrium
Ø When Qd = Qs we have equilibrium in the market
Ø Qd > Qs à P Ý
Ø Qd < Qs à P ß
Shifts (increases and decreases) In Demand and Supply
Ø Dd ß à P ß and Qd ß
Ø Dd Ý à P Ý and Qd Ý
Ø Ss ß à P Ý and Qs ß
Ø Ss Ý à P ß and Qs Ý
Elasticity of Supply
Ø Similar to Dd shows the responsiveness of the quantity supply to a change in price
Ø The key factor effecting supply elasticity is time. Given more time a producer can supply more of a product in response to higher prices
Ø Goods that can be stored easily, inexpensively and for long periods of time will be more elastic than more perishable products
Government Involvement in the Market
Ø At times the market system is unfair so in our mixed market system the government steps in to make the situation more fair
Ø If the government feels the price is too high then they make the price legally lower. This is called a ceiling price, but the problem is Qd > Qs
Ø If the government feels the price is too low then they make the price legally higher. This is called a floor price, but the problem is Qs > Qd