Chapter-3 Markets and Market Participants Supply and Demand

Chapter-3 Markets and Market Participants (Supply and Demand)

In This Chapter….

3. 1. Identifying Markets, Market Participants and their Behavior

3. 1. Identifying Markets, Market Participants and their Behavior Maximizing Behavior

3. 1. Identifying Markets, Market Participants and their Behavior

3. 1. Identifying Markets, Market Participants and their Behavior 1. Factor Markets: … are any place where factors of production (e. g. , land, labor, capital) are bought and sold. 2. Product Markets: … are any place where finished (final) goods and services (products) are bought and sold.

3. 1. Interaction in the Market Place Goods and services demanded Goods and services supplied Factors of production demanded The Circular Flow

Dollars and Exchange

3. 1. Interaction in the Market Place Household Expenses Goods and services demanded Incomes Factors of production supplied Revenue Goods and services supplied Factors of production demanded Costs of Production The Circular Flow

3. 2. Characterization of the Activities of Market Participants

3. 2. Supply and Demand

Individual Demand

Demand Schedule and Curve PRICE $50 45 40 35 30 25 20 15 10 5 A B C D E F G H I 0 2 4 6 8 10 12 14 16 18 20 Quantity of Tutoring Demanded (hours)

Individual Demand

Determinants of Demand

Types of Demand

Market Demand

The Market Demand Curve

Construction of the Market Demand Curve Price $50 Price 40 30 20 10 0 4 8 12 16 20 24 28 0 4 8 12 Quantity Demanded 0 4 8 12

Construction of the Market Demand Curve

Shifts in Demand Vs Movements along the Demand Curve

Changes in Demand Change in Demand is indicted by a shift in the Demand Curve An increase in demand shifts the demand curve to the right when: A decrease in demand shifts the demand curve to the left when: The good is normal and income increases The good is normal and income decreases The good is inferior and income increases The price of a substitute good decreases The price of a complementary good increases

Market Effects of Changes in Demand Shift the Demand Curve An increase in demand shifts the demand curve to the right when: A decrease in demand shifts the demand curve to the left when: Population increases Population decreases Consumer tastes shift in favor of the product Consumer tastes shift away from the product Consumers expect a higher price in the future Consumers expect a lower price in the future

Movements vs. Shifts

Pizza and Politics: False ) Quiz (True or

3. 2. Supply and Demand Supply

3. 2. Supply and Demand

Supply Supply

Law of Supply

Market Supply

Market Supply Erin’s Supply Hussein’s Supply Miranda’s Supply

Market Supply

Determinants of Supply

Market Supply

Movements and Shifts of Supply

Equilibrium Market Price

Equilibrium

Equilibrium Price

Equilibrium Price $50 45 40 35 30 25 20 15 10 5 0 Market demand Market supply Equilibrium price 25 39 50 75 100 125 Quantity

…. Equilibrium Price is a Market Clearing Price

The Invisible Hand

Deviation from the Equilibrium

Market Surplus

Market Shortage

Surplus and Shortage $50 45 40 35 30 25 20 15 10 5 0 Market demand Market supply Surplus x y Shortage 25 39 50 75 100 125 Quantity

Self-Adjusting Prices

Surplus and Shortage $50 45 40 35 30 25 20 15 10 5 0 Market demand Market supply Surplus x y Equilibrium price Shortage 25 39 50 75 100 125 Quantity

Changes in Equilibrium

Changes in Equilibrium Shift Demand

Changes in Equilibrium Shift Supply

Implications---Outcomes

Market Outcomes

Optimal, Not Perfect!!

Real Life Examples…

Price Ceilings Create Shortages P 2 P 1

Real Life Examples…

Price Ceilings Create Shortages P 2 Price ceiling P 1

Consequences of Price Ceilings

Price Ceilings Create Shortages