a market is an institution in which buyers and sellers exchange goods and services for a medium of...

A market is an institutionin which buyers and

sellers exchange goodsand services for

a medium of exchange--money

Markets, demand, and supply

Definitions:

Demand: The quantities of a good or service buyers are willing (and able) to buy at alternative market prices, ceteris paribus.

Quantity demanded: The quantity of a good or service buyers are willing (and able) to buy at a specific price, ceteris paribus.

Demand curve: The schedule indicating the quantities demanded of a good or service at alternative market prices, ceteris paribus.

Law of demand: ceteris paribus, price and quantity demanded of a good or service are negatively related

What is demand?

When it comes to the question ofhow much people are willing to buy of a good or service, price is clearly

a factor. However, there areimportant non-price determinant of

demand as well.

These include:

The price of substitute goods

The price of complementary goods

Consumer income

Tastes and preferences

The demand for pineapple depends on:

The price of pineapple

The price of cantaloupe

The price of bananas

Consumer income

Consumer tastes

As we move alongthe demand curve

for, all factorsare held constantexcept the price

of pineapple

The demand for pineapple

Quantity0

Price

D

P2

P1

q1q2

Why is the demand curve downward sloping?

Because of the substitution effect

(1)Price

(2)Anita's QD

(per month)

(3)Bo's QD

(per month)

(4) = (3) + (2)Total QD

(per month)$2.50 1 2 3

2.00 2 4 6

1.50 3 7 10

1.00 4 8 12

Here we derive the marketdemand curve by

summing up the individualdemand curves for pineapple

Market demand

Price ($)

Quantity0 3 6 10 12

1.00

1.50

2.00

2.50

Anita

BO

74

Price

0

A

B

H

D1

D2

P1

P2

q1 q2 Quantity

Demand could shift right due to:

Increase in the price of substitutes

Decrease in the price of complements

Increase in income

Change of tastes and preferences

Price

0

A

B

H

D0

D1

P1

P2

q1 q2 Quantity

Demand could shift left due to:

Decrease in the price of substitutes

Increase in the price of complements

Decrease in income

Change of tastes and preferences

The supply curve is theschedule indicating the quantities of a good or

service sellers are willingto offer for sale at

alternative market prices,ceteris paribus

Price/lb. Quantity-Supplied(lb’s)

Quantity-Demanded

(lb’s)$2.50 0 1,200

3.50 200 9004.50 400 750

5.50 550 550

6.50 670 425

7.50 780 325

The supply of salmon

Quantity (lbs)

Price/lb

0

$2.50

$6.50

$3.50

$4.50

$5.50

200 400 550 670

Supply

Quantity (lbs)

Price/lb

0

$2.50

$6.50

$3.50

$4.50

$5.50

200 400 550 670

Supply

750 900

Demand

Note thatsupply isequal to

demand at aprice of $5.50

Quantity

Price

0

S1

S2

D

B

A

P1

P2

q1 q2

S1 to S2 explained by:

•good weather

•increase in the number of sellers

•decrease in input prices (machinery, fertilizer, labor, etc.)