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# Ch. 4 - Supply and Demand in Market Economies We look for...

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Supply and Demand in Market Economies Material in Mankiw Ch. 4 We look for the answers to these questions: What factors affect buyers’ demand for goods? What factors affect sellers’ supply of goods? How do supply and demand determine the price of a good and the quantity sold? How do changes in the factors that affect demand or supply affect the market price and quantity of a good? How do markets allocate resources? Markets and Competition Recall that a market is a group of buyers and sellers of a particular product. A competitive market is one with many buyers and sellers, each has a negligible effect on price. A perfectly competitive market: all goods exactly the same buyers & sellers so numerous that no one can affect market price each is a “ price taker For now, we assume markets are perfectly competitive. Demand Demand comes from the behavior of buyers. The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase. An important determinant of the quantity demanded of a good is its price.

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Demand A demand schedule a table that shows the relationship between the price of a good and the quantity demanded. A demand curve is a graph showing the same relationship. “Law” of demand : the claim that the quantity demanded of a good falls when the price of the good rises, other things equal . (i.e. the demand curve is downward sloping) Example: Helen’s Demand Schedule Price of lattes Quantity of lattes demanded \$0.00 16 1.00 14 2.00 12 3.00 10 4.00 8 5.00 6 6.00 4 Notice that Helen’s preferences obey the Law of Demand. Law of Graphing When graphing demand (or supply) curves quantity demanded (supplied) is always placed on the horizontal axis price is always placed on the vertical axis \$0.00 \$1.00 \$2.00 \$3.00 \$4.00 \$5.00 \$6.00 0 5 10 15 Price of Lattes Quantity of Lattes Example: Helen’s Demand Schedule & Curve Price of lattes Quantity of lattes demanded \$0.00 16 1.00 14 2.00 12 3.00 10 4.00 8 5.00 6 6.00 4
Market Demand versus Individual Demand The quantity demanded in the market is the sum of the quantities demanded for all buyers at each price. Suppose Helen and Ken are the only two buyers in the Latte market. ( Q d = quantity demanded) 4 6 8 10 12 14 16 Helen’s Q d 2 3 4 5 6 7 8 Ken’s Q d + + + + = = = = 6 9 12 15 + = 18 + = 21 + = 24 Market Q d \$0.00 6.00 5.00 4.00 3.00 2.00 1.00 Price \$0.00 \$1.00 \$2.00 \$3.00 \$4.00 \$5.00 \$6.00 0 5 10 15 20 25 P Q The Market Demand Curve for Lattes P Q d (Market) \$0.00 24 1.00 21 2.00 18 3.00 15 4.00 12 5.00 9 6.00 6 Demand Curve Shifters The demand curve shows how price affects quantity demanded, other things being equal . These “other things” are non -price determinants of demand ( i.e., things that determine buyers’ demand for a good, other than the good’s price). Changes in them shift the demand curve.

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