## Why does the Demand Curve Slope Downward? Markets. Market Demand. Market Types or Structures. Demand Curve. The Market Forces of Supply and Demand

Demand Curve Price of Ice-Cream Cone The Market Forces of Supply and Demand \$3.00 2.50 2.00 1.50 Chapter 4 1.00 0.50 0 1 Quantity of Ice-Cream C...
Author: Mary Golden
Demand Curve Price of Ice-Cream Cone

The Market Forces of Supply and Demand

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Chapter 4

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Why does the Demand Curve Slope Downward?

Markets A market is a group of buyers and sellers of a particular good or service. # The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets. # And Economics, especially Microeconomics is about how supply and demand interact in markets.

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Law of Demand

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Law of Diminishing Marginal Utility.

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"Inverse relationship between price and quantity. "Utility is the extra satisfaction that one receives from consuming a product. "Marginal means extra. "Diminishing means decreasing.

Market Types or Structures !

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Market Demand

Competitive Markets

# Market

demand refers to the sum of all individual demands for a particular good or service. # Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

"Products are the same,price takers

Monopoly ! Monopolistic Competition ! Oligopoly !

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Ceteris Paribus Price of Cigarettes per Pack

Ceteris paribus is a Latin phrase that means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.”

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Changes in Quantity Demanded C

A tax that raises the price of cigarettes results in a movement along the demand curve.

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The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded!

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Two Simple Rules for Movements vs. Shifts !

Rule One

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Rule Two

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Number of Cigarettes Smoked per Day

Change in Quantity Demanded versus Change in Demand

"When an independent variable changes and that variable does not appear on the graph, the curve on the graph will shift.

Change in Demand A shift in the demand curve, either to the left or right. # Caused by a change in a determinant other than the price. #

"When an independent variable does appear on the graph, the curve on the graph will not shift, instead a movement along the existing curve will occur. !

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Let’s apply these rules to the following cases of supply and demand!

Change in Quantity Demanded versus Change in Demand

Determinants of Demand Market price Consumer income # Prices of related goods # Tastes # Expectations # What are some examples? # #

Change in Quantity Demanded # #

Movement along the demand curve. Caused by a change in the price of the product.

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Consumer Income

Change in Quantity Demanded versus Change in Demand

Normal Good

Price of Ice-Cream Cone

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Variables that Affect Quantity Demanded

An increase in income...

2.50 Increase in demand

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Consumer Income Inferior Good

Price of Ice-Cream Cone

Price of Ice-Cream Cone

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A Change in This Variable . . .

Price

Represents a movement along the demand curve

Income

Shifts the demand curve

Prices of related goods

Shifts the demand curve

Tastes

Shifts the demand curve

Expectations

Shifts the demand curve

Shifts the demand curve

Supply Curve

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An increase in income...

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Decrease in demand

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Prices of Related Goods

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Law of Supply

Substitutes & Complements # When

a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. # When a fall in the price of one good increases the demand for another good, the two goods are called complements.

The law of supply states that there is a direct (positive) relationship between price and quantity supplied.

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Determinants of Supply

Supply

# Market

price prices # Technology # Expectations # Number of producers # What are some examples?

Quantity supplied is the amount of a good that sellers are willing and able to sell.

# Input

Change in Quantity Supplied Price of Ice-Cream Cone

Change in Supply

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Decrease in Supply

A rise in the price of ice cream cones results in a movement along the supply curve.

Increase in Supply

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Change in Quantity Supplied versus Change in Supply

Market Supply

Variables that Affect Quantity Supplied

# Market

supply refers to the sum of all individual supplies for all sellers of a particular good or service. # Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

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A Change in This Variable . . .

Price

Represents a movement along the supply curve

Input prices

Shifts the supply curve

Technology

Shifts the supply curve

Expectations

Shifts the supply curve

Number of sellers

Shifts the supply curve

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Equilibrium of Supply and Demand

Price of Ice-Cream Cone

Three Steps To Analyzing Changes in Equilibrium

Supply

Decide whether the event shifts the supply or demand curve (or both). # Decide whether the curve(s) shift(s) to the left or to the right. # Examine how the shift affects equilibrium price and quantity. #

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Equilibrium

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Demand

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Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

How an Increase in Demand Affects the Equilibrium

Excess Supply

Price of Ice-Cream Cone

Price of Ice-Cream Cone

Supply

Surplus

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1. Hot weather increases the demand for ice cream...

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Supply

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New equilibrium

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2. ...resulting in a higher price...

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Initial equilibrium

Demand

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3. ...and a higher quantity sold.

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Price of Ice-Cream Cone

Price of Ice-Cream Cone

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New equilibrium

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1. An earthquake reduces the supply of ice cream...

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Supply

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How a Decrease in Supply Affects the Equilibrium

Excess Demand

Shortage

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Initial equilibrium

2. ...resulting in a higher price...

Demand

Demand

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7 8 9 10 11 12 13 3. ...and a lower quantity sold.

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