By Josephine Hamilton,2014-04-06 11:56
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Week Three: Lecture Three

    Chapter 3: Supply and Demand


    ? Why do some paintings sell for millions while other for

     only a few hundred dollars? ? Why are diamonds so expensive compared to water

     when water is essential to life?

     ? Value is more closely linked to

Model of a Competitive Market

    ? Competitive Market =


? Supply and Demand model consists of:





Demand Curve

    ? Demand =

    ? What influences how much of a good a consumer buys?





    Recall: simplified models measure only one change at a time,

     Therefore, a model of demand for a good will hold

     everything constant except .


? A model of demand illustrates how a change in price


?Let’s start with a demand schedule

     Demand schedule =



    If cookies were being sold in the hallway for $1.00 each, how

    many would you buy?

    Demand Schedule

    Price of Cookies Quantity of Cookies Demanded






    Demand Curve

    ? Demand curve is a graph of the demand schedule. ?


? Why does it slope down?

     It slopes down because people don’t want as much when

     the price is higher. When the price gets higher, holding

     everything else constant (income, prices of other goods,

     preferences, etc.), purchasing power of your income

     decreases, you cannot afford to buy the same amount as

     you did before.

    Law of Demand =

?Shifts in the Demand Curve:


    E.g. suppose your income increases by $100,000 per year. How would this affect your consumption for different goods? ?holding prices of different goods constant, you will buy

     more because you become wealthier.


The demand curve shifts

In general:

    1) An increase in quantity demanded at each price

    results in a shift to the


    2) A decrease in quantity demanded at each price

    results in a shift to the



Things that shift the demand curve:

    1. Changes in price of related goods.

     ? related goods can be substitutes or complements.

     1). Substitutes =


     2). Complements =


• Two goods are substitute if a rise in the price of one good

• Two goods are complements if a rise in the price of one


     (With complements consumers consider the price of the

     packagetotal price of both goods)


2. Changes in Income

     ? more income means consumers can buy more, holding

     prices constant.

     1). Normal goods =

     2). Inferior goods =


3. Changes in tastes/preferences

     ?Fads/trends influence consumer’s demand for certain




4. Changes in population

     ?more people, more demand

5. Changes in expectation

     ?expected future value of goods might change which

     influence people’s demand.

     1) If the expected future value of a good increases, current


     2) If the expected future value of a good decreases, current


?Movement along the Demand Curve:



In Conclusion:

    • If the quantity demanded of a good increases as the price

     falls there is

    • If the quantity demanded of a good increases and the price

     has remained the same then

Supply Curve

    ?Supply curve traces the quantity supplied or the quantity

     producers are willing to sell, at any given price.

Let’s start with a supply schedule

     Supply schedule =


    Assuming costs per pizza is $5, how many pizzas would you

    make if you could sell them for:


Supply Schedule

    Price of Pizza Quantity of Pizza Supplied





Supply Curve

    ? Supply curve is a graph of the supply schedule. ?


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