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 =
? 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?
Price of Cookies Quantity of Cookies Demanded
? 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
package—total price of both goods)
2. Changes in Income
? more income means consumers can buy more, holding
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:
• 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 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:
Price of Pizza Quantity of Pizza Supplied
? Supply curve is a graph of the supply schedule. ?