3.0) Week 3 Agenda�3.1) Markets�3.2) Demand�3.3) Supply�3.4) Market Equilibrium

Ch3. Supply and Demand

Principles of Economics

Week 3

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Dr. Christopher Paik

3.1) Markets

A market is an institution that enables ( ) and ( ) to interact and transact with one another (e.g., )

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• Market economy (the price system)
• When buyers and sellers exchange ( ), much of this communication is accomplished through the prices of these goods and services
• Prices provide considerable information to both buyers and sellers ( )

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3.2) Demand

1. We measure how much money people are willing to pay for goods and services

2. We are interested in people’s wants rather than their needs (actual purchase)

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• Willingness-to-pay (WTP)
• From individual WTP to market demand

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Demand

Definition: The maximum amount of a product that buyers are willing and able to purchase over a period of time at various prices, holding all other relevant factors constant (ceteris paribus)

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• The Law of Demand
• The law of demand explains the relationship between price and quantity demanded
• In a market economy, there is an inverse relationship between price (P) and quantity demanded (Q) (quantity demanded is usually denoted as Q_D)
• As price increases, quantity demanded decreases and vice versa
• The law of demand implies a downward-sloping demand curve
• This inverse relationship is explained by the ( ) effect and ( ) effect

(e.g., beef and pork, BOGO deal)

• The Demand Curve��

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• The inverse relationship between P and Q translates to a downward-sloping (negatively-sloped) demand curve
• Market demand curves are important because they can be used to predict changes in P and Q

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Chapter 3 Homework and Quiz Example

Demand

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• Determinants of Demand (Change in Demand)
• Non-price factors that affect demand (shift demand curves):

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• Tastes and preferences

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• Income

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• Prices of related goods

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• Number of buyers

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• Expectations

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In-Class Discussion

Q. What has led to the rise in popularity of electric cars? Is this an increase in demand (non-price factor) or an increase in quantity demanded (price factor)?

Quantity of electric cars (in millions)

Price ($)

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B

C

3.3) Supply (Sellers)

1. We focus on supplier decisions regarding production and sales

2. How do we illustrate the supply curve graphically?

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• The Supply Curve (WTS)
• Illustrates the relationship between the price of a good (P) and the quantity supplied (Q_S)

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Supply

Definition: The maximum amount of a product that producers are willing and able to offer for sale at various prices, all other relevant factors held constant (ceteris paribus)

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• Determinants of Supply (Change in Supply)
• Non-price factors that affect supply:

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• Production technology

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• Costs of resources

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• Prices of related commodities

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• Number of sellers

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• Expectations

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• Taxes and subsidies

Q. Ride-sharing services such as Uber and Lyft charge a higher price when the demand for rides is higher than normal. When drivers react to higher prices by working more hours, is this a change in supply or quantity supplied?

Quantity of services

Price ($)/mile

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B

3.4) Market Equilibrium

1. Supply and demand determine the prices and quantities of goods and services

2. A market price is determined when quantity demanded is equal to quantity supplied

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• Equilibrium: Market forces are in balance when the quantities demanded by consumers just equal the quantities supplied by producers
• Equilibrium price (= market-clearing price)
• Equilibrium quantity

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• How is equilibrium achieved?
• Q_D = Q_S
• Q_D < Q_S: Surplus
• Q_D > Q_S: Shortage

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• Moving to a new equilibrium

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3.4) Market Equilibrium

Q. Why Markets Move Toward Equilibrium (Qd = Qs)?

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• Excess Supply: Surplus (Qd < Qs)
• Price is too high

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• Excess Demand: Shortage (Qd > Qs)
• Price is too low

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• Example Question)

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