Micro Chapter 2

• Demand


  • The quantities that consumers are willing and able to buy per period of time at various prices
  • Price is the most important determinant
• Demand - Important points

  • Involves both the desire and the ability of consumers to purchase
  • Assumes that other things are held constant (ceteris paribus)
  • Refers to a range of prices
  • Measures quantities over time
• Demand Schedule


  • A table showing the various quantities demanded per period of time at different prices
• Demand Curve 


  • A graphic representation of a demand schedule
• Why the Demand Curve Slopes Downward (Income Effect)

  • The effect of a price change on real income, and therefore on quantity
  • Real income is measured in terms of the goods and services it will buy
  • Real income will increase if prices fall
• Why the Demand Curve Slopes Downward (Substitution effect)

  The substitution of one product for another as a result of a change in their relative prices
• Market Demand


  The total demand for a product or service by all consumers
• Supply 


  The quantities that producers are willing and able to supply per period of time at various prices
• Supple Schedule


  A table showing the various quantities supplied per period of time at different places
• Supple Curve


  A graphic representation of the supply schedule
• Why the Supply Curve Slopes Upward

  • Suppliers are motivated by profit
  • Higher prices means more profit and more suppliers who are willing to produce the product
  • Costs rise as more is produced, so higher prices are required to supply more
• Market Supply Curve

  Market Supply

  • Total supply from all producers of a product
  • Horizontal summation of each individual producer’s supply curve

  Assumptions:

  • Producers are all making a similar product
  • Consumers have no preference as to which supplier or product they use
• Market


  A mechanism That allows buyers and sellers to exchange products or services
• Market Equilibrium

  Equilibrium

  • The point where quantity demanded equals quantity supplied
  • There is neither a shortage nor a surplus
  • QD (quantity demanded) = QS (quantity supplied)
• Market Equilibrium (Surplus)


  • The amount by which quantity supplied is greater than quantity demanded
  • Occurs at prices above equilibrium
• Market Equilibrium (Shortage)


  • The amount by which quantity supplied is less that quantity demanded
  • Occurs at prices below equilibrium
• Market Adjustments


  When there is a Surplus

  • Producers drop the price to sell excess stock
  • As price drops:

  1. Quantity demanded increases
  2. Quantity supplied falls

  • Market moves back to equilibrium price, quantity
• Marketing Adjustment - Shortage

  When there is a Shortage:

  • Buyers bid up the price
  • As price rises

  1. Quantity demanded decreases
  2. Quantity supplied increases

  • Market moves back to equilibrium price, quantity
• Determinants of Demand


  Determinants of Demand are factors that bring about a change in demand. These are:

  1. Consumer preferences

  • If tastes change, demand changes
• Determinants of Demand


  Are factors that bring about a change in demand
• Determinants of Demand (Consumer preferences)


  If tastes change, demand changes
• Determinants of Demand (Consumer incomes)

  • Normal Products: Consumers buy more when income rises, less when income falls
  • Inferior Products: Consumers buy more when income falls, less when income rises
• Determinants of Demand (Prices of Related Products)

  Products are related if a change in the price of one product causes a change in demand for the other product. These are two types of related products:

  • Substitutes: Similar products that can be substituted for each other. Increase in price of one product causes increase demand for the substitute
  • Complements: Tend to be bought together. Increase in price of one product causes a decrease in demand for the complement
• Determinants of Demand (Expectations of future prices, income, availability)

  • If prices or incomes are expected to rise, consumers buy more now
  • If goods expected to be scarcer, more is bought now
• Determinants of Demand (Population size, or income and age distribution)

  • Increase in population or incomes cause increase in demand
  • Changes in age distribution affect demand