Markets

What is a market?

• markets are places where 1 or more buyers and 1 or more sellers come together

• ex: swap meet, stock market, grocery store, E-Bay

– good is a tangible item [product] that gives a person utility or satisfaction

– service is an intangible item that gives a person utility or satisfaction

utility = usefulness

Markets have 2 parts

• BuyersBuyers provide the DemandDemand

• SellersSellers provide the SupplySupply

DemandDemand

What is demand?

• Demand- is the willingness and ability to purchase a good or service.– willingness to purchase refers to a person’s want or

desire for a good– ability to purchase means having the money to pay for

the good.

• You may want something but may not have the ability to pay for it.

• There is no demanddemand unless BOTH BOTH components are there.

wants ≠ demand

The Law of Demand• Law of Demand

– as the price (P) of a good increases, the quantity demanded (QD) of the good decreases

– as the price of a good decreases, the quantity demanded increases

• Quantity Demanded (QD)

– the number of units of a good purchased at a specific price

Inverse Relationship between P and QD

P QD P QD

Why is this true?

Costs v. Benefits Analysis

• Costs Rise– Price is one element of

cost

• Benefits stay the same

Why is this true?

Law of Demand• When price rises, quantity demanded falls• When price falls, quantity demanded rises

Because . . .

…of the

Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility

utility = usefulness

Economists like to use graphs to represent changes in demand

A market can be described by A market can be described by analyzing supply and demandanalyzing supply and demand

Demand Schedulea numerical chart that shows the law of demand

Price Quantity Demanded

$4

$3

$2

$1

1

2

3

4

as price falls, demand increases

Demand Curvea graphic representation of the law of demand

Price Quantity Demanded

$4

$3

$2

$1

1

2

3

4

Demand

0

1

2

3

4

5

1 2 3 4

Quantity DemandedP

rice

Let’s convert the ipod demand schedule to a demand curve.

Shifts in Demand CurvesShifts in Demand Curves

• Demand increases DC shifts Right

• Demand decreases DC shifts left

What causes demand curves to shift?What causes demand curves to shift?

Shifts in Demand Curves

Now the ipod not only has all its original features,but also has all the

answers to your homework in a print format

• How will that change the demand curve?

• Can you predict other things that might cause a demand curve to shift?

What What causescauses demand curves to demand curves to shiftshift??

• PreferencesPreferences

• Number of BuyersNumber of Buyers

• IncomeIncome

• Price of Related GoodsPrice of Related Goods

Buyers demand more or less of a good at all prices

Preferences

• Fads

• Styles Change

Number of Buyers

• Population Changes– birth/death rate– migration

IncomeIncome may shift demand curve(affects ability)

• If income increases and…

– More of a good is demanded: NORMAL GOOD

– Less of the good is demanded: INFERIOR GOOD

– Neither more or less of the good is demanded: NEUTRAL GOOD

Price of Related Goods

• 2 types of related goods

– Substitutes Substitutes – Coke for Pepsi

» Price increase for Coke—demand increase for Pepsi

– ComplementsComplements– Peanut Butter and Jelly

» Price increase for pb—demand decrease for j

Caution!Caution!

Change of Demand (shift of demand curve)

IS NOT THE SAME ASIS NOT THE SAME AS

Change in Quantity Demanded(change along the line-based only on change in price)