2018-2019

Demand, Supply, and Market EquilibriumAP Econ. / Holliday

DEMANDLatin: mandare = to order Latin: demandare = to hand over

NEED TITLE

* markets bring together buyers and sellers

- “brick and mortar” physical space or online/virtual

- local, national, or international

- some highly personal; some “faceless” with no direct interaction between buyer and seller

Demand

* a schedule or curve that shows the various amounts of a product that consumers are willing and able to buy at each of a series of possible prices during a specific time period

* price and quantity demand are inversely related — consumers will buy more of a product as its price declines (and less of a product as the price rises) = called the Law of Demand

* must be during a TIME PERIOD because that will indicate demand

e.g. “A consumer will buy 45 cartons of milk” = meaningless “A consumer will buy 45 cartons of milk in a week” = meaningful

Demand Curve$

Pr

ice

per s

ong

0

0.5

1

1.5

2

2.5

3

3.5

Quantity Demand (songs) PER YEAR

0 20 40 60 80 100 120

Hypothetical Demand Curve for Song Purchases

Demand and Diminishing Marginal Utility

* consumers less willing to buy a second or third, etc. unit of the same product at the same price as the first one

* diminishing marginal utility

gets smaller

extra/additional

satisfactione.g. House with NO bathroom- adding the first bathroom will bring about tremendous utility

- adding a second bathroom will bring about some utility, but less utility than that gained from adding the first bathroom

- adding a third bathroom will bring about some utility, but less than that gained from adding the second, etc., etc.

Demand and Diminishing Marginal Utility

* A single extra dollar will yield a high level of utility for a poor family

* Rich family has millions of single dollars already…. each additional dollar yields less utility

The Income Effect and Substitution Effect

* because each successive unit of a product bring less utility, consumers will only buy additional units if the price is reduced relative to the first unit

- part of why businesses run “sales” on products

* product sales connected to income effect

- lower prices add more purchasing power to a person’s income

- can buy more with the same amount of money

* consumer behavior demonstrates the substitution effect

- will choose the less expensive option for competing sellers of the same/similar product (others things equal)

The Income Effect and Substitution Effect

$$ $

Market Demand

* individual demand —-> market demand

- add the quantities demanded by all individual consumers at each of various possible price points

- to simply calculation => assume all buyers in market are willing and able to buy same amounts at each possible price point

* multiply those amounts (quantity demanded at each price point) by number of total buyers to get demand for each price point of product

Market Demand

Ice Cream Sales

Price per tub of ice cream

Quantity demanded per 6 month period by

a SINGLE BUYER

Total number of buyers in ice cream tub market

Total Quantity demanded per 6 month period

$14 1 x 25,000,000 25,000,000

$10 2 x 25,000,000 50,000,000

$8 3 x 25,000,000 75,000,000

$5 4 x 25,000,000 100,000,000

$3 5 x 25,000,000 125,000,000

Market Demand<—

- Pr

ice

—->

<—- Quantity Demanded —->

Determinants of Demand

* To simplify model, economists assume price is the most important determinant for quantity purchased

- they understand that other factors affect purchase decisions (brand loyalty, varieties and styles available, access to product, etc.)

Market Demand<—

- Pr

ice

—->

<—- Quantity Demanded —->

* factors besides price are the “other things equal” in simplified models

* when determinants of demand change => referred to as demand shifters

Market Demand<—

- Pr

ice

—->

<—- Quantity Demanded —->

* E.g. Beloved rapper Fetty Wap sports some “hella sick grills (grilz? grillz?)”… MASSIVE spike in market demand may shift demand curve outward

Market Demand<—

- Pr

ice

—->

<—- Quantity Demanded —->

* News spreads that hairspray aerosols containing CFCs destroy the ozone… massive reduction in demand for that type of product… shifts curve inward

Market Demand

* increase in number of buyers => increase in product demand

- more older people in society, more demand for retirement communities, medical care, etc.

* decrease in number of buyers => decrease in demand

* brick and mortar stores replaced by online

* people move out of places, decrease demand for local goods and services

Market Demand

Superior vs. Inferior Goods

* How does demand change with an increase in income?

Superior Goods (also called normal goods)

* Demand increases as people’s income increases

* Most goods are superior goods

e.g. furniture => rise in incomes = people buy more furniture / nicer furniture

e.g. electronic goods => rise in incomes = people buy Apple computers, new gadgets, etc.

Market Demand

Superior vs. Inferior Goods

* How does demand change with an increase in income?

Inferior Goods:

* Demand for goods decreases as people’s incomes increase

e.g. used cars => people’s income increase = people buy fewer used cars (opt for new cars)

Market Demand: Substitutes and Complements

How does an increase in price affect product demand?

* depends on whether the good is a substitute good or a complementary good

Substitute Good Complementary Good

* one that can be used in place of another good

* aka substitutes; aka substitutes in consumption

* price of one increases = increases demand for the other

* price of one decreases = decreases demand for the other

* aka complements

* goods that are typically used together and demanded jointly

* price of one goes up => demand for other decreases

* price of one goes down => demand for other increases

Market Demand: Substitutes and Complements

* iPhone vs Google Pixel = substitues

* cell phones and cellular service complementary goods (complements)

Market Demand

* vast majority of goods are not related to each other

- called independent goods

- price of one has little or no effect on the other

* Consumer expectations may shift demand

- people may buy something now if they expect the price to be higher later

e.g. home purchases in rising market

- may reduce or increase demand for things if they expect a change in income

e.g. expect bonus? = increase in demand for travel or luxury items

Market Demand<—

- Pr

ice

—->

<—- Quantity Demanded —->

Important Note!* change in demand = shift of curve to

left or right

* change in quantity demanded = point along a given curve