Markets and Demand

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Markets and Demand
Overheads
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Markets
A market is a situation in which buyers and
sellers can negotiate the exchange of some
product or products.
A market is a group of buyers and seller with the
potential to trade.
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The economy is just a collection of individual
markets.
Separate, analyze, put back together
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Examples of Markets
Farmers Market
Cattle auction
Tractor market
Used car market
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Markets can be of many sizes
Some markets are local
Some markets are regional
Some markets are national
Some markets are global
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The purpose of the analysis determines the
breadth of market we specify.
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We often describe markets by the degree
of competition by which they are characterized.
Some markets are competitive ...
some are not.
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Imperfectly competitive markets
When a buyer or seller has the power to influence
the price of a product, we say that the market
is imperfectly competitive
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Examples
Breakfast cereal
Heavy duty trucks
Slaughter of cattle
Fructose syrup
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Purely competitive markets
When buyer or sellers in a market are not able
affect the price of a product, we say that the
market is purely competitive, or just,
competitive.
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When there are many buyer or sellers in a
market they are usually not able affect the
price of their product.
When there are few buyer or sellers in a
market they are often able affect the price of
their product.
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Examples
Wheat at the production level
Unskilled labor
Futures contracts on sugar
Coffee, Sugar and Cocoa Exchange
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Competitive agents
A buyer or seller (agent) is said to be
competitive if the agent assumes or believes that
the market price is given and that the agent's
actions do not influence the market price.
We call such an agent a price taker.
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Demand for a competitive agent
The total amount of a good that a competitive
agent would choose to purchase at a given price
is called the quantity demand by that agent.
The market demand of a good is the total amount
that all buyers in a market would choose to
purchase at a given price.
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Supply for a competitive agent
The total amount of a good that a competitive
agent would choose to produce and sell at a given
price is called the quantity supplied by that
agent.
The market supply of a good is the total amount
that all sellers in a market would choose to
produce and sell at a given price.
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Supply and demand are specifically relevant
for competitive markets
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The Demand Function
The demand function for a good is a rule that
specifies the quantity of the good that will be
demanded at a given price
holding all other factors that affect
the quantity demanded of the good constant.
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The Demand Function
D quantity demanded
P price of the good
ZD other factors that affect demand
ZD (z1, z2, z3, . . . , zr )
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The Law of Demand
The law of demand states that when the price of a
good rises, and everything else remains the same,
the quantity of the good demanded will fall.
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The Demand Schedule
The demand schedule is a list showing the
quantities of a good that consumers will choose
to purchase at different prices, with all other
variables held constant.
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Demand for Hamburger
Price (per lb) Quantity demanded
.25 10000
0.5 9000
0.75 8000
1 7000 1.25 6000 1.5 5000 1.75 4000 2 30
00 2.25 2000 2.5 1000
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The Demand Curve
The demand curve is a graphical depiction of a
demand schedule
a line showing the quantity of a good or
service demanded at various prices,
with all other variables held constant.
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The Law of Demand
The law of demand says that the demand curve has
a negative slope
(slopes downward)
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Demand for Hamburger Patties
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Price
2.5
2
1.5
1
0.5
0
0
2000
4000
6000
8000
10000
12000
Quantity
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Other factors in the demand function
Household income and wealth
Prices of other goods
Population or market size
Expectations
Tastes
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Demand depends on many things
D h (P, income, other prices, population,
expectations, tastes )
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Changes in Demand
A change in demand is a change in the entire
relationship between price and quantity demanded.

An increase in demand means that buyers would
choose to buy more at any price.
A decrease in demand means that they would choose
to buy less at any price.
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Example change in demand
Price (per lb) Quantity Demanded
New Quantity Demanded
.25 10000 0.5 9000 .75 8000 1
7000 1.25 6000 1.5 5000 1.75
4000 2 3000 2.25 2000 2.5 1000
9000 8000 7000 6000 5000 4000 3000 2000 1000 0
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Changes in demand are represented by a shift in
the demand curve.
Demand for Hamburger Patties Salmonella Threat
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Price
2.5
2
1.5
1
0.5
0
0
2000
4000
6000
8000
10000
12000
Quantity
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Changes in demand are represented by a shift in
the demand curve.
When demand increases, the demand curve shifts to
the right
when demand decreases, the demand curve shifts to
the left.
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Changes in demand as compared to changes in the
quantity demanded
Along a fixed demand curve, as price changes the
quantity demanded will change.
This is called a change in the quantity demanded
in contrast to a change in demand that shifts the
whole curve
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Change in quantity demanded
Movement along a fixed schedule or curve
Change in demand
Change in the whole schedule or curve
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Demand for Hamburger Patties
Salmonella Threat
3
Price
2.5
2
1.5
1
0.5
0
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Quantity
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Demand for Hamburger Patties
Change in Price
3
Price
2.5
2
D0
1.5
1
0.5
0
0
2000
4000
6000
8000
10000
12000
Quantity
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Demand for Hamburger Patties
Salmonella Threat
3
Price
2.5
2
D0
1.5
1
0.5
0
0
2000
4000
6000
8000
10000
12000
Quantity
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Factors causing changes in demand
Household income and wealth
Prices of other goods
Population or market size
Expectations
Tastes
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Income and Wealth
Income is a flow variable and represents the
amount that a person or firm earns over a
particular period.
Wealth is a stock variable and represents the
total value of everything a person or firm owns,
at a point in time, minus the total value of
everything owed.
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Effect of income and wealth on demand
Normal goods
The demand for most goods (normal goods) is
positively related to income or wealth.
A rise in either income or wealth will increase
the demand and shift the demand curve to the
right.
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Effect of income and wealth on demand
Inferior goods
The demand for inferior goods is negatively
related to income or wealth.
A rise in either income or wealth will decrease
the demand and shift the demand curve to the
left.
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Effect of prices of related goods on demand
Substitute goods
A substitute is a good that can be used in place
of some other good and that fulfills more or less
the same purpose.
A rise in the price of a substitute good will
cause an increase in the demand for the
good, shifting the demand curve to the right.
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Examples
Big Macs and Whoppers
Revlon and Maybelline eyeshadow
Dodge Caravan and Ford Winstar
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Effect of prices of related goods on demand
Complementary goods
A complement is a good that is used together with
some other good.
A rise in the price of a complementary good will
cause a decrease in the demand for the
good, shifting the demand curve to the left.
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Examples
Hamburgers and French Fry
Running shoes and running socks
Skis and ski poles
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Population and Demand
A larger population means a larger demand.
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Expectations and Demand
If individuals anticipate the price of a
product will rise in the near future, they may
choose to buy more of the product now, thus
increasing the demand.
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Expectations and Demand
If individuals anticipate the price of a
product will fall in the near future, they may
choose to buy less of the product now and wait
until later to buy, thus decreasing the current
demand.
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The Effect of Tastes on Demand
If individuals develop a stronger taste for
product the demand will increase and the demand
curve will shift to the right.
If individuals taste for product declines, the
demand will decrease and the demand curve will
shift to the left.
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Examples
Healthy food leads to a longer life
Herbal tea makes you think more clearly
Smoking causes you to die young
You lose your teeth in an accident
Your new spouse hates vegetables
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The End