A market is an institution in which buyers and sellers exchange goods and services for a medium of e

1
Markets, demand, and supply
A market is an institutionin which buyers
andsellers exchange goodsand services fora
medium of exchange--money
2
What is demand?

• Definitions
• Demand The quantities of a good or service
  buyers are willing (and able) to buy at
  alternative market prices, ceteris paribus.
• Quantity demanded The quantity of a good or
  service buyers are willing (and able) to buy at a
  specific price, ceteris paribus.
• Demand curve The schedule indicating the
  quantities demanded of a good or service at
  alternative market prices, ceteris paribus.
• Law of demand ceteris paribus, price and
  quantity demanded of a good or service are
  negatively related

3
Non-price determinants of demand
When it comes to the question ofhow much people
are willing to buy of a good or service, price
is clearlya factor. However, there areimportant
non-price determinant of demand as well.
These include

• The price of substitute goods
• The price of complementary goods
• Consumer income
• Tastes and preferences

4
The demand for pineapple

• The demand for pineapple depends on
• The price of pineapple
• The price of cantaloupe
• The price of bananas
• Consumer income
• Consumer tastes

As we move alongthe demand curvefor, all
factorsare held constantexcept the priceof
pineapple
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Why is the demand curve downward sloping?
Because of the substitution effect
Price
P2
P1
D
0
q2
q1
Quantity
6
Here we derive the marketdemand curve bysumming
up the individualdemand curves for pineapple
7
Deriving the demand for pineapple
Price ()
Anita
2.50
BO
2.00
1.50
Market demand
1.00
0
3
6
10
12
7
4
Quantity
8
Shifts of the demand curve

• Demand could shift right due to
• Increase in the price of substitutes
• Decrease in the price of complements
• Increase in income
• Change of tastes and preferences

Price
H
A
P2
B
P1
D2
D1
q1
q2
0
Quantity
9
Shifts of the demand curve, part II

• Demand could shift left due to
• Decrease in the price of substitutes
• Increase in the price of complements
• Decrease in income
• Change of tastes and preferences

Price
H
A
P2
B
P1
D1
D0
q1
q2
0
Quantity
10
The supply curve
The supply curve is theschedule indicating the
quantities of a good orservice sellers are
willingto offer for sale at alternative market
prices,ceteris paribus
11
The supply of salmon
12
The supply of salmon
Price/lb
Supply
6.50
5.50
4.50
3.50
2.50
0
200
400
550
670
Quantity (lbs)
13
The supply and demand of salmon
Price/lb
Note thatsupply isequal todemand at aprice of
5.50
Supply
6.50
5.50
4.50
Demand
3.50
2.50
0
Quantity (lbs)
200
400
550
670
750
900
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Shifts of supply

• S1 to S2 explained by
• good weather
• increase in the number of sellers
• decrease in input prices (machinery, fertilizer,
  labor, etc.)

Price
Pineapple
S1
S2
A
P2
B
P1
D
0
q1
q2
Quantity