demand, supply, and market equilibrium€¦ · demand, supply, and market equilibrium ap econ. /...
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2018-2019
Demand, Supply, and Market EquilibriumAP Econ. / Holliday
![Page 2: Demand, Supply, and Market Equilibrium€¦ · Demand, Supply, and Market Equilibrium AP Econ. / Holliday. DEMAND Latin: mandare = to order Latin: demandare = to hand over. NEED TITLE](https://reader036.vdocuments.net/reader036/viewer/2022062311/5fc133a9f31ec90208736f4d/html5/thumbnails/2.jpg)
DEMANDLatin: mandare = to order Latin: demandare = to hand over
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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
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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
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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
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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.
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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
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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)
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The Income Effect and Substitution Effect
$$ $
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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
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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
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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.)
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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
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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
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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
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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
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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.
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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)
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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
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Market Demand: Substitutes and Complements
* iPhone vs Google Pixel = substitues
* cell phones and cellular service complementary goods (complements)
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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
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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