In this unit:- When trade happens….
- How is price determined?
- How is the quantity traded determined?
- and
- What if the government sets the price or quantity?
Law of Demand- “Quantity Demanded” Varies Inversely with Price, other things constant
- Relative price: rate at which 2 goods exchange
- Scarcity relative to other goods determines relative price
- Models: Curves, Schedule, or Function
A Model: The Demand “Curve”- how much (Q) consumers are willing and able to buy
- at each possible
price (P)
- given time period
- Ceteris paribus
Change in Quantity Demanded- Demand curve:
- relationship between
P and Q,
when other factors don’t change
- If P changes,
QD changes
- Movement Along Demand Curve
Factors that Change Demand- Tastes or “Preferences”
- Expectations
- Money Incomes
- Normal Goods
- Inferior Goods
- Prices of related goods
- # Consumers in Market
Reminder- Only P changes
- movement along a curve
- change QD
- Change in other factors
shift entire D curve.
- A shift in D curve MIGHT change P – but it depends on Supply
Law of Supply- “Quantity Supplied” Varies Directly with Price, other things constant
- Models: Curves, Schedule, or Function
The Supply Curve - Supply: ability to willingess to supply the good at various prices
Markets- Coordinate buyers & sellers
- Markets:
- Prices as Signals
- “Invisible Hand”
- If D or S shift
- QD not equal QS,
- P changes
- surplus P declines
- shortage P rises
Market Equilibrium- P for which
QD = QS
- Perfect Coordination of Buyers & Sellers
- No Reason for P or Q to Change
Summary- surplus downward price pressure
- shortage upward price pressure
- If QD not equal to QS, P changes
Restrictions on Markets- Fixed Prices
- Price Floors
- Price Ceilings
- Price Supports
- Govt Purchases to Force Price Up
- Quotas
- Non-price allocation devices emerge
- Incentives for Illegal Activity
Price Floor- If:
- Price Floor > Equilib.
surplus
- Price Floor < Equilib.
no effect
Price Ceilings- If:
- Price Ceiling > Equilib.
no effect
- Price Floor < Equilib.
Shortage
In the next unit:- Quantity Demanded changes when Price changes, but by how much?
- Why are people more sensitive to some prices than others?
- How can we measure price sensitivity?
- A business wants to collect more money. Should they raise the price or lower it?