Chapter 1

CHAPTER 2

Market Forces: Demand and Supply

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Chapter Outline

• Demand

Chapter Overview

– Factors that change quantity demanded and factors that change demand – The demand function – Consumer surplus

• Supply

– Factors that change quantity supplied and factors that change supply – The supply function – Producer surplus

• Market equilibrium • Price restrictions and market equilibrium

– Price ceilings – Price floors

• Comparative statics

– Changes in demand – Changes in supply – Simultaneous shifts in supply and demand

2-2

Demand

• Market demand curve

– Illustrates the relationship between the total quantity and price per unit of a good all consumers are willing and able to purchase, holding other variables constant.

Demand

• Law of demand

– The quantity of a good consumers are willing and able to purchase increases (decreases) as the price falls (rises).

2-3

Market Demand Curve

Price ($)

$40

Demand

$30

$20

$10

Demand

0 20

40

60

80

Quantity

(thousands per year)

2-4

Changes in Quantity Demanded

• Changing only price leads to changes in quantity demanded.

Demand

– This type of change is graphically represented by a movement along a given demand curve, holding other factors that impact demand constant.

• Changing factors other than price lead to changes in demand.

– These types of changes are graphically represented by a shift of the entire demand curve.

2-5

Demand

Changes in Demand

Price

A

Increase in demand

Decrease in demand

B

D1

D2

0

D0 Quantity

2-6

Demand

Demand Shifters

• Income

– Normal good – Inferior good

• Prices of related goods

– Substitute goods – Complement goods

• Advertising and consumer tastes

– Informative advertising – Persuasive advertising

• Population •...