Microeconomics unit 2 ch.

4 - demand and supply

The market:
-it is important to understand the distinction between an economy as we have come to know in
the previous 3 chapters, and a market.
1) A physical place where items are bought and sold.

2) All of the buyers and sellers of a particular good or service

3) The demand that exists for a particular product or service

4) The process where a buyer and seller come to an agreement with regard to the price
and quantity of a product to be sold
-The key within any market is that the combination of demand and supply is what will determine
the price of a product

Examining demand
-Demand: can be defined as the quantity of a good or service that the buyers will purchase at
various times during a given period of time
-Two key components of demand are consumer Wants along with consumer affordability
-Therefore, the quantity of a product that consumers demand will depend on the products price
-This can be stated in the Law of Demand
-The quantity demanded varies inversely price, as long as other things do not change
-Why do we buy more of a product if the price falls, and less of a product when the price
increases?
-There are two reasons for this; one is the substitution effect, and the other is the income effect
-1) The substitution effect states that when the price of a particular product rises, consumers will
substitute a lesser priced product or brand name over what they would normally buy. The
opposite is also true
-2) The income effect states that if the price of a product falls, the consumer in essence has
more “real” income or disposable income as a result and will put that money towards purchasing
more of a product thus increasing the demand for that product. The opposite is also true.
-How does demand work
-The best way to gain a better understanding of how demand works is to examine a market
demand schedule.

The market demand for the wwjd wristbands is comprised of all the individual

Examining supply
-supply is defined as the quantity that sellers will offer for sale at various prices during a given
time period
-sellers want to make a profit of the product increases, the seller will want to sell more of the
products as this will increase their profits and vice versa.
-The law of supply states that:
The quantity supplied will increase if price increases and fall of price falls, as long as other
things do not change.
-examining a supply schedule along with the graph of a supply curve will help us to see this law
in effect

Market Equilibrium
-within any market, the consumer wants to buy at the lowest price possible while the seller
wants to sell at the highest price possible
-in out market of the WWJD wristbands, we can see that market equilibrium is achieved at a
price of 4$ where both supply and demand equal at 300 units
-If the price moves above 4$ there will be a surplus because the quantity supplied is greater
than the demand. On the other hand, if the price drops below there will be a shortage in supply
because the quantity demanded is greater than the quantity supplied

Changes in demand
-There are five types of changes that can take place in customer demand for a product.
All five of these changes will have the effect of shifting the demand curve.
● the five types of change are:
1) Income: if average incomes were to increase, the overall demand for a
particular product would increase.
2) Population: if the population (# of consumers) were to increase, then the
overall demand for a particular product would also increase.
3) Tastes and Preferences: Changes in either tastes or preferences can
lead can lead to either an increase or decrease in demand for certain
products
4) Expectations: if consumers expect the price of a certain product to rise
in the future (ie: housing) then demand for that product will increase as a
result of consumers trying to avoid the increase in price.
5) Prices of substitute Goods: should the price of substitute goods either
increase or decrease, this will have either a positive or negative effect on
the demand for various alternative or complementary products.
Changes in supply
- Changes in supply can be caused by a variety of factors that may shift the supply curve
to the right ( increase in supply ) or to the left (decrease in supply)

1) Costs: If production costs were to decrease, this world cause an increase in

supply of the product.
2) Number of sellers: if the number of sellers increases, then supply would
increase, and vice versa
3) Technology: an improvement in technology would decrease the cost of
production, allowing manufacturers to supply more of the product
 4) Nature and the Environment: a drought, or any inclement weather pattern that
has a negative effect on a crop can cause supply to drop and prices to rise.
5) Prices of related outputs: if the price of a complementary product rises, then
suppliers might shift resources into producing that other product, thus increasing
the supply of that product while reducing the supply of what the supplier was
originally producing.

The Determine of Price

- There are a variety of characteristics within a particular market that way heavily in
determining price. For our purposes, we will analyze this from the perspective of a
market with pure/ perfect competition.
- A market with perfect competition has many producers or sellers, with no single one able
to dominate the market, it has many buyers with no single similar quality, and all sellers
and buyers with no single one able to dictate price, each suppliers product is exactly the
same with similar quality, and all sellers and buyers know what the prices and conditions
are throughout the entire market.
- Oln the following slides, we will look at what happens with regard to price when there is
an increase in demand, a demand, a decrease in demand, and increase in supply, and a
decrease in supply.

-If there's a change in the quantity demanded or supplied ----- that is a curve
A change in supply or demand is a shiftc