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1
MARKETS AND COMPETITION
Supply and demand are the two words that
economists use most often.
Supply and demand are the forces that make
market economies work.
Modern microeconomics is about supply,
demand, and market equilibrium.
Price of
Potato per bags
$3.00
2.50
1. A decrease
2.00
in price ...
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Potato (bags)
2. ... increases quantity
of cones demanded.
2007 Thomson South-Western
The Demand Curve: The Relationship
between Price and Quantity Demanded
Demand Curve
The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded.
7 13
4 8 3 5
When the price is $1.00, When the price is $1.00, The market demand at
Catherine will demand 8 Nicholas will demand 5 $1.00, will be 13 bags.
bags. bags.
1.00 A
D
0 4 8 Quantity of potatoes (bags)
2007 Thomson South-Western
Shifts in the Demand Curve
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers
Change in Demand
A shift in the demand curve, either to the left or
right.
Caused by any change that alters the quantity
demanded at every price.
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of
Potatoes 9bags)
2007 Thomson South-Western
Shifts in the Demand Curve
Consumer Income
As income increases the demand for a normal good
will increase.
As income increases the demand for an inferior
good will decrease.
Price of
potatoes
$3.0 An increase
0
2.5 in income...
0 Increase
2.0 in demand
0
1.5
0
1.0
0
0.5
0
D2
D1 Quantity
of
0 1 2 3 4 5 6 7 8 9 10 11 12 potatoes
(bags)
2007 Thomson South-Western
Consumer Income Inferior Good
Price of
potatoes (bags)
$3.0
0
2.5 An increase
0
2.0
in income...
0 Decrease
1.5 in demand
0
1.0
0
0.5
0
D2 D1 Quantity of
Price of
0 1 2 3 4 5 6 7 8 9 10 11 12 potatoes
(bags)
2007 Thomson South-Western
Shifts in the Demand Curve
P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P ric e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e in p ric e
Inelastic Demand
Quantity demanded does not respond strongly to
price changes.
Price elasticity of demand is less than one.
Elastic Demand
Quantity demanded responds strongly to changes in
price.
Price elasticity of demand is greater than one.
Perfectly Inelastic
Quantity demanded does not respond to price
changes.
Perfectly Elastic
Quantity demanded changes infinitely with any
change in price.
Unit Elastic
Quantity demanded changes by the same percentage
as the price.
Price
Demand
$5
4
1. An
increase
in price . . .
0 100 Quantity
Price
$5
4
1. A 22% Demand
increase
in price . . .
0 90 100 Quantity
$5
4
1. A 22% Demand
increase
in price . . .
0 80 100 Quantity
$5
4 Demand
1. A 22%
increase
in price . . .
0 50 100 Quantity
1. At any price
above $4, quantity
demanded is zero.
$4 Demand
2. At exactly $4,
consumers will
buy any quantity.
0 Quantity
3. At a price below $4,
quantity demanded is infinite.
TR P Q
$4
P Q = $400
P
(revenue) Demand
0 100 Quantity
Price Price
An Increase in price from $1 leads to an Increase in
to $3 total revenue from $100 to
$240
$3
Revenue = $240
$1
Revenue = $100 Demand Demand
Price Price
$5
$4
Demand
Demand
0 50 Quantity 0 20 Quantity
Note that with each price increase, the Law of Demand still holds an
increase in price leads to a decrease in the quantity demanded. It is the
change in TR that varies! 2007 Thomson South-Western
Elasticity of a Linear Demand Curve
4
Elasticity is is<inelastic;
Demand 1 in this range.
demand is
3
not very responsive to changes
2 When price increases from
in price.
$2 to $3, TR increases from
1 $20 to $24.
0 2 4 6 8 10 12 14
Quantity
P e rc e n ta g e c h a n g e
in q u a n tity d e m a n d e d
In c o m e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e
in in c o m e
Income Elasticity
Types of Goods
Normal Goods EI > 0
Inferior Goods EI <0