Microeconomics

Module 3a: Supply and Demand

Economic Systems: Free

Market: any situation that brings

together buyers and sellers of goods or
services.

Types of Economies - In the modern

world today, there is a range of
economic systems:
• Market Economy: an economy
where economic decisions are
decentralized, resources are owned
by private individuals, and
businesses supply goods and
services based on demand.
Economic Systems: Free (cont.)

Types of Economies: In the

modern world today, there is a
range of economic systems:
• Competitive Market: a
market in which there is a
large number of buyers and
sellers, so that no one can
control the market price.
• Free Economy: a market in
which the government does
not intervene in any way.
Economic Systems: Planned
Planned (or Command) Economies:
an economy where economic decisions
are passed down from government
authority and where resources are
owned by the government.
• Resources and businesses are owned
by the government.
• Government decides what goods and
services will be produced and what
prices will be charged for them.
• Government decides what methods of
production will be used and how much
workers will be paid.
Economic Systems: Distinction

Primary Distinction
• The primary distinction between a free and command economy is
the degree to which the government determines what can be
produced and what prices will be charged.
Real World: Most economies in the real world are mixed; they
combine elements of command and market systems.
What Is Demand?

Demand for Goods and Services

• Demand: the relationship between the price of a certain good or
service and the quantity of that good or service someone is
willing and able to buy.
• Price: what a buyer pays for a unit of the specific good or
service.
• Quantity Demanded: the total number of units of a good or
service consumers wish to purchase at a given price.
• Law of Demand: the common relationship that a higher price
leads to a lower quantity demanded of a certain good or service
and a lower price leads to a higher quantity demanded, while all
other variables are held constant.
What Is Demand? (cont.)

Demand Schedule: a table that shows the quantity demanded for

a certain good or service at a range of prices.
• Example: Price is measured in dollars per gallon of gasoline. The
quantity demanded is measured in millions of gallons over some
time period and over some geographic area.
Demand Schedule Example: Table 1

Quantity Demanded (millions

Price (per gallon)
of gallons)
$1.00 800
$1.20 700
$1.40 600
$1.60 550
$1.80 500
$2.00 460
$2.20 420
What Is a Demand Curve?
Demand curve: a graphic
representation of the relationship
between price and quantity demanded
of a certain good or service, with price
on the vertical axis and quantity on the
horizontal axis.
• For example, the figure to the left,
with price per gallon on the vertical
axis and quantity on the horizontal
axis.
• The demand schedule shows that as
price rises, quantity demanded
decreases, and vice versa.
• The downward slope of the demand
curve illustrates the law of demand—
the inverse relationship between
What Is Assumed in a Demand Curve?

Ceteris Paribus: a Latin phrase meaning “other things being

equal.”
• Any given demand or supply curve is based on the ceteris
paribus assumption that all else is held equal.
• When changing one variable in a function (e.g. demand for some
product), we assume everything else is held constant.
• A demand curve or a supply curve is a relationship between two,
and only two, variables when all other variables are held equal. If
all else is not held equal, then the laws of supply and demand
will not necessarily hold.
What Affects a Demand Curve?

Demand Curves Affected By:

• “Willingness to purchase”
suggests a desire to buy, and it
depends on what economists call
tastes and preferences. If you
neither need nor want something,
you won’t be willing to buy it.
• “Ability to purchase” suggests
that income is important.
Professors are usually able to
afford better housing and
transportation than students,
because they have more income.
What Affects a Demand Curve? (cont.)

Demand Curves Affected By:

• Prices of related goods can also affect demand. If you need a
new car, the price of a Honda may affect your demand for a Ford.
• Size or composition of the population. The more children a
family has, the greater their demand for clothing. The more
driving-age children a family has, the greater their demand for
car insurance and the less for diapers and baby formula.
Factors Affecting Demand: Income

Income Example with Shifts in Demand

Automobiles
• Initial demand for automobiles is
D0.
• At point Q, if the price is $20,000
per car, the quantity of cars
demanded is 18 million.
• D0 also shows how the quantity of
cars demanded would change as
a result of a higher or lower price.
For example, if the price of a car
rose to $22,000, the quantity
demanded would decrease to 17
million, at point R.
Factors Affecting Demand: Income (cont.)

Shifts in Demand Income Example with Automobiles

• Assume the economy expands and
increases many people’s incomes,
making cars more affordable. With
cars still $20,000, but with higher
incomes, the quantity demanded
increases to 20 million cars, shown
at point S.
• As a result of the higher income
levels, the demand curve shifts to
the right to the new demand curve
D1, indicating an increase in
demand.
Factors Affecting Demand: Other Factors

Shift in demand happens when a change in some economic

factor (other than price) causes a different quantity to be
demanded at every price.
• changing tastes or preferences
• changes in the composition of the population
• changes in the prices of related goods
• changes in expectations about future prices
Factors Affecting Demand:
Goods or Services
Good or Services Terms: The demand for a product can be affected by
changes in the prices of related goods such as substitutes or
complements.
• Substitutes: goods or services that can be used in place of one
another
• Complements: goods or services that are used together because the
use of one enhances the use of the other.
• Inferior good: good or service whose demand decreases when a
consumer’s income increases and demand increases when income
decreases.
• Normal good: good or service whose demand increases when a
consumer’s income increases and demand decreases when income
decreases.
Factors Affecting Demand: Six Factors
Factors Shifting Demand Curves
• Six factors that can shift demand curves are summarized in the
charts above.
• The direction of the arrows indicates whether the demand curve
shifts represent an increase in demand or a decrease in demand.