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Lecture

Topic 3 - Demand Supply and Market Price 1. The Demand Curve -- Law of Downward-Sloping Demand; -- Market vs. Individual Demand Curve; -- Movement Along vs. Shift; 2. The Supply Curve -- Law of Upward-Sloping Supply; -- Market vs. Firm Suppl


Department
Economics
Course Code
ECO101H1
Professor
James Pesando

Page:
of 4
ECO100Y1-Pesando-Notes edited by Eva Wu
Topic 3 Demand, Supply and the Market Price
(Week three Sep 27th)
Outline:
1. The Demand Curve
-- Law of Downward-Sloping Demand;
-- Market vs. Individual Demand Curve;
-- Movement Along vs. Shift;
2. The Supply Curve
-- Law of Upward-Sloping Supply;
-- Market vs. Firm Supply Curve;
-- Movement Along vs. Shift;
3. Equilibrium (Price, Quantity) in Competitive Market
-- How Equilibrium is Determined;
-- Examples;
The Demand Curve
Competitive market: many buyers and sellers, each of who has no influence on market price (e.g. coffee);
1. Law of Downward-Sloping Demand
Other things equal, the higher is the price of the good, the lower is the quantity demanded.
Individual Demand
Price
Quantity
Demanded
5
0
4
3
3
6
2
9
2. Market Demand Curve
The sum of individual demand curve (at each possible price, sum of the quantities demanded by each
individual)
Janes individual demand Johns individual demand Market demand
9 Quantity Demanded
Price
5
2
6 Quantity Demanded
Price
3
3 Quantity Demanded
Price
3
Price
3
ECO100Y1-Pesando-Notes edited by Eva Wu
3. Movement Along vs. Shifts
a. A change in quantity demanded (as the price of the good changes) is a movement along the demand
curve;
b. A change in demand (for a given price) is a shift in the demand curve;
c. Sources of shifts in demand:
-- Price of related goods: substitutes; complements;
-- Substitute instead of (e.g. coffee & tea);
-- Complements “together” (e.g. coffee & cream);
-- Income;
-- Preferences;
c. Insights:
-- Movement along: the curve does not change;
-- Shifts: the curve changes
e.g. 1. Shift in Demand Curve for Ice Cream Cones
scenario #1 Unusually hot summer; scenario #2 sharp drop in price of yogurt cones (substitute)
demand of Ice Cream Cones #1 demand of Ice Cream Cones #2
Supply Curve
1. Law of Upward-Sloping Supply
Other things equal, the higher is the price of a good, the higher is the quantity supplied;
(source: firms seeking to maximize profits)
Individual supplied curve
Price
Quantity
Supplied
5
9
4
6
3
3
2
0
500 750 Quantity Demanded
Price
ee
$2
DD
DD
Demand increase
= demand curve shifts outwards
300 500 Quantity Demanded
Price
ee
$2
DD
DD
price of a substitute decrease
= quantity demanded of the substitute increase
= demand decrease
= demand curve shifts inwards
9 Quantity Supplied
Price
5
2
ECO100Y1-Pesando-Notes edited by Eva Wu
2. Market Supplied Curve
The sum of individual firm supply curves (at each possible price, sum of the quantities supplied by each
individual)
Jane’s individual supply Johns individual supply Market supply
3. Movement Along vs. Shifts
a. A change in quantity supplied (as the price of the good changes) is a movement along the supply curve;
b. A change in supply (for a given price) is a shift in the supply curve;
c. Sources of shifts in supply:
-- Costs of production
-- price of factors of production (rent, wage, interest, etc.)
-- Technology;
c. Insights:
-- Movement along: the curve does not change;
-- Shifts: the curve changes
e.g. 2 Shifts in Supply Curve for Coffee
Scenario #1 Severe Drought in Brazil Scenario #2 Technological innovation which reduces the cost
of harvesting
Supply of coffee #1 Supply of coffee #2
6 Quantity Demanded
Price
3
3 Quantity Demanded
Price
3
9 Quantity
Demanded
Price
3
100 200 Quantity supplied
Price
ee
$4
SS
SS
200 275 Quantity supplied
Price
ee
$4
SS
SS
Decrease in Supply
= Supply curve shifts inward
Increase in Supply
= Supply curve shifts outwards