OUTLINE -- CHAPTER 3
Understanding Individual Markets: Demand and Supply
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Structural Adjustment Policies

1. Privatization
2. Promotion of Competition
3. Limited and Reoriented Role for Government
4. Price Reform: Removing Controls
5. Joining the World Economy
6. Macroeconomic Stability

I. Demand

A. Definition
1. a schedule
2. various quantities
3. willing and able
4. various prices
5. given time period
6. ceteris paribus
7. demand is NOT how much we buy

B. Demand Schedule and Curve [sdtabblk.gif] [sdpoint.gif] [sdline.gif]
C. Law of Demand

1. there is an inverse relationship between price and quantity demanded
2. why?
a. common sense
b. diminishing marginal utility
c. income effects
d. substitution effects

D. Market Demand

1. definition
2. graphically (fig. 4-2)

E. Determinates of Demand (VODKA)

1. the price of the product
2. the non-price determinates of demand

II. Two Kinds of Changes Involving Demand

A. Change in Quantity Demanded
1. caused ONLY by a change in the PRICE of the product
2. a movement ALONG a SINGLE demand curve

B. Change in Demand

1. shifting the demand curve / a new demand schedule
a. an increase in demand
b. a decrease in demand

2. caused by a CHANGE in the non-price determinates of demand

a. Pe -- expected price
b. Pog -- price of other goods
1) substitute goods
2) complementary goods
3) independent goods

c. I -- income

1) normal goods
2) inferior goods

d. N -- number of POTENTIAL consumers

1) population change
2) expanded marketing area
3) new competitor
(changes individual demand curve but NOT market demand curve)
4) change in eligible consumers (i.e. drinking age)

e. T -- tastes and preferences

III. Supply

A. Definition
1. a schedule
2. various quantities
3. willing and able
4. various prices
5. given time period
6. ceteris paribus
7. supply is NOT the quantity available for sale

B. Supply Schedule and Curve sssupply.gif sdspnt.gif sdsline.gif
C. Law of Supply

1. there is a direct relationship between price and quantity supplied
2. why?
a. common sense
b. increasing costs because some resources are fixed
c. increasing costs because not all resources are identical

D. Market Supply
E. Determinates of Supply

1. the price of the product
2. the non-price determinates of supply

IV. Two Kinds of Changes Involving Supply

A. Change in Quantity Supplied schgqs.gif
1. caused ONLY by a change in the PRICE of the product
2. a movement ALONG a SINGLE supply curve

B. Change in Supply slineinc.gif

1. shifting the supply curve / a new supply schedule
a. an increase in supply
b. a decrease in supply

2. caused by a CHANGE in the non-price determinates of supply

a. Pe -- expected price
b. Pog -- price of other goods ALSO PRODUCED BY THE FIRM
c. Pres -- price of resources
d. T --technology
e. T --taxes and subsidies
f. N -- number of sellers

V. Market Equilibrium -- Equilibrium Price and Quantity

A. Market Equilibrium
1. define equilibrium
2. find market equilibrium sdequil.gif

B. Market Disequilibrium

1. surpluses
2. shortages

VI. Changes in Demand AND Supply

A. Case 1: D changes and supply stays the same dinc.gif
B. Case 2: S changes and demand stays the same sinc.gif
C. Case 3: D and S both change
1. S increases, D decreases
2. S decreases, D increases SDdisd.gif
3. S increases, D increases SDdisi.gif
4. S decreases, D decreases

VII. Example