Mar Forces

8/18/2019 Mar Forces

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Copyright © 2004 South-Western

• 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.


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• A market is a group of buyers and sellers of a

particular good or service.

• The terms supply and demand refer to the

behavior of people . . . as they interact with one

another in markets.

MARKETS AND COMPETITION


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MARKETS AND COMPETITION

• uyers determine demand .

• Sellers determine supply


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Competitive Markets

• A competitive market is a market in which there

are many buyers and sellers so that each has a

negligible impact on the market price.


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• !erfect "ompetition

• !roducts are the same

• #umerous buyers and sellers so that each has no

influence over price• uyers and Sellers are price takers

• Monopoly

• $ne seller, and seller controls price

Competition: Perfect and Otherise


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• $ligopoly

• %ew sellers

• #ot always aggressive competition

• Monopolistic "ompetition

• Many sellers

• Slightly differentiated products

• &ach seller may set price for its own product

Competition: Perfect and Otherise


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DEMAND

• Quantity demanded is the amount of a good

that buyers are willing and able to purchase.

• 'aw of (emand

• The law of demand states that, other things equal,

the quantity demanded of a good falls when the

price of the good rises.


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The Demand C!rve: The Re"ationship#eteen Price and $!antit% Demanded

• (emand Schedule

• The demand schedule is a table that shows the

relationship between the price of the good and the

quantity demanded.


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Catherine&s Demand Sched!"e



The Demand C!rve: The Re"ationship#eteen Price and $!antit% Demanded

• (emand "urve

• The demand curve is a graph of the relationship

between the price of a good and the quantity

demanded.


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'i(!re ) Catherine&s Demand Sched!"e and DemandC!rve


Price of

Ice-Cream Cone

*

+,-*

+,**

),-*

),**

*,-*

) + . / - 0 1 2 3 )* )) Quantity of Ice-Cream Cones

4.,**

)+

), A decrease

in price ,,,

+, ,,, increases 5!antit%

of cones demanded,



Market Demand vers!s Individ!a" Demand

• Market demand refers to the sum of all

individual demands for a particular good or

service.

• )raphically, individual demand curves aresummed hori*ontally to obtain the market

demand curve.



Shifts in the Demand C!rve

• "hange in +uantity (emanded

• Movement along the demand curve.

• "aused by a change in the price of the product.



0

D

Price of Ice-CreamCones

Quantity of Ice-Cream Cones

A ta6 that raises theprice of ice7creamcones res!"ts in a

movement a"on( thedemand c!rve,

A

B

8

1.00

$2.0

0

4

Chan(es in $!antit% Demanded




• "onsumer income

• !rices of related goods

• Tastes

• &pectations

• #umber of buyers




• "hange in (emand

• A shift in the demand curve, either to the left or

right.

• "aused by any change that alters the quantitydemanded at every price.


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'i(!re . Shifts in the Demand C!rve

Copyright©2003 Southwestern/homson !earning

Price of

Ice-CreamCone

Quantity of

Ice-Cream Cones

Increasein demand

Decreasein demand

Demand c!rve8D.

Demandc!rve8 D)

Demandc!rve8 D+

*




• "onsumer -ncome

• As income increases the demand for a normal good

will increase.

• As income increases the demand for an inferior good will decrease.



$3.002.5

02.001.50

1.00

0.50

21 3 4 5 6 8 ! 10 1211

Price of Ice-Cream Cone

Quantityof Ice-

CreamCones

0

Increasein "eman"

An increasein income,,,

D1

D2

Cons!mer IncomeNorma" 9ood



$3.002.5

02.001.501.00

0.50

21 3 4 5 6 8 ! 10 1211

Price of Ice-Cream Cone

Quantity of

Ice-Cream

Cones0

#ecrease

in "eman"

An increase

in income,,,

D1

D2

Cons!mer IncomeInferior 9ood




• !rices of elated )oods

• /hen a fall in the price of one good reduces the

demand for another good, the two goods are called

substitutes.• /hen a fall in the price of one good increases the

demand for another good, the two goods are called

complements.


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Ta#"e ) aria#"es That Inf"!ence ;!%ers

Copyright©2004 South-Western



S

• Quantity supplied is the amount of a good thatsellers are willing and able to sell.

• 'aw of Supply

• The law of supply states that, other things equal, the

quantity supplied of a good rises when the price of

the good rises.



The S!pp"% C!rve: The Re"ationship #eteenPrice and $!antit% S!pp"ied

• Supply Schedule

• The supply schedule is a table that shows the

relationship between the price of the good and the

quantity supplied.



;en&s S!pp"% Sched!"e



The S!pp"% C!rve: The Re"ationship #eteen

Price and $!antit% S!pp"ied

• Supply "urve

• The supply curve is the graph of the relationship

between the price of a good and the quantity

supplied.


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'i(!re - ;en&s S!pp"% Sched!"e and S!pp"% C!rve


Price of

Ice-CreamCone

*

+,-*

+,**

),-*

),**

) + . / - 0 1 2 3 )* )) Quantity of Ice-Cream Cones

4.,**

)+

*,-*

), Anincrease

in price ,,,

+, ,,, increases 5!antit% of cones s!pp"ied,


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Market S!pp"% vers!s Individ!a" S!pp"%

• Market supply refers to the sum of allindividual supplies for all sellers of a particular

good or service.

• )raphically, individual supply curves aresummed hori*ontally to obtain the market

supply curve.


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Shifts in the S!pp"% C!rve

• -nput prices

• Technology

• &pectations

• #umber of sellers


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• "hange in +uantity Supplied• Movement along the supply curve.

• "aused by a change in anything that alters the

quantity supplied at each price.


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1 5

Price of Ice-Cream

Cone

Quantity of

Ice-Cream

Cones0

S

1.00

A

C$3.00

A rise in the priceof ice creamcones res!"ts in amovement a"on(the s!pp"% c!rve,

Chan(e in $!antit% S!pp"ied


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• "hange in Supply• A shift in the supply curve, either to the left or right.

• "aused by a change in a determinant other than price.


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'i(!re 1 Shifts in the S!pp"% C!rve


Price of

Ice-CreamCone

Quantity of

Ice-Cream Cones

*

Increasein s!pp"%

Decreasein s!pp"%

S!pp"% c!rve8S .

c!rve8S!pp"%

S )S!pp"%

c!rve8S +

T #" + i #" Th t I f" S ""


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Ta#"e + aria#"es That Inf"!ence Se""ers



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S AND DEMANDTO9ET?ER

• Equilibrium refers to a situation in which the price has reached the level where quantity

supplied equals quantity demanded.


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• Equilibrium Price• The price that balances quantity supplied and

quantity demanded.

• $n a graph, it is the price at which the supply anddemand curves intersect.

• Equilibrium Quantity

• The quantity supplied and the quantity demanded atthe equilibrium price.

• $n a graph it is the quantity at which the supply and

demand curves intersect.


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At 4+,**8 the 5!antit% demandedis e5!a" to the 5!antit% s!pp"ied@


"eman#c%e#u&e

u''&yc%e#u&e

'i 2 Th E i"i# i f S " d D d


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'i(!re 2 The E5!i"i#ri!m of S!pp"% and Demand


Price of

Ice-CreamCone

* ) + . / - 0 1 2 3 )* )) )+

Quantity of Ice-Cream Cones

).

E5!i"i#ri!m

5!antit%

E5!i"i#ri!m price E5!i"i#ri!m

S!pp"%

Demand

4+,**

'i 3 M k t N t i E i"i# i


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'i(!re 3 Markets Not in E5!i"i#ri!m


Price of

Ice-Cream

Cone

*

S!pp"%

Demand

$a% &'cess Supp(y

$!antit%

demanded$!antit%

s!pp"ied

S!rp"!s

Quantity of

Ice-Cream

Cones

/

4+,-*

)*

+,**

1


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E5!i"i#ri!m

• Surplus• /hen price 0 equilibrium price, then quantity

supplied 0 quantity demanded.

• There is ecess supply or a surplus.• Suppliers will lower the price to increase sales, thereby

moving toward equilibrium.


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E5!i"i#ri!m

• Shortage• /hen price 1 equilibrium price, then quantity

demanded 0 the quantity supplied.

• There is ecess demand or a shortage.• Suppliers will raise the price due to too many buyers

chasing too few goods, thereby moving toward

equilibrium.

'i 3 M k t N t i E i"i# i


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'i(!re 3 Markets Not in E5!i"i#ri!m


Price of

Ice-Cream

Cone

* Quantity of

Ice-Cream

Cones

S!pp"%

Demand

$)% &'cess #eman"

$!antit%

s!pp"ied$!antit%

demanded

),-*

)*

4+,**

1/

Shorta(e


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Three Steps to Ana"%in( Chan(es inE5!i"i#ri!m

• (ecide whether the event shifts the supply ordemand curve 3or both4.

• (ecide whether the curve3s4 shift3s4 to the left

or to the right.• 5se the supply6and6demand diagram to see

how the shift affects equilibrium price and

quantity.

'i(!re )* ?o an Increase in Demand Affects the


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'i(!re )* ?o an Increase in Demand Affects theE5!i"i#ri!m


Price of

Ice-Cream

Cone

* Quantity ofIce-Cream Cones

S!pp"%

Initia"e5!i"i#ri!m

D

D

., , , , and a hi(her

5!antit% so"d,

+, , , , res!"tin(in a hi(her

price , , ,

), ?ot eather increases

the demand for ice cream , , ,

+,**

1

Ne e5!i"i#ri!m4+,-*

)*

Th St t A " i Ch i


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Three Steps to Ana"%in( Chan(es in

E5!i"i#ri!m

• Shifts in "urves versus Movements along"urves

• A shift in the supply curve is called a change in

supply.• A movement along a fied supply curve is called a

change in quantity supplied.

• A shift in the demand curve is called a change in

demand.

• A movement along a fied demand curve is called a

change in quantity demanded.

'i(!re )) ?o a Decrease in S!pp"% Affects the E5!i"i#ri!m


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'i(!re )) ?o a Decrease in S!pp"% Affects the E5!i"i#ri!m


Price of

Ice-Cream

Cone

* Quantity ofIce-Cream Cones

Demand

Ne

e5!i"i#ri!m

Initia" e5!i"i#ri!m

S )

S +

+, , , , res!"tin(in a hi(her price of icecream , , ,

), An increase in the

price of s!(ar red!cesthe s!pp"% of ice cream, , ,

., , , , and a "oer

5!antit% so"d,

+,**

1

4+,-*

/

Ta#"e / Bhat ?appens to Price and $!antit% Bhen S!pp"%


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Ta#"e / Bhat ?appens to Price and $!antit% Bhen S!pp"%or Demand Shifts



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S!mmar%

• &conomists use the model of supply anddemand to analy*e competitive markets.

• -n a competitive market, there are many buyers

and sellers, each of whom has little or noinfluence on the market price.


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S!mmar%

• The demand curve shows how the quantity of agood depends upon the price.

• According to the law of demand, as the price of a

good falls, the quantity demanded rises. Therefore,the demand curve slopes downward.

• -n addition to price, other determinants of how

much consumers want to buy include income, the

prices of complements and substitutes, tastes,

epectations, and the number of buyers.

• -f one of these factors changes, the demand curve

shifts.


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S!mmar%

• The supply curve shows how the quantity of agood supplied depends upon the price.

• According to the law of supply, as the price of a

good rises, the quantity supplied rises. Therefore,the supply curve slopes upward.

• -n addition to price, other determinants of how

much producers want to sell include input prices,

technology, epectations, and the number of sellers.

• -f one of these factors changes, the supply curve

shifts.


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S!mmar%

• Market equilibrium is determined by theintersection of the supply and demand curves.

• At the equilibrium price, the quantity demanded

equals the quantity supplied.• The behavior of buyers and sellers naturally

drives markets toward their equilibrium.


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S!mmar%

• To analy*e how any event influences a market,we use the supply6and6demand diagram to

eamine how the even affects the equilibrium

price and quantity.• -n market economies, prices are the signals that

guide economic decisions and thereby allocate

resources.

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