Download Economics for Business 2 Notes

Economics for Business 2 Notes The Market Forces of Demand and Supply Markets and Competition What is a Market? • Market: a group of buyers and sellers of a particular G/S. • Buyers as a group determine demand and sellers as a group determine supply. • Some markets are highly organised (share market or fish markets) while others are less organised (market for ice cream). What is Competition? • Competitive market: a market in which there are many buyers and sellers so that each has a negligible impact on the market price. • Each seller has limited control over price because other sellers are offering similar products. • To be perfectly competitive, a market must have the following characteristics: o Homogeneous goods; and o Buyers and sellers are so numerous that no single buyer or seller has any influence over market price. • Although not all markets are perfectly competitive in the real world and their exists monopolies. Demand The Demand Curve: The Relationship between Price and Quantity Demanded • Quantity demanded: amount of a good that buyers are willing and able to purchase. • A determinant that places a central role, with myriad other factors, is price. • Example: if the price of ice cream were $20 per scoop, you’d more likely purchase less of it and vice versa if the price were say $0.20 per scoop. • Thus, the quantity of demand is negatively related to price. • Law of demand: ceteris paribus, the quantity demanded of a good falls when the price of a good rises. • Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded. o Example: the gradual price increase for ice-­‐creams and its effect on quantity demanded can be clearly shown through a schedule. • Demand curve: a graph of the relationship between the price of a good and the quantity demanded. o Note: price is on the x-­‐axis and quantity is on the y-­‐axis. • The demand curve slops downwards because, ceteris paribus, lower prices mean a greater quantity demanded. Market Demand versus Individual Demand • Market demand is the sum of all the individual demands for a particular G/S. • Market demand curve shows how the total quantity demanded of a good varies as the price of the good varies, while all other factors that affect how much consumers want to buy are held constant. 1 Shifts in the Demand Curve • If something happens to alter quantity demanded at any given price, the curve shifts. • Any change that increases the quantity demanded at every price shifts the demand curve to the right (known as an increase in demand) and vice versa. Income • If the demand for a good falls when income falls, the good is a normal good. o Normal good: a good for which, ceteris paribus, an increase in income leads to an increase in quantity demanded. • If the demand for a good rises when income falls, the good is an inferior good. o Inferior good: a good for which, ceteris paribus, an increase income leads to a decrease in quantity demanded. Price of Related Goods • Substitutes: two goods for which a decrease in the price of one good leads to a decrease in the demand for the other good. o E.g. hot dogs and hamburgers, butter and margarine, etc. • Complements: two goods for which a decrease in the price of one good leads to an increase in the demand for the other good. o E.g. petrol and cars, computers and software, etc. Tastes • An obvious determinant of demand based on consumer preferences and tastes. Expectations • Expectations about the future may affect your demand for a G/S today. • E.g. if you expect the price of ice-­‐cream to fall tomorrow, you may be less willing to buy an ice-­‐cream at today’s price. Number of Buyers • E.g. if another individual were to join two other ice cream consumers, the quantity demanded in the market would be higher at every price, cause the demand curve to shift rightward. Supply The Supply Curve: The Relationship between Price and Quantity Supplied • Quantity supplied: amount of a G/S that sellers are willing and able to sell. • Law of supply: the claim that, ceteris paribus, the quantity supplied of a good rises when the price of the good rises. • Supply schedule: a table that shows the relationship between the price of a good and the quantity supplied. • Supply curve: graph of the relationship between price of good and quantity supplied. Market Supply versus Individual Supply • Market supply is the sum of the supplies of all sellers. • The market supply curve shows how the total quantity supplied varies as the price of the good varies, holding constant all the other factors beyond price that influence producer’s decisions about how much to sell. Shifts in the Supply Curve • Since the market supply curve holds other things constant, the curve shifts when one of these other factors change. 2 •
Any change that increases the quantity supplied at every price shifts the supply curve to the right and is called an increase in supply and vice versa. Input Prices • When the price of one or more of the inputs for a G/S rises, producing the G/S is less profitable and sellers supply less of it. • The quantity supplied of a good is negatively related to price of the inputs used to make it. Technology • Advancement in technologies can make it more efficient to produce goods and thus assists in reducing seller’s costs à increases in quantity supplied. Expectations • The quantity of a good a seller supplies today may depend on its expectations about the future. • E.g. expected increase in ice cream in the future à suppler may put some of its current production into storage and supply less today. Number of Sellers • Market supply depends on the number of sellers. • E.g. if two sellers were to retire from the same industry, the supply in the market would fall. Supply and Demand Together Equilibrium (Market Clearing Price) • Equilibrium: a situation in which supply and demand have been brought in balance. o The point at which the demand and supply curves intersect. • Equilibrium price: price that balances supply and demand. • Equilibrium quantity: quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand. • At equilibrium price, the quantity of the good that the buyers are willing and able to buy exactly balance the quantity that sellers are willing and able to sell. • Surplus (excess supply): a situation in which quantity supplied is greater than quantity demanded. o Can lead to falling prices à increase quantity demanded and the decrease quantity supplied. o Note these are movements along the demand and supply curves. o Prices fall until equilibrium is reached. • Shortage (excess demand): a situation in which quantity demanded is greater than quantity supplied. o With too many buyers chasing too few goods, sellers respond by raising their prices. o Price increase à quantity demand to fall and quantity supplied to rise, falling until equilibrium is reached. o Note these are movements along the demand and supply curves. • Law of supply and demand: claim that the price of any good adjusts to bring the supply and demand for that good into balance. Three Steps for Analysing Changes in Equilibrium For examples refer to pp 83-­‐85 or else follow the below three steps. 3 1. Decide whether the event shifts the supply or demand curve (or perhaps both). 2. Decide in which direction the curve shifts. 3. Use the supply-­‐and-­‐demand diagram to see how the shift changes the equilibrium. 4