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Markets, Demand and Supply www.lrjj.cn Market • A group of buyers and sellers for a good or service – Buyers demand goods and services – Sellers supply goods and services • Demand and supply interact on the market to determine the price • Market equilibrium: a state where demand and supply are balance www.lrjj.cn The Concept of Demand • The Law of Demand – Other things equal, the quantity demanded of a goods falls when the price of the goods rises. • The Quantity Demanded – The amount of the good that buyers are willing and able to purchase. www.lrjj.cn Demand Curve • Illustrates how much would be demanded at each price • An individual demand curve shows the relationship between a buyer’s quantity demanded and the price of the good www.lrjj.cn Demand Curve (Monthly) (1) Price (pence per kg) (2) Tracey's demand (3) Darren's demand (4) Total market demand (kg) (kg) (tonnes: 000s) A 20 28 16 700 B 40 15 11 500 C 60 5 9 350 D 80 1 7 200 E 100 0 6 100 www.lrjj.cn Market demand for potatoes (monthly) 100 Price (pence per kg) Market demand Point Price (pence per kg) (tonnes 000s) E D 80 C 60 A 20 700 B C D E 40 60 80 100 500 350 200 100 B 40 A 20 Demand 0 0 100 200 300 400 500 Quantity (tonnes: 000s) 600 700 800 www.lrjj.cn Demand Curve • Change in quantity demanded – Movement along the demand curve – Caused by a change in the price of the product • Change in demand – A shift in the curve, either to the left or right – Caused by a change in factors other than the price of the product www.lrjj.cn Other Determinants of Demand • Preferences and Tastes • Income – Normal goods (Income , demand ) – Inferior goods (Income , demand ) • Price of related goods – Prices of substitutes (MP3 players and CD players) – Prices of complements (Car and gasoline) • Expectations about the future (e.g. prices) www.lrjj.cn An increase in demand Possible causes of a rise in demand • • • • • Price P Tastes shift towards this product Rise in price of substitute goods Fall in price of complementary goods Rise in income Expectations of a rise in price D0 O Q0 Q1 Quantity D1 www.lrjj.cn The Concept of Supply • The Law of Supply – Other things equal, the quantity supplied of a good rises when the price of the good rises • The Quantity Supplied – The amount of the good that the sellers are willing and able to sell www.lrjj.cn Supply Curve • Illustrates how much would be supplied at each price • An individual supply curves relates a seller’s quantity supplied to the price of a good. www.lrjj.cn Supply Curve (Monthly) Price of potatoes Farmer X's supply Total Market supply (pence per kg) (tonnes) (tonnes: 000s) a 20 50 100 b 40 70 200 c 60 100 350 d 80 120 530 e 100 130 700 www.lrjj.cn Market supply of potatoes (monthly) 100 e d Price (pence per kg) 80 c 60 Supply P a 20 b 40 c 60 d 80 e 100 Q 100 200 350 530 700 b 40 a 20 0 0 100 200 300 400 500 Quantity (tonnes: 000s) 600 700 800 www.lrjj.cn Supply Curve • Change in quantity supplied – Movement along the supply curve – Caused by a change in the price of the product • Change in supply – A shift in the supply curve, either to the left or right – Caused by a change in factors other than the price of the product www.lrjj.cn Other Determinants of Supply • Costs of production – Input prices – Technology – organizational changes – government policy • Profitability of alternative products & goods in joint supply • Nature and other random shocks • Expectations about the future www.lrjj.cn Shifts in the supply curve P Possible causes of a rise in supply • Fall in costs of production S0 S1 • Reduced profitability of alternative products that could be supplied • Increased profitability of goods in joint supply • Expectations of a fall in price Increase O Q www.lrjj.cn E Price (pence per kg) 100 Demand & Supply Together Equilibrium Price 60 Cc Equilibrium b 40 B a 20 A Equilibrium Quantity 0 0 100 Supply d D 80 e 200 300 400 500 Quantity (tonnes: 000s) Demand 600 700 800 www.lrjj.cn Surplus • Excess supply – Suppliers are unable to sell all they want at the going price. • Market price is above equilibrium price. • Quantity supplied is above quantity demanded. • Suppliers will lower the price to increase sales, thereby moving toward equilibrium. www.lrjj.cn E e 100 Price (pence per kg) Supply D 80 SURPLUS d (330 000) Cc 60 b 40 B a A 20 Demand 0 0 100 200 300 400 500 Quantity (tonnes: 000s) 600 700 800 www.lrjj.cn Shortage • Excess shortage – Buyers are unable to buy all they want at the going price. • Market price is below equilibrium price. • Quantity demanded is above quantity supplied. • Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium. www.lrjj.cn E e 100 Price (pence per kg) Supply d D 80 Cc 60 b 40 SHORTAGE B (300 000) a A 20 Demand 0 0 100 200 300 400 500 Quantity (tonnes: 000s) 600 700 800 www.lrjj.cn Changes in Equilibrium • Three steps to analyze changes in equilibrium – Decide whether the event shifts the supply or demand curve (or both). – Decide whether the curve(s) shift(s) to the left or to the right. – Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity. www.lrjj.cn Changes in Equilibrium • Effects of shifts in the demand curve – Movement along S curve and new D curve • Rise in demand (rightward shift) P rises • Fall in demand (leftward shift) P falls • Effects of shifts in the supply curve – Movement along D curve and new S curve • Rise in supply (rightward shift) P falls • Fall in supply (leftward shift) P rises www.lrjj.cn Scenario 1 Market of ice cream in hot weather www.lrjj.cn Effect of a shift in the demand curve P S i New equilibrium at point i Pe2 g h Pe1 D2 D1 O Q e1 Q e2 Q www.lrjj.cn Scenario 2 • Hurricane destroys part of the sugarcane crop and drives up the price of sugar www.lrjj.cn Effect of a shift in the supply curve P S2 S1 k Pe3 j g Pe1 New equilibrium at point k D O Q e3 Q e1 Q www.lrjj.cn Scenario 3 • Hot weather and hurricane occur during the same summer www.lrjj.cn Price Rises, Quantity Rises P S2 S1 Large increase in demand e2 Small decrease in supply Pe2 Pe1 e1 D2 D1 O Q e1 Q e2 Q www.lrjj.cn Price Rises, Quantity Falls P S2 Small increase in demand e2 Pe2 S1 Large decrease in supply e1 Pe1 D2 D1 O Q e2 Q e1 Q www.lrjj.cn