Download Market1

The Single Market
Demand , Supply, and Equilibrium
J.F. O’Connor
2/7/00
What is a Market?
• Remember that if you are going to have
specialization and division of labor, you are
going to need a way for people to sell what
they produced but don’t wish to consume
and buy what they want to consume but did
not produce. We need an arrangement that
facilitates exchange, an arrangement that
gets potential buyers in contact with
potential sellers.
A Modern Market
• In our earlier discussion, we talked about
the value of oranges in terms of apples. We
could also value all the other goods in the
economy in terms of apples. Apples would
then be the unit of account. However, we
still have a problem in that we need a
medium of exchange and apples are not too
convenient. So we introduce money.
The Role of Money
•
•
•
•
The unit of account
The medium of exchange
A store of value
The importance of money in the market
process is that it allows one to sell what one
has without having to find a buyer who is
selling what you want.
Two Kinds Of Money
• Currency
• Demand deposits - what is in your checking
account
• Be careful to distinguish income, wealth,
and money.
The Market
• Two kinds of people
– Buyers
– Sellers
• Demand represents the intentions of
buyers
• Supply represents the intentions of
sellers
Demand
• Demand gives the relationship between the
quantity of the good that buyers are willing
and able to purchase and the price of the
good , while other factors affecting demand
held constant.
• We can represent demand in a table, a
graph, or an equation. Accordingly, we talk
about a demand schedule, curve, or function
Factors Affecting Demand
•
•
•
•
•
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Prices of other goods
Income of buyers
Preferences or tastes of buyers
Number of buyers
Expectations
Advertising ?
Demand Schedule
Price
Cath
0
0.5
1
1.5
2
2.5
3
3.5
Nick
12
10
8
6
4
2
0
Mkt
7
6
5
4
3
2
1
0
19
16
13
10
7
4
1
0
Demand Curve
Market Demand
4
Price
3
2
1
0
0
2
4
6
8
10
Quantiy
12
14
16
18
20
Supply
• Supply gives the relationship between the
quantity of the good that sellers are willing
and able to supply and the price of the good,
while other factors affecting supply held
constant.
• We can represent supply in a table, a graph,
or an equation. Accordingly, we talk about a
supply schedule, curve, or function
Factors Affecting Supply
•
•
•
•
Input prices
Technology of production
Number of sellers
Expectations
Supply Schedule
Price
Ben
0
0.5
1
1.5
2
2.5
3
Jerry
0
0
1
2
3
4
5
Market
0
0
0
2
4
6
8
0
0
1
4
7
10
13
Supply Curve
Market Supply
3.0
2.5
Price
2.0
1.5
1.0
0.5
0.0
0
2
4
6
8
Quantity
10
12
14
Market Equilibrium
• Demand and Supply in Balance
• The equilibrium price is the price at which
the quantity demanded is equal to the
quantity supplied
• If you have excess demand or excess supply
the market is not in equilibrium. Why?
Equilibrium
price $2
Market Equilibrium
quantity 7 units
3.5
3.0
2.5
Price
2.0
1.5
1.0
0.5
0.0
0
1
2
3
4
5
6
7
8
9
10
11
Quantity
12
13
14
15
16
17
18
19
20
Increase in Demand
• Means the demand curve shifts right
• Caused by factors other than the price of the
good
– For a normal good, an increase in income
– An increase in the price of a substitute or
a decrease in the price of a complement
– An increase in the number of buyers
– Change in preferences
Increase in Demand
Increase in Demand
3.5
3.0
Supply
2.5
Price
2.0
Demand2
1.5
1.0
0.5
0.0
0
Demand1
1
2
3
4
5
6
7
8
9
10
11
Quantity
12
13
14
15
16
17
18
19
20
Increase in Demand
• Note that demand increases by 6 units but
the new equilibrium quantity is only 3 units
greater than old. Why?
• Note that the increase in demand results in a
movement up the supply curve.
• You should analyze a decrease in demand
Increase in Supply
• Sellers are willing to supply more units of
the good at each price
• Major Causes:
– decrease in input prices
– improvement in technology of production
– increase in the number of sellers
Increase in Supply
3.5
3.0
Supply
2.5
Price
2.0
1.5
1.0
0.5
0.0
Demand1
0
1
2
3
4
5
6
7
8
9
10
11
Quantity
12
13
14
15
16
17
18
19
20
Increase in Supply
• Increase in supply results in an increase in
the equilibrium quantity and a decrease in
price
• Note that the increase in supply results in a
movement down the demand curve.
• You should analyze a decrease in supply