Download Economics for Today 2006

Market Demand
and Supply
©2006 South-Western College Publishing
1
The Market Forces of
Supply and Demand
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.
Markets
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
 Buyers determine demand.

Sellers determine supply.
Market Type:
A Competitive Market
A competitive market is a market. . .
with many buyers and sellers.
that is not controlled by any one person.
in which a narrow range of prices are
established that buyers and sellers act upon.
Competition:
Perfect and Otherwise
Perfect Competition
Products are the same
Numerous buyers and sellers so that
each has no influence over price
Buyers and Sellers are price takers
Competition:
Perfect and Otherwise
Monopoly
 One
seller, and seller controls price
Oligopoly
 Few
sellers
 Not always aggressive competition
Competition:
Perfect and Otherwise
Monopolistic Competition
 Many
sellers
 Slightly differentiated products
 Each seller may set price for its own
product
What is demand?
Demand represents the
choice making
behavior of buyers
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Demand Schedule
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
12
10
8
6
4
2
0
Law of Demand
The law of demand states
that there is an inverse
relationship between price
and quantity demanded.
What is a
demand curve?
Depicts the relationship
between price and
quantity demanded
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Why do demand curves
have a negative slope?
At a higher price buyers will
buy fewer units, and at a
lower price they will buy
more units
13
Ceteris Paribus
Ceteris paribus is a Latin phrase that
means all variables other than the
ones being studied are assumed to
be constant. Literally, ceteris
paribus means “other things being
equal.”
The demand curve slopes downward
because, ceteris paribus, lower prices
imply a greater quantity demanded!
Market Demand
Market demand refers to the sum
of all individual demands for a
particular good or service.
Graphically, individual demand
curves are summed horizontally to
obtain the market demand curve.
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IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
DEMANDED AND A
CHANGE IN DEMAND
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When price changes,
what happens?
The curve does not shift
- there is a change in
the quantity demanded
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Change in
Quantity
Demanded
Change in
Price
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When something
changes other than
price, what happens?
The whole curve
shifts,there is a
change in demand
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What can cause a
demand curve to shift?
A change in:
• Number of buyers in the market
• Tastes and preferences
• Income
• Expectations of consumers
• Prices of related goods
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Decrease or
increase in
demand
Leftward or
rightward shift in
the demand curve
Change in a
Nonprice
determinant
21
Why does Sunkist http://www.sunkist.com, a
major producer of oranges, provide free
orange recipes? To increase the demand
for oranges, of course
22
Consumer Income
As income increases the demand
for a normal good will increase.
As income increases the demand
for an inferior good will decrease.
What are
substitute goods?
Goods that compete
with one another for
consumer purchases
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What happens when
the price increases for
a good that has a
substitute?
The demand curve for
the substitute good
increases
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What happens when
the price decreases for
a good that has a
substitute?
The demand curve for
the substitute good
decreases
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What does a direct
relationship
between price and
quantity mean?
The two move in the
same direction
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What are
complementary goods?
Goods that are
jointly consumed
with another good
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What happens when
the price increases for
a good that has a
complement?
The demand curve for
the substitute good
decreases
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What happens when
the price decreases for
a good that has a
complement?
The demand curve for
the substitute good
increases
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What does an inverse
relationship between
price & quantity mean?
It means that the two
move in opposite
directions
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What is supply?
Supply represents the
choice making
behavior of sellers
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Supply Schedule
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
0
0
1
2
3
4
5
What is the
law of supply?
The principle that there is
a direct relationship
between the price of a
good and the quantity
sellers are willing to offer
for sale in a defined time
period, ceteris paribus
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Why do supply curves
have a positive slope?
Only at a higher price will it
be profitable for sellers to
incur the higher opportunity
cost associated with
supplying a larger quantity
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What is market supply?
The horizontal summation of
all the quantities supplied at
various prices that might
prevail in the market
36
IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
SUPPLIED AND A
CHANGE IN SUPPLY
37
When price changes,
what happens?
The curve does not shift
- there is a change in
the quantity supplied
38
Change in
Quantity
Supplied
Change in
Price
39
When something
changes other than
price, what happens?
The whole curve shifts there is a change in supply
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Change in
supply
Change in
nonprice
determinant
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What can cause a
supply curve to shift?
A change in:
• Number of sellers in the market
• Technology
• Resource prices
• Taxes and subsidies
• Expectations of producers
• Prices of other goods the firm
could produce
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What is the
equilibrium price?
The price towards which
the economy tends
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Where is the
equilibrium price?
At the price where the
quantity demanded and
the quantity supplied
are equal
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Surplus
When the price is above the equilibrium
price, the quantity supplied exceeds the
quantity demanded. There is excess
supply or a surplus. Suppliers will lower
the price to increase sales, thereby
moving toward equilibrium.
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Shortage
When the price is below the equilibrium
price, the quantity demanded exceeds the
quantity supplied. There is excess
demand or a shortage. Suppliers will raise
the price due to too many buyers chasing
too few goods, thereby moving toward
equilibrium.
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Steps To Analyzing Changes in
Equilibrium
Determine the Event
Decide whether the event shifts the supply or
demand curve (or both in very rare cases).
Shift demand or supply to the left or to the
right. (Make a cheat sheet!)
Find the new equilibruim
Examine how the shift affects equilibrium
price and quantity.