Download Supply & Demand may 03

Market Demand and Supply
and Equilibrium Prices
Department of
Market Supply and Demand
Economics and Business DCS
Functions of Prices within the market mechanism
Prices provide the main method through which scarce resources are
allocated between competing uses in virtually all modern economies
The Signalling Function
 Prices signal what is available, giving information to producers and
consumers alike
 If prices signal wrong or misleading information, then markets may
perform inefficiently or break down completely
The Incentive Function
 Prices create incentives for economic agents to behave in ways
consistent with their self-interest. For example, the rising price of a
good may:
Result in a firm expanding production of that good in its pursuit of
profit-maximisation
Result in a consumer contracting demand as she tries to maximise her
overall ‘utility’ with her limited income
Market Supply and Demand
Demand: Buyers in the Market
Demand:
The quantity of a product consumers are
willing and able to buy at different prices in
a specified time period
Normally there is an inverse relationship
between the price of good X and the
quantity demanded of good X
This is shown by a Demand curve which
shows that when price falls demand
increases, and when price rises demand
falls.
Market Supply and Demand
The Demand Curve
The demand curve shows
how quantity demanded
responds to a change in
the goods own price
Price
A fall in market price
causes an movement up
along the demand curve
P2
P1
P3
D
Q2
Q1 Q3
Output (Q)
Market Supply and Demand
A rise in market price
causes a movement down
the demand curve.
Shifts in the Demand Curve

Main Conditions of Demand

Increase in consumer population

Increase in income
P2

Consumer tastes shift toward the
good in question
P1

The price of substitute rises
P3

D2
D1
Price

Q2
Q1 Q3
Output (Q)
Market Supply and Demand
The price of a complementary
good falls
The Bank of Thailand cuts
interest rates
Factors Affecting Market Demand for Beef
These are factors other than the price of beef itself
Fall in consumer incomes (real purchasing power)
An increase in the price of chicken ( a substitute)
A government tax on hamburger producers
A successful advertising campaign
Rise in the price of Yorkshire Puddings (The best!)
A fall in the price of lamb
A fear of recession and rising unemployment
Market Supply and Demand
Facts About Demand
Quantity demanded is the quantity that consumers are willing
and able to buy at a specified price
A change in the price of the good itself does not shift demand
- it causes a movement along a demand curve…..
Demand curves normally slope downward – why?
 A fall in price increases the real purchasing power of the
consumer (the income Effect)
 A lower price stimulates a substitution effect away from other
products in the market
 Consumers can now enjoy more satisfaction from each pound
spent
The demand curve for a product can shift (outwards or
inwards) when the conditions of demand change
Market Supply and Demand
Market Supply
Market Supply –
 The quantity that producers are willing and able to OFFER for
sale at different prices during a specified period of time
 Normally a positive relationship between the price of good T and
the quantity supplied of good T
Factors that affect market supply
 Technology
 The cost of factor resources used in production
Wage costs
Raw material prices
 The prices of “related goods”
 The number of producers / suppliers in the market
 Government taxes and subsidies
Market Supply and Demand
The Supply Curve
Price
S
P2
The supply curve shows
how quantity supplied
responds to a change in the
goods own price
A fall in market price
causes an contraction along
the supply curve
P1
P3
Q3 Q1
Market Supply and Demand
Q2
Output (Q)
A rise in market price
causes a expansion of
market supply
Shifts in the Supply Curve
S3
Price
S1
S2
Changes in market supply
come from:
(a) Changes in production
costs
(b) Producer taxes and
subsidies
P1
(c) Changes in technology
Q3
Q1
Q2
Output (Q)
Market Supply and Demand
(d) Weather / climate for
some primary
commodities
(e) Number of producers in
the market
Facts About Supply
The “quantity supplied” is the amount sellers are willing and
able to offer for sale at a single price--it’s a single number.
The change in the price of the good itself does not shift
supply--it causes a movement ALONG the supply curve.
Supply curves normally slope upward. Why?
 Rising prices act as an incentive for producers to expand output
– potential for higher profits
 Increased output may lead to higher costs of production
Market Supply and Demand
Market Equilibrium
S
Price
Equilibrium established
when market demand =
market supply
P2
At P2 there is excess supply
(S>D)
P1
At P3 there is excess
demand (D>S)
P3
D
Q1
Market Supply and Demand
Output (Q)
Shifts in Demand and Price
Price
A change in market demand will
lead to a change in market price
If demand shifts outwards from
D1 to D2 – we see a rise in both
price and quantity
S2
P2
P1
Total spending by consumers will
rise
D2
D1
Q1
Market Supply and Demand
Q2
Output (Q)
Changes in Supply and Price
S1
Price
S2
In the example shown we see
an outward shift in the supply
curve
P1
Market price falls from P1 to
P2
P2
Equilibrium quantity rises from
Q1 to Q2
D
Q1
Market Supply and Demand
Q2
Output (Q)
Does the consumer benefit?
A Rise in Market Demand
Price
Change in consumer
tastes and preferences
causes an outward shift
in demand
S1
Increase in demand puts
the pressure on available
supply
P2
P1
Increase in equilibrium
market price and quantity
D
Q1
Market Supply and Demand
Q2
Output (Q)
D2
Total spending increases
Producers enjoy higher
total revenue / profits
Key Terms
Market
 a set of arrangements by which buyers and sellers are in contact
to exchange goods or services
Demand
 the quantity of a good or service that buyers (consumers) wish
to purchase at each conceivable price
Supply
 the quantity of a good or service that sellers (firms) wish to sell
at each conceivable price
Market Equilibrium price
 The price at which quantity supplied = quantity demanded
 The price where there is no excess demand or excess supply
Market Supply and Demand