4 The Market Forces of Supply and Demand. The Parrot Supply and demand are the two words that...
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Transcript of 4 The Market Forces of Supply and Demand. The Parrot Supply and demand are the two words that...
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4
The Market Forces of Supply and Demand
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The Parrot
• 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.
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• 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 AND COMPETITION
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MARKETS AND COMPETITION
• Buyers determine demand.
• Sellers determine supply
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Competitive Markets
• A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.
• Can you provide examples of a competitive market?
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• Perfect Competition– Products are the same– Numerous buyers and sellers so that each
has no influence over price– Buyers and Sellers are price takers
• Monopoly– One seller, and seller controls price– Can you provide an example of a monopoly?
Competition: Perfect and Otherwise
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• Oligopoly– Few sellers– Not always aggressive competition
• Monopolistic Competition– Many sellers– Slightly differentiated products– Each seller may set price for its own product
Competition: Perfect and Otherwise
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DEMAND
• Quantity demanded is the amount of a good that buyers are willing and able to purchase.
• Law of Demand– The law of demand states that, other things
equal, the quantity demanded of a good falls when the price of the good rises.
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The Demand Curve: The Relationship between Price and Quantity Demanded
• Demand Schedule – The demand schedule is a table that shows
the relationship between the price of the good and the quantity demanded.
• There may be other determinants of demand (like what), but the demand schedule looks ONLY at the good’s own price.
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Catherine’s Demand Schedule (per wk.)
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The Demand Curve: The Relationship between Price and Quantity Demanded
• Demand Curve – The demand curve is a graph of the
relationship between the price of a good and the quantity demanded.
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Figure 1 Catherine’s Demand Schedule and Demand Curve
Copyright © 2004 South-Western
Price ofIce-Cream Cone
0
2.50
2.00
1.50
1.00
0.50
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
1. A decrease in price ...
2. ... increases quantity of cones demanded.
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Figure 1 Catherine’s Demand Schedule and Demand Curve: How much does she spend?
Copyright © 2004 South-Western
Price ofIce-Cream Cone
0
2.50
2.00
1.50
1.00
0.50
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
1. A decrease in price ...
2. ... increases quantity of cones demanded.
$5
$9
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Market Demand versus Individual 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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Shifts in the Demand Curve
• Change in Quantity Demanded– Movement along the demand curve.– Caused by a change in the price of the
product.
• See Demand.xls
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0
D
Price of Ice-Cream Cones
Quantity of Ice-Cream Cones
A tax that raises the price of ice-cream cones results in a
movement along the demand curve.
A
B
8
1.00
$2.00
4
Changes in Quantity Demanded
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Shifts in the Demand Curve
• Consumer income• Prices of related goods• Tastes• Expectations• Number of buyers
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Shifts in the Demand Curve
• Change in Demand– A shift in the demand curve, either to the left
or right.– Caused by any change that alters the quantity
demanded at every price.
• Anything OTHER THAN own price SHIFTS the demand curve. Leads to “change in demand” NOT “quantity demanded.”
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Figure 3 Shifts in the Demand Curve
Copyright©2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
Quantity ofIce-Cream Cones
Increasein demand
Decreasein demand
Demand curve, D3
Demandcurve, D1
Demandcurve, D2
0
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Shifts in the Demand Curve
• Consumer Income– As income increases the demand for a normal
good will increase.– As income increases the demand for an
inferior good will decrease.
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$3.002.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
0
Increasein demand
An increase in income...
D1D2
Consumer IncomeNormal Good
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$3.002.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Ice-Cream Cone
Quantity of Ice-Cream
Cones0
Decreasein demand
An increase in income...
D1D2
Consumer IncomeInferior Good
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Shifts in the Demand Curve
• Prices of Related Goods– When a fall in the price of one good reduces
the demand for another good, the two goods are called substitutes.
– When a fall in the price of one good increases the demand for another good, the two goods are called complements.
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Table 1 Variables That Influence Buyers
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