Chapter: 4Market Forces of Supply & DemandAuthorProf. Sharif Memon

MarketA group of buyers and sellers of a particular good or service.

Competitive MarketA market in which there are many buyers and many sellers so that each has a negligible impact on the market price.

Competition: Perfect and Otherwise Characteristics of a perfectly competitive market:The goods being offered for sale are all the same.The buyers and sellers are so numerous that none can influence the market price.Because buyers and sellers must accept the market price as given, they are often called price takers.Agricultural market provide good example of perfect competition.

Competition: Perfect and OtherwiseA market with only one seller is called a monopoly market.A market with only a few sellers is called an oligopoly.A market with a large number of sellers, each selling a product that is slightly different from its competitors products, is called monopolistic competition.

DemandQuantity Demanded: the amount of a good that buyers are willing and able to purchase.What Determines the Quantity of an Individual Demands?Law of Demand: the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

Demand1. PriceQuantity demanded is negatively related to price. This implies that the demand curve is downward sloping.2. IncomeThe relationship between income and quantity demanded depends on what type of good the product is.Normal Good: a good for which, other things equal, an increase in income leads to an increase in demand.

Inferior Good: a good for which, other things equal, an increase in income leads to decrease in demand.

DemandPrices of Related Goods

Substitutes: two goods for which an increase in the price of one good leads to an increase in the demand for the other good.

Complements: two goods for which an increase in the price of one good leads to a decrease in the demand for the other good.

Tastes

5.Expectations: This could include expectations of future income or expectations of future price changes.

The Demand Schedule and the Demand CurveDemand Schedule: a table that shows the relationship between the price of a good and the quantity demanded.

Demand Curve: a graph of the relationship between the price of a good and the quantity demanded.

Exercise

Solution 5.010.015.0020.025.030.00012 108642PriceIce Cream Cones

Exercise

DemandCeteris Paribus:a Latin phrase, translated as other things being equal, used as a reminder that all variables other than the ones being studied are assumed to be constant.When a demand curve is drawn, everything but price and quantity demanded is held constant.Economists use the term ceteris paribus to point out that all other relevant variables are assumed fixed.

Market Demand Versus Individual Demand The market demand is the sum of all of the individual demands for a particular good or service.The demand curves are summed horizontally meaning that the quantities demanded are added up for each level of price.

Market Demand Versus Individual Demand The market demand is the sum of all of the individual demands for a particular good or service.The demand curves are summed horizontally meaning that the quantities demanded are added up for each level of price.The market demand curve shows how the total quantity demanded of a good varies with the price of the good.

SupplyQuantity Supplied: the amount of a good that sellers are willing and able to sell.What Determines the Quantity an Individual Supplies?1.PriceQuantity supplied is positively related to price.Law of Supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.2.Input Prices3.Technology4.Expectations

SupplyMarket Supply Versus Individual SupplyThe market supply curve can be found by summing individual supply curves.Individual supply curves are summed horizontally at every price.The market supply curve shows how the total quantity supplied varies as the price of the good varies.

Exercise

Solution0.501.001.502.002.503.0032415Ice Cream Cones

SupplyShifts in the Supply Curve1.When any determinant of supply changes (other than price), the supply curve will shift.2.An increase in supply can be represented by a shift of the supply curve to the right.3.A decrease in supply can be represented by a shift of the supply curve to the left.

Supply and Demand Together

EquilibriumThe point where the supply and demand curves intersect is called the markets equilibrium.Equilibrium: a situation in which supply and demand has been brought into balance.Equilibrium Price: the price that balances supply and demand.The equilibrium price is often called the market-clearing price because both buyers and sellers are satisfied at this price.

Q*P*Ice Cream ConesPriceDemandSupplyEquilibrium

Supply and Demand Together

Equilibrium Quantity: the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand.

If the actual market price is higher than the equilibrium price, there will be a surplus of the good.Surplus: a situation in which quantity supplied is greater than quantity demanded.To eliminate the surplus, producers will lower the price until the market reaches equilibrium.

Supply and Demand Together

6. If the actual price is lower than the equilibrium price, there will be a shortage of the good.Shortage: a situation in which quantity demanded is greater than quantity supplied.Sellers will respond to the shortage by raising the price of the good until the market reaches equilibrium.7. Law of Supply and Demand: the claim that the price of any good adjusts to bring the supply and demand for that good into balance.

ExampleDemandShortage410SurplusIce Cream ConesSupplyPrice2.501.50