Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition The...

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition

The Market Forces of Supply and Demand

Chapter 4

© 2002 by Nelson, a division of Thomson Canada Limited


Overview

Market and CompetitionDemandSupplyEquilibriumPrice and Resource Allocation


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 and Competition

The terms supply and demand refer to the behaviour

of people. . .

. . .as they interact with one another

in markets.


Market: any institution, mechanism, or arrangement which facilitates exchange.

A market is a group of buyers and sellers of a particular good or service.– 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


Market Type: Perfect & OthersPerfectly Competitive:

– Homogeneous Products

– Buyers and Sellers are Price TakersMonopoly:

– One Seller, controls priceOligopoly:

– Few Sellers, not aggressive competitionMonopolistic Competition:

– Many Sellers, differentiated products


Quick Quiz! What is a market?Identify two

characteristics of a perfectly competitive market.

Identify examples of non-competitive markets.


Overview



The Concept of Demand. . .

Quantity Demanded refers to the amount (quantity) of a good that buyers are willing to purchase at alternative prices for a given period.

P

Q


Individual Demand ScheduleCathy’s Demand: Ice Cream Cones

Price PerCone

(P)

DailyQuantity

(Q)

$3.00 0$2.50 2$2.00 4$1.50 6


Individual Demand CurveCathy’s Demand: Ice Cream Cones

P$ Per Cone

Q # Cones Per Day

$2.50

$2.00

$1.50

2 4 6


Market Demand ScheduleMarket demand is the sum of all individual

demands at each possible price.Assume the ice cream market has two

buyers as follows:

Price Per Cone Cathy Nick Market Demand $0.00 12 + 7 = 19 $0.50 10 + 6 = 16 $1.00 8 + 5 = 13 $1.50 6 + 4 = 10 $2.00 4 + 3 = 7


Market Demand CurveAll Buyers

P$ Per Cone

Q # Cones Per Day

$2.00

$1.50

$1.00

7 10 13


Determinants of Demand

What factors determine how much ice cream you will buy?

What factors determine how much you will really purchase?


Determinants of Demand

Product’s Own PriceConsumer IncomePrices of Related GoodsTastesExpectationsNumber of Consumers


Determinant of Demand: Product’s Own Price

Law of Demand:

There exists an inverse

relationship between Price and Quantity Demanded.

P

Q


Determinant of Demand: Product’s Own Price

Law of Demand:

There exists an inverse

relationship between Price and Quantity Demanded.

P

Q

As P

Q


Ceteris Paribus . . .

...implies that all the relevant variables (e.g. determinants of demand) are held constant, except the one(s) being studied at the time.


Determinant of Demand: Income

As income increases the demand for a normal good will increase.

Examples?

P

Q


Determinant of Demand: Income

As income increases the demand for an inferior good will decrease.

Examples?

P

Q


Determinant of Demand: Prices of Related Goods

When the fall in price of one good reduces the demand for another good, the two goods are substitutes.

Examples?


Determinant of Demand: Prices of Related Goods

When the fall in price of one good increases the demand for another good, the two goods are complements.

Examples?


Change in Quantity Demanded vs. Change in Demand

Change in Quantity DemandedMovement along the demand curve. Caused by a change in the Price of the product.

Change in Demand

A shift in the demand curve, either to the left or right. Caused by changes in Non-Price Factors.


Changes in Quantity Demanded

Price

Quantity

$2.00

7



Price

Quantity

$2.00

7

$1.00

13



Price

Quantity

$2.00

7

$1.00

13

Caused by a changein Price


Change in Demand

Price

Quantity

$2.00

7


Change in Demand

Price

$2.00

7

Quantity

10


Change in Demand

Price

$2.00

7

Quantity

10

Caused byNon-PriceFactors:Income,Tastes...


Quick Quiz!

List the determinants of the demand for pizza.

Give an example of a demand schedule for pizza.

Give an example of something that would shift the demand curve.


Overview



The Concept of Supply. . .

Quantity Supplied refers to the amount (quantity) of a good that sellers are willing to make available for sale at alternative prices for a given period.

P

Q


Individual Supply ScheduleBen’s Store: Ice Cream Cones

Price PerCone

(P)

DailyQuantity

(Q)

$3.00 5$2.50 4$2.00 3$1.50 2


PPricePer Cone

Q # Cones Per Day

$2.50

$2.00

$1.50

2 3 4

Individual Supply CurveBen’s Store: Ice Cream Cones


Market Supply ScheduleMarket supply is the sum of all individual

supplies at each possible price.Assume the ice cream market has two

firms as follows:

Price Per Cone Ben’s Jerry’s IceMart Market Supply $0.00 0 + 0 = 0 $0.50 0 + 0 = 0 $1.00 1 + 0 = 1 $1.50 2 + 2 = 4 $2.00 3 + 4 = 7


PPricePer Cone

Q # Cones Per Day

$2.00

$1.50

$1.00

1 4 7

Market Supply CurveAll Sellers


Determinants of Supply

Product’s Own PriceInput PricesTechnologyExpectations Number of Producers


Determinant of Supply: Market Price

Law of Supply

There exists a direct (positive)

relationship between Price and Quantity

Supplied.

P

Q


Change in Quantity Supplied vs. Change in Supply

Change in Quantity SuppliedMovement along the supply curve. Caused by a change in the Price of the product.

Change in SupplyA shift in the supply curve, either to the left or right. Caused by changes inNon-Price Factors


Changes in Quantity Supplied

Price

Quantity

$2.00

3



Price

Quantity

$2.00

3

$1.00

1



Price

Quantity

$2.00

3

$1.00

1

Caused bya change in Price


Change in Supply

Price

Quantity

$2.00

3


Change in Supply

Price

Quantity

$2.00

3 6


Change in Supply

Price

Quantity

$2.00

3 6

Caused byNon-PriceFactors:Technology,Input Prices


Quick Quiz!

List the determinants of the supply for pizza.

Give an example of a supply schedule for pizza.

Give an example of something that would shift the supply curve.


Overview



Supply and Demand Together

Equilibrium Price The price at which the supply and demand

curve intersect. Quantity Supplied and Quantity Demanded are equal.

Equilibrium Quantity The quantity at which the supply and

demand curve intersect.


Forces of Demand. . .

Price

Quantity


Forces of Demand and Supply. . .

Price

Quantity


Forces of Demand and Supply At RestMarket Equilibrium

Price

Quantity

$2.00

7


Actions of buyers and sellers that move toward equilibrium.

Excess SupplyPrice is above equilibrium price, therefore

producers are unable to sell all they want at the going price.

Excess DemandPrice is below equilibrium price, therefore

consumers are unable to buy all they want at the going price.



Price

Quantity

$2.50

$2.00

4 10



Price

Quantity

$2.50

$2.00

4 10

Excess Supply = 6 cones

7



Price

Quantity

$2.00

$1.50

4 7 10



Price

Quantity

$2.00

$1.50

4 7 10

ExcessDemand=6 cones


Comparative Statics: Analyzing Changes in Equilibrium

Determine if an event shifts supply curve, the demand curve, or both.

Determine if curve(s) shift to left or right.

Determine how the shift affects equilibrium price and quantity.

Example Event: Heat Wave Product: Ice Cream Cones


Heat Wave Affects Buyers (Demand)

Price

Quantity

P1

Q1


Heat Wave Will Cause:“Increase in Demand”

Price

Quantity

P1

Q1

P2

Q2


An Increase in Demand: Demand Shifts Right

Price

Quantity

P1

Q1

P2

Q2


An Increase in Demand: Demand Shifts Right

Price

Quantity

P1

Q1

P2

Q2

AsDemandP Q


Changes in EquilibriumFour Principles

An Increase in Demand will cause:Pe Qe

A Decrease in Demand will cause:Pe Qe

An Increase in Supply will cause:Pe Qe

A Decrease in Supply will cause:Pe Qe


Overview



Concluding Thoughts. . .

Market economies harness the forces of supply and demand. . .

Supply and Demand together determine the prices of the economy’s different goods and services. . .

Prices in turn are the signals that guide the allocation of resources.


Overview


Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition The...

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