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The Market Forces of Supply and Demand

Chapter 4

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.

And Economics, especially Microeconomics is about how supply and demand interact in markets.

Market Types or Structures

Competitive MarketsProducts are the same,price takers

Monopoly Monopolistic Competition Oligopoly

Demand Curve

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12

11

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

Why does the Demand Curve Slope Downward?

Law of DemandInverse relationship between price and

quantity. Law of Diminishing Marginal Utility.

Utility is the extra satisfaction that one receives from consuming a product.

Marginal means extra.Diminishing means decreasing.

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.

Ceteris ParibusCeteris 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!

Two Simple Rules for Movements vs. Shifts

Rule OneWhen an independent variable changes and that

variable does not appear on the graph, the curve on the graph will shift.

Rule TwoWhen an independent variable does appear on the

graph, the curve on the graph will not shift, instead a movement along the existing curve will occur.

Let’s apply these rules to the following cases of supply and demand!

Change in Quantity Demanded versus Change in Demand

Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of

the product.

Changes in Quantity Demanded

0

D1

Price of Cigarettes per Pack

Number of Cigarettes Smoked per Day

A tax that raises the price of cigarettes

results in a movement along the

demand curve.

A

C

20

2.00

$4.00

12


Change in Demand A shift in the demand curve, either to

the left or right. Caused by a change in a

determinant other than the price.

Determinants of Demand

Market price Consumer income Prices of related goods Tastes Expectations What are some examples?

Consumer IncomeNormal Good

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0

Increasein demand

An increase

in income...

D1

D2

Consumer IncomeInferior Good

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0

Decreasein demand

An increase

in income...

D1D2

Prices of Related GoodsSubstitutes & Complements

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.


Variables that Affect Quantity

DemandedA Change in

This Variable . . .Price Represents a movement

along the demand curveIncome Shifts the demand curve

Prices of relatedgoods

Shifts the demand curve

Tastes Shifts the demand curveExpectations Shifts the demand curveNumber ofbuyers

Shifts the demand curve

Supply Curve

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0

Law of Supply

The law of supply states that there is a direct (positive) relationship between

price and quantity supplied.

Supply

Quantity supplied is the amount of a good that sellers are willing and able

to sell.

Change in Quantity Supplied

1 5



0

S

1.00 A

C$3.00

A rise in the price of ice cream cones

results in a movement along the supply curve.

Market Supply

Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.

Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

Determinants of Supply

Market price Input prices Technology Expectations Number of producers What are some examples?

Change in SupplyPrice of Ice-Cream Cone


0

S1 S2

S3

Increase in Supply

Decrease in Supply

Change in Quantity Supplied versus Change in Supply

Variables that Affect Quantity Supplied

A Change in This Variable . . .

Price Represents a movement along the supply curve

Input prices Shifts the supply curve

Technology Shifts the supply curve

Expectations Shifts the supply curve

Number of sellers Shifts the supply curve

Supply

Demand



Equilibrium of Supply and Demand

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Equilibrium



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Supply

Demand

Surplus

Excess Supply

Excess Demand

Quantity ofIce-Cream Cones

Price ofIce-Cream

Cone

$2.00

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Supply

Demand

$1.50

Shortage

Three Steps To Analyzing Changes in Equilibrium

Decide whether the event shifts the supply or demand curve (or both).

Decide whether the curve(s) shift(s) to the left or to the right.

Examine how the shift affects equilibrium price and quantity.

How an Increase in Demand Affects the Equilibrium

Price ofIce-Cream

Cone

2.00

0 7 Quantity ofIce-Cream Cones

Supply

Initialequilibrium

D1

1. Hot weather increasesthe demand for ice cream...

D2

2. ...resultingin a higherprice...

$2.50

103. ...and a higherquantity sold.

New equilibrium

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

S2

How a Decrease in Supply Affects the Equilibrium

Price ofIce-Cream

Cone

2.00

0 1 2 3 4 7 8 9 11 12 Quantity ofIce-Cream Cones

13

Demand

Initial equilibrium

S1

10

1. An earthquake reducesthe supply of ice cream...

Newequilibrium

2. ...resultingin a higherprice...

$2.50

3. ...and a lowerquantity sold.

pertemuan ii bagaimana bekerjanya pasar

Economy & Finance