Harcourt Brace & Company Chapter 4 The Market Forces of Supply and Demand

Harcourt Brace & Company 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.

Harcourt Brace & Company 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...

Harcourt Brace & Company Market Types Perfect Competition: – Many buyers and sellers (price takers) – Homogeneous products Monopolistic Competition: – Many sellers, differentiated products Oligopoly: Few sellers, strategic competition Monopoly: – One seller, controls price

Harcourt Brace & Company The Concept of Demand... Quantity Demanded refers to the amount (quantity) of a good that buyers are willing and able to purchase at alternative prices at a given point in time. P Q

Harcourt Brace & Company Example: Demand For Ice Cream Price of Ice Cream Quantity of Ice Cream Demand

Harcourt Brace & Company Demand Schedule and Demand Curve Demand Schedule: A table that shows the relationship between the price of the good and the quantity demanded. ( Table 4-1 ) Demand Curve: The downward-sloping line relating price and quantity demanded. ( Figure 4-1 )

Harcourt Brace & Company Determinants of Demand Market Price Consumer Income Prices of Related Goods Tastes Expectations Number of Consumers

Harcourt Brace & Company Determinant of Demand: 1. Market Price Law of Demand: There exists an inverse relationship between Price and Quantity Demanded. P Q

Harcourt Brace & Company Determinant of Demand: 2. Income As income increases the demand for a normal good will increase. P Q

Harcourt Brace & Company Determinant of Demand: 2. Income As income increases the demand for a normal good will increase. As income increases the demand for a inferior good decrease. P Q

Harcourt Brace & Company Determinant of Demand: 3. Prices of Related Goods When the fall in price of one good reduces the demand for another good, the two goods are substitutes.

Harcourt Brace & Company Determinant of Demand: 3. Prices of Related Goods When the fall in price of one good increases the demand for another good, the two goods are complements.

Harcourt Brace & Company Other Demand Determinants 4. Tastes: importance of advertising, consumers are fickle 5. Expectations: future events impact current demand 6. Customers: increase in population leads to a demand increase (housing market in Atlanta)

Harcourt Brace & Company 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.

Harcourt Brace & Company Change in Quantity Demanded verses Change in Demand Change in Quantity Demanded Movement along the demand curve. Caused by a change in the market price of the product. (Table 4-3) Change in Demand A shift in the demand curve, either to the left or right. (Figure 4-3)

Harcourt Brace & Company Changes in Quantity Demanded Price Quantity $2.00 7

Harcourt Brace & Company Changes in Quantity Demanded Price Quantity $ $

Harcourt Brace & Company Change in Demand Price Quantity $2.00 7

Harcourt Brace & Company Change in Demand Price $ Quantity 10

Harcourt Brace & Company Other Demand Concepts Recognizing shifts in demand (overhead) Individual to Market Demand (pp.70-72) Case Study: Teen Smoking (pp.73-74)

Harcourt Brace & Company The Concept of Supply... Quantity Supplied refers to the amount (quantity) of a good that sellers are willing and able to make available for sale at alternative prices for a given point in time. P Q

Harcourt Brace & Company Supply: Schedule and Curve Supply Schedule A table that shows the relationship between the price of the good and the quantity supplied. (Table 4-4) Supply Curve The upward-sloping line relating price and quantity supplied. (Figure 4-5)

Harcourt Brace & Company Supply of Ice Cream Price Quantity

Harcourt Brace & Company Determinants of Supply Market Price Input Prices Technology Expectations Number of Producers

Harcourt Brace & Company Determinant of Supply: 1. Market Price Law of Supply There exists an direct (positive) relationship between Price and Quantity Supplied. P Q

Harcourt Brace & Company Other Supply Determinants 2. Input Price : e.g, a sharp increase in resource costs will cause a leftward shift in supply 3. Technology: improvements in technology are associated with a rightward shift in supply

Harcourt Brace & Company Other Supply Determinants 4. Expectations : future events impact current supply 5. Producers: more producers will expand supply

Harcourt Brace & Company Change in Quantity Supplied verses Change in Supply Change in Quantity Supplied Movement along the supply curve. Caused by a change in the market price of the product. (Table 4-6) Change in Supply A shift in the supply curve, either to the left or right. (Figure 4-7)

Harcourt Brace & Company Changes in Quantity Supplied Price Quantity $2.00 7

Harcourt Brace & Company Changes in Quantity Supplied Price Quantity $ $1.00 1

Harcourt Brace & Company Change in Supply Price Quantity $2.00 7

Harcourt Brace & Company Change in Supply Price Quantity $

Harcourt Brace & Company 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.

Harcourt Brace & Company Forces of Demand... Price Quantity

Harcourt Brace & Company Forces of Demand and Supply... Price Quantity

Harcourt Brace & Company Forces of Demand and Supply At Rest Market Equilibrium Price Quantity $2.00 7

Harcourt Brace & Company Actions of buyers and sellers that move toward equilibrium. Excess Supply Price is above equilibrium price, therefore producers are unable to sell all they want at the going price. Excess Demand Price is below equilibrium price, therefore consumers are unable to buy all they want at the going price.

Harcourt Brace & Company Actions of buyers and sellers that move toward equilibrium. Price Quantity

Harcourt Brace & Company Actions of buyers and sellers that move toward equilibrium. Price Quantity Excess Supply

Harcourt Brace & Company Actions of buyers and sellers that move toward equilibrium. Price Quantity

Harcourt Brace & Company Actions of buyers and sellers that move toward equilibrium. Price Quantity Excess Demand

Harcourt Brace & Company Analyzing Changes in Equilibrium Prices Determine if event shifts supply curve, the demand curve, or both. Determine if curve(s) shift to left or right. Determine how shift affects equilibrium price and quantity. Example: Demand for ice cream given hot weather.

Harcourt Brace & Company Change in demand due to hot weather Price Quantity Equilibrium PePe QeQe

Harcourt Brace & Company Change in demand due to hot weather Price Quantity PePe QeQe

Harcourt Brace & Company Change in demand due to hot weather Price Quantity PePe QeQe PePe

Harcourt Brace & Company Change in demand due to hot weather Price Quantity New Equilibrium PePe QeQe PePe QeQe

Harcourt Brace & Company 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 service... Prices in turn are the signals that guide the allocation of resources.