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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview  Market and Competition  Demand  Supply  Equilibrium  Price and Resource Allocation

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Markets and Competition The terms supply and demand refer to the behaviour of people......as they interact with one another in markets.

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

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Market Type: Perfect & Others  Perfectly Competitive: –Homogeneous Products –Buyers and Sellers are Price Takers  Monopoly: –One Seller, controls price  Oligopoly: –Few Sellers, not aggressive competition  Monopolistic Competition: –Many Sellers, differentiated products

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Quick Quiz!  What is a market?  Identify two characteristics of a perfectly competitive market.  Identify examples of non-competitive markets.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition  Demand  Supply  Equilibrium  Price and Resource Allocation

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Individual Demand Schedule Cathy’s Demand: Ice Cream Cones

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Individual Demand Curve Cathy’s Demand: Ice Cream Cones P $ Per Cone Q # Cones Per Day $2.50 $2.00 $

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Market Demand Schedule  Market 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 $ = 19 $ = 16 $ = 13 $ = 10 $ = 7

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Market Demand Curve All Buyers P $ Per Cone Q # Cones Per Day $2.00 $1.50 $

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Determinants of Demand  What factors determine how much ice cream you will buy?  What factors determine how much you will really purchase?

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Determinants of Demand  Product’s Own Price  Consumer Income  Prices of Related Goods  Tastes  Expectations  Number of Consumers

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Determinant of Demand: Product’s Own Price Law of Demand: There exists an inverse relationship between Price and Quantity Demanded. P Q

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

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Determinant of Demand: Income  As income increases the demand for a normal good will increase.  Examples? P Q

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Determinant of Demand: Income  As income increases the demand for an inferior good will decrease.  Examples? P Q

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

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Quantity Demanded vs. Change in Demand  Change in Quantity Demanded Movement 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.

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Demanded Price Quantity $2.00 7

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Demanded Price Quantity $ $

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Demanded Price Quantity $ $ Caused by a change in Price

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Demand Price Quantity $2.00 7

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Demand Price $ Quantity 10

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Demand Price $ Quantity 10 Caused by Non-Price Factors: Income, Tastes...

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition Demand  Supply  Equilibrium  Price and Resource Allocation

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Individual Supply Schedule Ben’s Store: Ice Cream Cones

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition P Price Per Cone Q # Cones Per Day $2.50 $2.00 $ Individual Supply Curve Ben’s Store: Ice Cream Cones

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Market Supply Schedule  Market 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 $ = 0 $ = 1 $ = 4 $ = 7

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition P Price Per Cone Q # Cones Per Day $2.00 $1.50 $ Market Supply Curve All Sellers

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Determinants of Supply  Product’s Own Price  Input Prices  Technology  Expectations  Number of Producers

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Determinant of Supply: Market Price Law of Supply There exists a direct (positive) relationship between Price and Quantity Supplied. P Q

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Quantity Supplied vs. Change in Supply  Change in Quantity Supplied Movement along the supply curve. Caused by a change in the Price of the product.  Change in Supply A shift in the supply curve, either to the left or right. Caused by changes in Non-Price Factors

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Supplied Price Quantity $2.00 3

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Supplied Price Quantity $ $1.00 1

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Supplied Price Quantity $ $ Caused by a change in Price

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Supply Price Quantity $2.00 3

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Supply Price Quantity $

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Supply Price Quantity $ Caused by Non-Price Factors: Technology, Input Prices

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition Demand Supply  Equilibrium  Price and Resource Allocation

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Forces of Demand... Price Quantity

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Forces of Demand and Supply... Price Quantity

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Forces of Demand and Supply At Rest Market Equilibrium Price Quantity $2.00 7

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Actions of buyers and sellers that move toward equilibrium. Price Quantity $2.50 $

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Actions of buyers and sellers that move toward equilibrium. Price Quantity $2.50 $ Excess Supply = 6 cones 7

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Actions of buyers and sellers that move toward equilibrium. Price Quantity $2.00 $

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Actions of buyers and sellers that move toward equilibrium. Price Quantity $2.00 $ Excess Demand =6 cones

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Heat Wave Affects Buyers (Demand) Price Quantity P1P1 Q1Q1 

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Heat Wave Will Cause: “Increase in Demand” Price Quantity P1P1 Q1Q1 P2P2 Q2Q2  

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition An Increase in Demand: Demand Shifts Right Price Quantity P1P1 Q1Q1 P2P2 Q2Q2  

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition An Increase in Demand: Demand Shifts Right Price Quantity P1P1 Q1Q1 P2P2 Q2Q2   As Demand P Q

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Equilibrium Four 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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition Demand Supply Equilibrium  Price and Resource Allocation

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

Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition Demand Supply Equilibrium Price and Resource Allocation