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

Harcourt Brace & Company The Market Forces of Supply and Demand u Supply and Demand are the two words that economists use most often. u Supply and Demand are the forces that make market economies work! u Modern microeconomics is about supply, demand, and market equilibrium.

Harcourt Brace & Company Markets and Competition The terms supply and demand refer to the behavior of people......as they interact with one another in markets.

Harcourt Brace & Company Market: any institution, mechanism, or arrangement which facilitates exchange. u 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 Type: A Competitive Market u 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

Harcourt Brace & Company Market Type: Perfect & Otherwise u Perfect Competitive: –Homogeneous Products –Buyers and Sellers are Price Takers u Monopoly: –One Seller, controls price u Oligopoly: –Few Sellers, not aggressive competition u Monopolistic Competition: –Many Sellers, differentiated products

Harcourt Brace & Company Quick Quiz! u What is a market? u Identify two characteristics of a perfectly competitive market. u Identify examples of non-competitive markets.

Harcourt Brace & Company The Concept of Demand... u Quantity Demanded refers to the amount (quantity) of a good that buyers are willing and able to purchase at alternative prices for 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 Determinants of Demand u What factors determine how much ice cream you will buy? u What factors determine how much will you really purchase?

Harcourt Brace & Company Determinants of Demand À Market Price Á Consumer Income  Prices of Related Goods à Tastes Ä Expectations Å Number of Consumers

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

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

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

Harcourt Brace & Company 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.

Harcourt Brace & Company 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.

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

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 u Change in Quantity Demanded Movement along the demand curve. Caused by a change in the market price of the product. (Table 4-3) u 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 Quick Quiz! u List the determinants of the demand for pizza. u Give an example of a demand schedule for pizza. u Give an example of something that would shift the demand curve.

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 of Ice Cream Price Quantity

Harcourt Brace & Company Determinants of Supply À Market Price Á Input Prices  Technology à Expectations Ä Number of Producers

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

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

Harcourt Brace & Company Change in Quantity Supplied verses Change in Supply u Change in Quantity Supplied Movement along the supply curve. Caused by a change in the market price of the product. (Table 4-6) u 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 Quick Quiz! u List the determinants of the supply for pizza. u Give an example of a supply schedule for pizza. u Give an example of something that would shift the supply curve.

Harcourt Brace & Company Supply and Demand Together u Equilibrium Price The price at which the supply and demand curve intersect. Quantity Supplied and Quantity Demanded are equal. u 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. u Excess Supply Price is above equilibrium price, therefore producers are unable to sell all they want at the going price. u 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 Comparative Statics: Analyzing Changes in Equilibrium u Determine if event shifts supply curve, the demand curve, or both. u Determine if curve(s) shift to left or right. u Determine how shift affects equilibrium price and quantity. u 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... u Market economies harness the forces of supply and demand... u Supply and Demand together determine the prices of the economy’s different goods and service... u Prices in turn are the signals that guide the allocation of resources.