Presentation on theme: "The Market Forces of Supply and Demand"— Presentation transcript:
1 The Market Forces of Supply and Demand 4The Market Forces of Supply and Demand
2 Markets and Competition A group of buyers and sellers of a particular good or serviceCan be highly organizedE.g.: agricultural commoditiesCan be less organizedE.g.: ice creamCompetitive marketMany buyers and many sellersEach has a negligible impact on market price
3 Markets and Competition Perfectly competitive marketGoods offered for sale - exactly the sameBuyers and sellers – numerousNo single buyer or seller has any influence over the market priceMust accept the price determined on the marketPrice takersAt the market priceBuyers - buy all they wantSellers - sell all they want
4 Markets and Competition MonopolyThe only seller in the marketSets the priceOther marketsBetween perfect competition and monopoly
5 Demand Quantity demanded Law of demand Amount of a good Buyers are willing and able to purchaseLaw of demandOther things equalWhen the price of the good risesQuantity demanded of a good falls
6 Demand Demand schedule - a table Demand curve - a graph Relationship betweenPrice of a goodQuantity demandedDemand curve - a graphIndividual demandDemand of one individual
7 Catherine’s demand schedule and demand curve 1Catherine’s demand schedule and demand curve$3.002.502.001.501.000.50Price ofIce-CreamCones1. A decreasein price . . .Demand curvePrice ofIce-cream coneQuantity ofCones demanded$0.000.501.001.502.002.503.0012 cones108642increases quantityof cones demanded.121011912345678Quantity of Ice-Cream ConesThe demand schedule is a table that shows the quantity demanded at each price.The demand curve, which graphs the demand schedule, illustrates how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward.
8 Demand Market demand Market demand curve Sum of all individual demands for a good or serviceMarket demand curveSum - individual demand curves horizontallyTotal quantity demanded of a good variesAs the price of the good variesAll other factors that affect how much consumers want to buy are hold constant
9 Market demand as the sum of individual demands (demand schedule) 2Market demand as the sum of individual demands (demand schedule)Price of ice-cream coneCatherineNicholasMarket$0.000.501.001.502.002.503.0012108642+7531=191613The quantity demanded in a market is the sum of the quantities demanded by all thebuyers at each price. Thus, the market demand curve is found by adding horizontallythe individual demand curves. At a price of $2.00, Catherine demands 4 ice-creamcones, and Nicholas demands 3 ice-cream cones. The quantity demanded in themarket at this price is 7 cones.
10 Market demand as the sum of individual demands 2Market demand as the sum of individual demandsCatherine’sdemand+Nicholas’sdemand=Marketdemand$3.002.502.001.501.000.50Price ofIceCreamCones$3.002.502.001.501.000.50Price ofIceCreamCones$3.002.502.001.501.000.50Price ofIceCreamConesDCatherineDNicholasDMarket121011912345678Quantity of Ice-Cream Cones1234567Quantity ofIce-Cream Cones18246810121416Quantity of Ice-Cream Cones
11 Demand Shifts in demand Increase in demand Decrease in demand Any change that increases the quantity demanded at every priceDemand curve shifts rightDecrease in demandAny change that decreases the quantity demanded at every priceDemand curve shifts left
12 Shifts in the demand curve 3Shifts in the demand curvePrice ofIce-CreamConesDemandcurve, D1Demandcurve, D2Increase inDemandDemandcurve, D3Decrease inDemandQuantity of Ice-Cream ConesAny change that raises the quantity that buyers wish to purchase at any given price shifts the demand curve to the right. Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left.
13 Demand Variables that can shift the demand curve Income Prices of related goodsTastesExpectationsNumber of buyers
14 Demand Income Normal good Inferior good Other things constant An increase in incomeIncrease in demandInferior goodDecrease in demand
15 Demand Prices of related goods Substitutes - two goods An increase in the price of oneLeads to an increase in the demand for the otherComplements – two goodsLeads to a decrease in the demand for the other
16 Demand Tastes Expectations - about the future (income, prices) Change in tastes – changes the demandExpectations - about the future (income, prices)Affect current demandNumber of buyers – increaseMarket demand - increases
17 Variables that influence buyers 1Variables that influence buyersVariableA Change in This Variable . . .Price of the good itselfIncomePrices of related goodsTastesExpectationsNumber of buyersRepresents a movement along the demand curveShifts the demand curveThis table lists the variables that affect how much consumerschoose to buy of any good. Notice the special role that the priceof the good plays: A change in the good’s price represents amovement along the demand curve, whereas a change in one ofthe other variables shifts the demand curve.
18 Two ways to reduce the quantity of smoking demanded Shift the demand curve for cigarettes and other tobacco productsPublic service announcementsMandatory health warnings on cigarette packagesProhibition of cigarette advertising on televisionIf successfulShift demand curve to the left
19 Two ways to reduce the quantity of smoking demanded Try to raise the price of cigarettesTax the manufacturerMuch of tax – passed to consumers (high prices)Movement along demand curve10% increase in price → 4% decrease in smokingTeenagers: 10% increase in price → 12% decrease smokingDemand for cigarettes vs. demand for marijuanaAppear to be complements
20 Shifts in demand curve vs. movements along demand curve 4Shifts in demand curve vs. movements along demand curve(a) A Shift in the Demand Curve(b) A Movement along the Demand CurvePrice ofCigarettes,per PackA policy to discourage smoking shifts the demand curve to the leftPrice ofCigarettes,per PackA tax that raises theprice of cigarettesresults in a movementalong the demand curveD1D1D2$4.00C12BA$2.002.001020A20Number of Cigarettes Smoked per DayNumber of Cigarettes Smoked per DayIf warnings on cigarette packages convince smokers to smoke less, the demand curve for cigarettes shifts to the left. In panel (a), the demand curve shifts from D1 to D2. At a price of $2.00 per pack, the quantity demanded falls from 20 to 10 cigarettes per day, as reflected by the shift from point A to point B. By contrast, if a tax raises the price of cigarettes, the demand curve does not shift. Instead, we observe a movement to a different point on the demand curve. In panel (b), when the price rises from $2.00 to $4.00, the quantity demanded falls from 20 to 12 cigarettes per day, as reflected by the movement from point A to point C.
21 Supply Quantity supplied Law of supply Amount of a good Sellers are willing and able to sellLaw of supplyOther things equalWhen the price of the good risesQuantity supplied of a good rises
22 Supply Supply schedule - a table Supply curve - a graph Relationship betweenPrice of a goodQuantity suppliedSupply curve - a graphIndividual supplySupply of one seller
23 Ben’s supply schedule and supply curve 5Ben’s supply schedule and supply curve$3.002.502.001.501.000.50Price ofIce-CreamConesSupply curvePrice ofIce-cream coneQuantity ofCones supplied$0.000.501.001.502.002.503.000 cones123451. An increasein price . . .increases quantityof cones supplied.121011912345678Quantity of Ice-Cream ConesThe supply schedule is a table that shows the quantity supplied at each price. Thissupply curve, which graphs the supply schedule, illustrates how the quantity suppliedOf the good changes as its price varies. Because a higher price increases the quantity supplied, the supply curve slopes upward.
24 Supply Market supply Market supply curve Sum of the supplies of all sellers for a good or serviceMarket supply curveSum - individual supply curves horizontallyTotal quantity supplied of a good variesAs the price of the good variesAll other factors that affect how much suppliers want to sell are hold constant
25 Market supply as the sum of individual supplies (supply schedule) 6Market supply as the sum of individual supplies (supply schedule)Price of ice-cream coneBenJerryMarket$0.000.501.001.502.002.503.0012345+68=71013The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. Thus, the market supply curve is found by adding horizontally the individual supply curves. At a price of $2.00, Ben supplies 3 ice-cream cones, and Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this price is 7 cones
26 Market supply as the sum of individual supplies 6Market supply as the sum of individual suppliesBen’ssupply+Jerry’ssupply=Marketsupply$3.002.502.001.501.000.50Price ofIceCreamCones$3.002.502.001.501.000.50Price ofIceCreamCones$3.002.502.001.501.000.50Price ofIceCreamConesSBenSMarketSJerry121011912345678Quantity of Ice-Cream Cones1234567Quantity ofIce-Cream Cones18246810121416Quantity of Ice-Cream Cones
27 Supply Shifts in supply Increase in supply Decrease in supply Any change that increases the quantity supplied at every priceSupply curve shifts rightDecrease in supplyAny change that decreases the quantity supplied at every priceSupply curve shifts left
28 Shifts in the supply curve 7Shifts in the supply curvePrice ofIce-CreamCones`Supplycurve, S3Supplycurve, S1Supplycurve, S2Decrease insupplyIncrease inSupplyQuantity of Ice-Cream ConesAny change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left.
29 Supply Variables that can shift the supply curve Input Prices Supply – negatively related to prices of inputsTechnologyAdvance in technology – increase in supplyExpectations about futureAffect current supplyNumber of sellers – increaseMarket supply - increase
30 Variables that influence sellers 2Variables that influence sellersVariableA Change in This Variable . . .Price of the good itselfInput pricesTechnologyExpectationsNumber of sellersRepresents a movement along the supply curveShifts the supply curveThis table lists the variables that affect how much producers choose to sell of any good. Notice the special role that the price of the good plays: A change in the good’s price represents a movement along the supply curve, whereas a change in one of the other variables shifts the supply curve
31 Supply and Demand Together Equilibrium - a situationMarket price has reached the level :Quantity supplied = quantity demandedEquilibrium price - the price:Balances quantity supplied and quantity demandedEquilibrium quantityQuantity supplied and the quantity demanded at the equilibrium price
32 The equilibrium of supply and demand 8The equilibrium of supply and demand$3.002.502.001.501.000.50Price ofIce-CreamConesSupplyDemandEquilibriumpriceEquilibriumEquilibriumquantity121011912345678Quantity of Ice-Cream ConesThe equilibrium is found where the supply and demand curves intersect. At the equilibrium price, the quantity supplied equals the quantity demanded. Here the equilibrium price is $2.00: At this price, 7 ice-cream cones are supplied, and 7 ice-cream cones are demanded.
33 Supply and Demand Together SurplusQuantity supplied > quantity demandedExcess supplyDownward pressure on priceShortageQuantity demanded > quantity suppliedExcess demandUpward pressure on price
34 Markets not in equilibrium 9Markets not in equilibrium(a) Excess Supply(b) Excess demandPrice ofIceCreamConesPrice ofIceCreamConesSupplySupplySurplusDemandDemand$2.504Quantitydemanded10Quantitysupplied2.00$2.00771.504Quantitysupplied10QuantitydemandedShortageQuantity of Ice-Cream ConesQuantity of Ice-Cream ConesIn panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price, the quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level. In panel (b), there is a shortage. Because the market price of $1.50 is below the equilibrium price, the quantity demanded (10 cones) exceeds the quantity supplied (4 cones). With too many buyers chasing too few goods, suppliers can take advantage of the shortage by raising the price. Hence, in both cases, the price adjustment moves the market toward the equilibrium of supply and demand
35 Supply and Demand Together Law of supply and demandThe price of any good adjustsBring the quantity supplied and the quantity demanded into balanceIn most marketsSurpluses and shortages are temporary
36 Supply and Demand Together Three steps to analyzing changes in equilibriumDecide: the event shifts the supply curve, the demand curve, or both curvesDecide: curve shifts to right or to leftUse supply-and-demand diagramCompare initial and new equilibriumHow the shift affects equilibrium price and quantity
37 Three steps for analyzing changes in equilibrium 3Three steps for analyzing changes in equilibriumDecide whether the event shifts the supply or demand curve (or perhaps both).Decide in which direction the curve shifts.Use the supply-and demand diagram to see how the shift changes the equilibrium price and quantity.
38 Supply and Demand Together Example: A change in market equilibrium due to a shift in demandOne summer - very hot weatherEffect on the market for ice cream?Hot weather - demand curve (tastes )Demand curve shifts to the rightHigher equilibrium price; higher equilibrium quantity
39 How an increase in demand affects the equilibrium 10How an increase in demand affects the equilibriumPrice ofIce-CreamConesSupplyHot weatherincreases the demandfor ice cream . . .D22. …resulting ina higher price . . .D1$2.50New equilibrium102.007Initial equilibrium3. …and a higher quantity sold.Quantity of Ice-Cream ConesAn event that raises quantity demanded at any given price shifts the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here an abnormally hot summer causes buyers to demand more ice cream. The demand curve shifts from D1 to D2, which causes the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10 cones
40 Supply and Demand Together Shifts in curves versus movements along curvesShift in the supply curveChange in supplyMovement along a fixed supply curveChange in the quantity suppliedShift in the demand curveChange in demandMovement along a fixed demand curveChange in the quantity demanded
41 Supply and Demand Together Example: A change in market equilibrium due to a shift in supplyOne summer - a hurricane destroys part of the sugarcane cropPrice of sugar - increasesEffect on the market for ice cream?Change in price of sugar - supply curveSupply curve - shifts to the leftHigher equilibrium price; lower equilibrium quantity
42 How a decrease in supply affects the equilibrium 11How a decrease in supply affects the equilibriumPrice ofIce-CreamCones1. An increase in theprice of sugar reducesthe supply of ice cream . . .S22. …resulting ina higher price . . .DemandS1$2.50New equilibrium42.007Initial equilibrium3. …and a smaller quantity sold.Quantity of Ice-Cream ConesAn event that reduces quantity supplied at any given price shifts the supply curve to the left. The equilibrium price rises, and the equilibrium quantity falls. Here an increase in the price of sugar (an input) causes sellers to supply less ice cream. The supply curve shifts from S1 to S2, which causes the equilibrium price of ice cream to rise from $2.00 to $2.50 and the equilibrium quantity to fall from 7 to 4 cones
43 Supply and Demand Together Example: shifts in both supply and demandOne summer: hurricane and heat waveHeat wave – shift demand curve; hurricane – shift supply curveDemand curve shifts to the right; Supply curve shifts to the leftEquilibrium price raisesIf demand increases substantially while supply falls just a little: equilibrium quantity –risesIf supply falls substantially while demand rises just a little: equilibrium quantity falls
44 A shift in both supply and demand 12A shift in both supply and demandPrice ofIceCreamCones(a) Price Rises, Quantity RisesPrice ofIceCreamCones(b) Price Rises, Quantity FallsS2Smallincreasein demandNewequilibriumD2S2Largeincreasein demandS1S1NewequilibriumD2D1P2P2D1Q2Q2Largedecreasein supplySmalldecreasein supplyP1P1InitialequilibriumQ1Q1InitialequilibriumQuantity of Ice-Cream ConesQuantity of Ice-Cream ConesHere we observe a simultaneous increase in demand and decrease in supply. Two outcomes are possible. In panel (a), the equilibrium price rises from P1 to P2, and the equilibrium quantity rises from Q1 to Q2. In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium quantity falls from Q1 to Q2.
45 What happens to price and quantity when supply or demand shifts? 4What happens to price and quantity when supply or demand shifts?No changeIn SupplyAn increaseA decreaseIn supplyIn demandP sameQ sameP upQ upP downQ downP ambiguousP DownQ ambiguous