Presentation on theme: "SUPPLY AND DEMAND: HOW MARKETS WORK"— Presentation transcript:
1 SUPPLY AND DEMAND: HOW MARKETS WORK Chapter 2SUPPLY AND DEMAND: HOW MARKETS WORK
2 SUPPLY AND DEMANDSupply 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.2
3 MARKETS AND COMPETITION A market is a group of buyers and sellers of a particular good or service.4
4 MARKETS AND COMPETITION Buyers determine demand.Sellers determine supply4
5 WHAT IS DEMAND? If I desire a Porsche but don’t have the money to buy it, is it “demand”?
6 WHAT IS DEMAND? Demand is when a person is WILLING and ABLE to buy a good or service.
7 DemandThe demand schedule is a table that shows the relationship between the price of the good and the quantity demanded in a given time period when all factors other than the product's price remain unchanged.Individual demand is the demand of just one consumer, while the market demand for a product is the total demand for a product from all its consumers.17
9 The Demand Curve Demand Curve The demand curve is a graph of the relationship between the price of a good and the quantity demanded.Quantity demanded is the amount of a good that buyers are willing and able to purchase.17
11 Market Demand versus Individual 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.
12 EXERCISE: INDIVIDUAL & MARKET DEMAND The Ice Cream Café is selling ice cream cones at different prices.How many ice cream cones wouldyou be prepared to buy in a week at different prices?How many would your friends buy?Fill in the table and graph the information in your demand schedule for ice cream cones.
13 Law of DemandThe law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises and vice versa; therefore, there exists an inverse relationship between quantity demanded and price.8
14 THE SUBSTITUTION EFFECT AND INCOME EFFECT Why do people buy more quantity of a good whenits price falls and vice versa?INCOME EFFECT If the price of a good, e.g., PepsiFalls then consumers have more purchasing power so they can buy more Pepsi and more of other goods.SUBSTITUTION EFFECT If the price of a goode.g. Pepsi Falls then consumers willSubstitute the now cheaper product ,Pepsi,for other goods e.g. Coke.
15 Ceteris Paribus: Other things equal assumption Economists use the “ceteris paribus”, all other factors held constant, assumption when making generalizations. Only the variable that is under consideration is changed while all other variables are held constant.For example, the number of cars bought in a year is determined by the price of cars, consumer incomes, gas prices, price of substitutes (i.e. public transport), etc. In order to analyze the effect that a change in the price of gas has on car sales, all other factors that may affect car sales are held constant and only the price of gas is changed.
16 Changes in Quantity Demanded Price of Ice-Cream ConesA change in the price of ice-cream cones results in a movement along the demand curve.B$2.00A1.00D48Quantity of Ice-Cream Cones
17 Shifts in the Demand Curve Change in Quantity DemandedMovement along the demand curve.Caused by a change in the price of the product.19
18 Shifts in Demand Curve caused by Non-Price Determinates of Demand A change in demand is a SHIFT in the demand curve, either to the left or right caused by any change that changes quantity demanded at every price.Fill in the blanks for the exercise when Ice Cream Café increases its advertising.
19 Non-Price determinants of Demand cause Shifts in the Demand Curve Consumer incomeChanges in population/ number of buyersPrices of related goodsTastes and fashionAdvertisingExpectations about future pricesNote: When we draw the demand curve we assumethese non-price determinates are heldconstant.11
20 Shifts in the Demand Curve Change in DemandA shift in the demand curve, either to the left or right.Caused by any change that changes the quantity demanded at every price.Non-price Determinants of Demand cause Shifts in the Demand Curve/A Change in Demand.19
22 Consumer IncomeAs income increases the demand for a normal good will increase.As income increases the demand for an inferior good will decrease. Examples of inferior goods include second hand clothing and public transportation.
23 Consumer Income Normal Good Price of Ice-Cream Cone$3.00An increase in income...2.50Increasein demand2.001.501.000.50D2D1Quantity of Ice-Cream Cones123456789101112
24 Consumer Income Inferior Good Price of Public Transport$3.002.50An increase in income...2.00Decreasein demand1.501.00.50D2D1Quantity of Public Transport123456789101112
25 Prices of Related Goods When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. For example an increase in the price of margarine will lead to an increase in the demand for butter.When a fall in the price of one good increases the demand for another good, the two goods are called complements.
27 SUPPLYQuantity supplied is the amount of a good that sellers are willing and able to sell.Law of SupplyThe law of supply states that, other things equal, as price rises the quantity supplied rises when the price of the good rises.25
28 The Supply Curve: The Relationship Supply ice and Quantity Supplied Supply shows the amount of a good that producers are willing and able to supply at different prices.The supply curve is the graph of the relationship between the price of a good and the quantity supplied.The supply schedule is a table that shows the relationship between the price of a good and the quantity supplied.29
29 Price of Ice-Cream Cones ($) Quantity of Ice-Cream Cones Supplied Ben's Supply SchedulePrice of Ice-Cream Cones ($)Quantity of Ice-Cream Cones Supplied$0.00$0.50$1.001$1.502$2.003$3.00529
31 The Law of SupplyThe Law of Supply states that as price rises the quantity SUPPLIED falls and vice versaThere exists a positive relationship between quantity supplied and price.
32 Market Supply versus Individual 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.
33 Non-Price determinates of Supply Input prices/Cost of Production/Price of Factors of Production (eg. Wages, oil prices, prices of raw materials, etc)TechnologyExpectations about future sales/economic situation (optimistic and pessimistic)Taxes All taxes affect S except income taxes)Number of sellersPollution RegulationsWeatherChange in ProfitabilitySubsidies27
34 Exercise Complete Farmer Ahmed’s Crops exercise on the Portal. Write the answer in your handout.
35 Movement along the Supply Curve Change in Quantity SuppliedMovement along the supply curve.Caused by a change Price.30
36 Change in Quantity Supplied Price of Ice-Cream ConeSC$3.00A rise in the price of ice cream cones results in a movement along the supply curve.A1.00Quantity of Ice-Cream Cones1530
37 Shifts in the Supply Curve Change in SupplyA shift in the supply curve, either to the left or right.Caused by a change in a determinant other than price.30
44 SurplusWhen price > equilibrium price, then quantity supplied > quantity demanded.There is excess supply or a surplus.Suppliers will lower the price to increase sales, thereby moving toward equilibrium.
45 ShortageWhen price < equilibrium price, then quantity demanded > the quantity supplied.There is excess demand or a shortage.Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.
47 Events that affect demand and/or supply Economists use the model of supply and demand to analyze competitive markets.In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.
48 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.Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.45
52 Price Ceiling and Price Floors Complete the exercises to learn about price floors and price ceilings.
53 Summary DemandThe demand curve shows how the quantity of a good depends upon the price.According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward.In addition to price, other determinants of how much consumers want to buy include income, the prices of complements and substitutes, tastes, expectations, and the number of buyers.If one of these factors changes, the demand curve shifts.
54 Summary SupplyThe supply curve shows how the quantity of a good supplied depends upon the price.According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward.In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers.If one of these factors changes, the supply curve shifts.
55 Summary Market Equilibrium Market equilibrium is determined by the intersection of the supply and demand curves.At the equilibrium price, the quantity demanded equals the quantity supplied.The behavior of buyers and sellers naturally drives markets toward their equilibrium.
56 Summary Market Equilibrium To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity.In market economies, prices are the signals that guide economic decisions and thereby allocate resources.