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 The ParrotSupply 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.The terms supply and demand refer to the behavior of people as they interact with one another in markets.4
4 MARKETS AND COMPETITION Buyers determine demand.Sellers determine supply4
5 Competitive MarketsA competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.Can you provide examples of a competitive market?Computing supplies like memory are a good example.5
6 Competition: Perfect and Otherwise Perfect CompetitionProducts are the sameNumerous buyers and sellers so that each has no influence over priceBuyers and Sellers are price takersMonopolyOne seller, and seller controls priceCan you provide an example of a monopoly?6
7 Competition: Perfect and Otherwise OligopolyFew sellersNot always aggressive competitionMonopolistic CompetitionMany sellersSlightly differentiated productsEach seller may set price for its own product6
8 DEMANDQuantity demanded is the amount of a good that buyers are willing and able to purchase.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.8
9 The Demand Curve: The Relationship between Price and Quantity Demanded Demand ScheduleThe demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.There may be other determinants of demand (like what), but the demand schedule looks ONLY at the good’s own price.17
14 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.
15 Shifts in the Demand Curve Change in Quantity DemandedMovement along the demand curve.Caused by a change in the price of the product.See Demand.xls19
16 Changes in Quantity Demanded Price of Ice-Cream ConesA tax that raises 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 Consumer incomePrices of related goodsTastesExpectationsNumber of buyers11
18 Shifts in the Demand Curve Change in DemandA shift in the demand curve, either to the left or right.Caused by any change that alters the quantity demanded at every price.Anything OTHER THAN own price SHIFTS the demand curve. Leads to “change in demand” NOT “quantity demanded.”19
20 Shifts in the Demand Curve Consumer IncomeAs income increases the demand for a normal good will increase.As income increases the demand for an inferior good will decrease.
21 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
22 Consumer Income Inferior Good Price of Ice-Cream Cone$3.002.50An increase in income...2.00Decreasein demand1.501.000.50D2D1Quantity of Ice-Cream Cones123456789101112
23 Shifts in the Demand Curve Prices of Related GoodsWhen a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.When a fall in the price of one good increases the demand for another good, the two goods are called complements.