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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
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition Demand Supply Equilibrium Price and Resource Allocation
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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.
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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.
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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...
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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
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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
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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.
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition Demand Supply Equilibrium Price and Resource Allocation
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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
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Individual Demand Schedule Cathy’s Demand: Ice Cream Cones
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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 $1.50 246
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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 $0.00 12 + 7 = 19 $0.50 10 + 6 = 16 $1.00 8 + 5 = 13 $1.50 6 + 4 = 10 $2.00 4 + 3 = 7
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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 $1.00 71013
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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?
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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
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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
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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
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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.
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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
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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
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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?
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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?
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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.
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Demanded Price Quantity $2.00 7
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Demanded Price Quantity $2.00 7 $1.00 13
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Demanded Price Quantity $2.00 7 $1.00 13 Caused by a change in Price
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Demand Price Quantity $2.00 7
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Demand Price $2.00 7 Quantity 10
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Demand Price $2.00 7 Quantity 10 Caused by Non-Price Factors: Income, Tastes...
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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.
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition Demand Supply Equilibrium Price and Resource Allocation
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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
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Individual Supply Schedule Ben’s Store: Ice Cream Cones
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition P Price Per Cone Q # Cones Per Day $2.50 $2.00 $1.50 234 Individual Supply Curve Ben’s Store: Ice Cream Cones
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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 $0.00 0 + 0 = 0 $0.50 0 + 0 = 0 $1.00 1 + 0 = 1 $1.50 2 + 2 = 4 $2.00 3 + 4 = 7
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition P Price Per Cone Q # Cones Per Day $2.00 $1.50 $1.00 147 Market Supply Curve All Sellers
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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
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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
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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
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Supplied Price Quantity $2.00 3
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Supplied Price Quantity $2.00 3 $1.00 1
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Changes in Quantity Supplied Price Quantity $2.00 3 $1.00 1 Caused by a change in Price
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Supply Price Quantity $2.00 3
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Supply Price Quantity $2.00 36
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Change in Supply Price Quantity $2.00 36 Caused by Non-Price Factors: Technology, Input Prices
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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.
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition Demand Supply Equilibrium Price and Resource Allocation
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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.
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Forces of Demand... Price Quantity
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Forces of Demand and Supply... Price Quantity
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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
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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.
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Actions of buyers and sellers that move toward equilibrium. Price Quantity $2.50 $2.00 410
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Actions of buyers and sellers that move toward equilibrium. Price Quantity $2.50 $2.00 410 Excess Supply = 6 cones 7
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Actions of buyers and sellers that move toward equilibrium. Price Quantity $2.00 $1.50 4710
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Actions of buyers and sellers that move toward equilibrium. Price Quantity $2.00 $1.50 4710 Excess Demand =6 cones
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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
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Heat Wave Affects Buyers (Demand) Price Quantity P1P1 Q1Q1
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Heat Wave Will Cause: “Increase in Demand” Price Quantity P1P1 Q1Q1 P2P2 Q2Q2
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition An Increase in Demand: Demand Shifts Right Price Quantity P1P1 Q1Q1 P2P2 Q2Q2
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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
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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
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition Demand Supply Equilibrium Price and Resource Allocation
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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.
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Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition Overview Market and Competition Demand Supply Equilibrium Price and Resource Allocation
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