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1
Chapter 4Chapter 4The Market Forces ofThe Market Forces ofSupply and DemandSupply and Demand
2ObjectivesObjectives
1. Understand the concept of a 1. Understand the concept of a competitivecompetitivemarketmarket..
2. Learn the factors that determine market 2. Learn the factors that determine market demanddemand..
3. Learn the factors that determine market 3. Learn the factors that determine market supplysupply..
4. Understand how and why demand and supply 4. Understand how and why demand and supply forces establish forces establish market prices market prices and and quantitiesquantities..
5. Learn how prices and markets 5. Learn how prices and markets allocateallocate society’s society’s scarce resources.scarce resources.
3
Understanding Individual Markets:Understanding Individual Markets:DEMAND AND SUPPLYDEMAND AND SUPPLY
WHY DON'T WE ALL DRIVE WHY DON'T WE ALL DRIVE FERRARIS?FERRARIS?
4 MARKETS DEFINED
5Markets Markets
A A marketmarket is a group of buyers and is a group of buyers and sellers of a particular good or service. sellers of a particular good or service.
The terms supply and demand refer to The terms supply and demand refer to the behavior of people . . . as they the behavior of people . . . as they interact with one another in interact with one another in marketsmarkets. .
6Markets Markets
BuyersBuyers determinedetermine demanddemand..
Sellers determine supply.
7 MARKETS DEFINED
.... FOR PRODUCTS & RESOURCES
COMPETITIONCOMPETITION
8 MARKETS DEFINED
.... FOR PRODUCTS & RESOURCES
PRICESPRICES
COMPETITIONCOMPETITION
9 MARKETS DEFINED
.... FOR PRODUCTS & RESOURCES
.... THE RATIONING FUNCTION
PRICESPRICES
COMPETITIONCOMPETITION
10Competition: Competition:
Perfect and OtherwisePerfect and Otherwise
Is a market structure characterized byIs a market structure characterized by Many buyers and sellers Many buyers and sellers Homogenius productHomogenius product No control over priceNo control over price Very easy enterance and exit from marketVery easy enterance and exit from market
Perfect Competition
11
The Quantity demanded is the amount of a good or service that buyers are willing and able to purchase.
Quantity DemandedQuantity Demanded
12
The claim that, other things being equal, the quantity demanded of a good or service falls when the price of the good rises.
Law of DemandLaw of Demand
-Ceteris Paribus
13DEMAND & SUPPLYDEMAND & SUPPLY
LAW OF DEMAND
14
LAW OF DEMAND
FOR HIGHER PRICES
DEMAND & SUPPLYDEMAND & SUPPLY
15
LAW OF DEMAND
FOR HIGHER PRICESLESS QUANTITY IS DEMANDED
DEMAND & SUPPLYDEMAND & SUPPLY
16 DEMAND...
INVERSE PRICE ANDQUANTITY RELATIONSHIP
ILLUSTRATED....
DEMAND...P Qd
$ 1$ 2$ 3$ 4
$ 5 10
20355580
o
P
Q d
PLOTTHE POINTS
DEMAND...
o
P
Qd10 20 35 55 80
P Qd
$ 1$ 2$ 3$ 4
$ 5 10
20355580
1
2
3
4
5
DEMAND...
o
PP Qd
$ 1$ 2$ 3$ 4
$ 5 10
20355580
1
2
3
4
5
Qd10 20 35 55 80
DEMAND...
o
PP Qd
$ 1$ 2$ 3$ 4
$ 5 10
20355580
1
2
3
4
5
Qd10 20 35 55 80
DEMAND...
o
PETC.
1
2
3
4
5P Qd
$ 1$ 2$ 3$ 4
$ 5 10
20355580
Qd10 20 35 55 80
DEMAND...
o
P CONNECT THE DOTS
P Qd
$ 1$ 2$ 3$ 4
$ 5 10
20355580
Qd10 20 35 55 80
1
2
3
4
5
DEMAND...
o
PP Qd
$ 1$ 2$ 3$ 4
$ 5 10
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Qd10 20 35 55 80
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2
3
4
5
DEMAND...
o
P
D
P Qd
$ 1$ 2$ 3$ 4
$ 5 10
20355580
Qd10 20 35 55 80
1
2
3
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5
25 Movement Along Versus a Movement Along Versus a Shift of the Demand CurveShift of the Demand Curve
If the price of a good changes but If the price of a good changes but everything else remains the same,everything else remains the same,there is a there is a movement alongmovement along the thedemand curve.demand curve.
If the price of a good remains constantIf the price of a good remains constantbut some other influence on buyers’ plans but some other influence on buyers’ plans changes, there is a changes, there is a shiftshift of the demand of the demand curve.curve.
26A Change in Quantity Demanded A Change in Quantity Demanded
Versus a Change in DemandVersus a Change in Demand
A movement along the demand curve A movement along the demand curve shows a shows a change in the quantity demandedchange in the quantity demanded..
27A Change in Quantity Demanded A Change in Quantity Demanded
Versus a Change in DemandVersus a Change in Demand
A movement along the demand curve A movement along the demand curve shows a shows a change in the quantity demandedchange in the quantity demanded..
A shift of the demand curve shows aA shift of the demand curve shows a change in demandchange in demand..
28
29Market DemandMarket Demand
Market demandMarket demand refers to the sum of all refers to the sum of all individual demands for a particular individual demands for a particular good or service.good or service.
Graphically, individual demand curves Graphically, individual demand curves are summed are summed horizontallyhorizontally to obtain the to obtain the market demand curve.market demand curve.
30DETERMINANTS OF DEMAND
NON - PRICE
31
TASTES
DETERMINANTS OF DEMAND NON - PRICE
32
TASTESNUMBER OF BUYERS
DETERMINANTS OF DEMAND NON - PRICE
33
TASTESNUMBER OF BUYERSINCOME
Normal or Inferior Goods
DETERMINANTS OF DEMAND NON - PRICE
34
TASTESNUMBER OF BUYERSINCOME
PRICE OF RELATED GOODS
Substitutes or Complements
DETERMINANTS OF DEMAND NON - PRICE
Normal or Inferior Goods
35
TASTESNUMBER OF BUYERSINCOME
PRICE OF RELATED GOODS
EXPECTATIONS
DETERMINANTS OF DEMAND NON - PRICE
Substitutes or Complements
Normal or Inferior Goods
36
The Quantity supplied is the amount of a good or service that sellers are willing and able to sell.
Quantity SuppliedQuantity Supplied
37
Law of supply is the claim that, other things being equal, the quantity supplied of a good or service rises when the price of the good or service rises.
Law of SupplyLaw of Supply
-Ceteris Paribus
38 DEMAND & SUPPLYDEMAND & SUPPLYLAW OF SUPPLY
39 DEMAND & SUPPLYDEMAND & SUPPLYLAW OF SUPPLY
FOR HIGHER PRICES
40 DEMAND & SUPPLYDEMAND & SUPPLYLAW OF SUPPLY
FOR HIGHER PRICES
GREATER QUANTITY IS SUPPLIED
41 DEMAND & SUPPLYDEMAND & SUPPLYLAW OF SUPPLY
FOR HIGHER PRICES
GREATER QUANTITY IS SUPPLIED
SUPPLY IS ALWAYS BASEDSUPPLY IS ALWAYS BASEDUPON A FIRM'S COSTSUPON A FIRM'S COSTS
42Market SupplyMarket 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.
43 SUPPLY...
DIRECT PRICE ANDQUANTITY RELATIONSHIP
ILLUSTRATED....
SUPPLY...
o
PLOT THE
POIN
TS
P Qs
$ 1$ 2$ 3$ 4
$ 5 60
503520 5
P
Qs
SUPPLY...
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1
2
3
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5P Qs
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Qs10 20 35 55 80
SUPPLY...
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5P Qs
$ 1$ 2$ 3$ 4
$ 5 60
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Qs10 20 35 55 80
SUPPLY...
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2
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SUPPLY...
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ETC.1
2
3
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SUPPLY...
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CONNECT THE DOTS
1
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SUPPLY...
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P S
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51 DETERMINANTS OF SUPPLYDETERMINANTS OF SUPPLYNON - PRICENON - PRICE
RESOURCE PRICES
52
RESOURCE PRICES
TECHNOLOGY
DETERMINANTS OF SUPPLYDETERMINANTS OF SUPPLYNON - PRICENON - PRICE
53
RESOURCE PRICES
TECHNOLOGY
TAXES & SUBSIDIES
DETERMINANTS OF SUPPLYDETERMINANTS OF SUPPLYNON - PRICENON - PRICE
54
RESOURCE PRICES
TECHNOLOGY
TAXES & SUBSIDIES
PRICES OF RELATED GOODS
DETERMINANTS OF SUPPLYDETERMINANTS OF SUPPLYNON - PRICENON - PRICE
55
RESOURCE PRICES
TECHNOLOGY
TAXES & SUBSIDIES
PRICES OF RELATED GOODS
EXPECTATIONS
DETERMINANTS OF SUPPLYDETERMINANTS OF SUPPLYNON - PRICENON - PRICE
56
RESOURCE PRICES
TECHNOLOGY
TAXES & SUBSIDIES
PRICES OF RELATED GOODS
EXPECTATIONS
NUMBER OF SELLERS
DETERMINANTS OF SUPPLYDETERMINANTS OF SUPPLYNON - PRICENON - PRICE
SUPPLY...
o
P
1
2
3
4
5
Changes in pricebring about a
change inquantityquantitysuppliedsupplied
SP Qs
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DEMAND & SUPPLYDEMAND & SUPPLYPUTTING THE TWO TOGETHER
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59
Equilibrium is a situation in which supply and demand have been broght into balance.
EquilibriumEquilibrium
Equilibrium PriceEquilibrium Quantity
MARKET CLEARINGMARKET CLEARINGEQUILIBRIUMEQUILIBRIUM
DEMAND & SUPPLYDEMAND & SUPPLYPUTTING THE TWO TOGETHER
P Q s
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61 DEMAND & SUPPLYDEMAND & SUPPLYSHIFTS VS. MOVEMENTS
ALONG THE CURVE
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SHIFTSMOVEONE
CURVE
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62
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MOVEMENTALONG
A CURVE
DEMAND & SUPPLYDEMAND & SUPPLYSHIFTS VS. MOVEMENTS
ALONG THE CURVE
D10 20 35 55 80 Q
S S'
63THE MARKET SYSTEM IS OUR RATIONING
DEVICE AND THE EQUILIBRIUM POINT IS OPTIMAL
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D10 20 35 55 80 Q
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64THE MARKET SYSTEM IS OUR RATIONING
DEVICE AND THE EQUILIBRIUM POINT IS OPTIMAL
DEMAND & SUPPLYDEMAND & SUPPLY
Note:Note:Rationingfunctionof prices.
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65 Supply and Demand TogetherSupply and Demand Together
Equilibrium Price The price that balances supply and demand.
On a graph, it is the price at which the supply and demand curves intersect.
Equilibrium Quantity The quantity that balances supply and
demand. On a graph it is the quantity at which the supply and demand curves intersect.
INTERFERENCE WITH MARKET PRICE LEADS TO PROBLEMS
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SURPLUS
SHORTAGE
$6PRICEFLOOR
PRICECEILING
DEMAND & SUPPLYDEMAND & SUPPLY
10 20 35 55 80
67Three Steps To Analyzing Three Steps To Analyzing Changes in EquilibriumChanges in Equilibrium
Decide whether the event shifts the supply or demand curve (or both).
Decide whether the curve(s) shift(s) to the left or to the right.
Examine how the shift affects equilibrium price and quantity.
68
How aboutchanges in demand?
DEMAND & SUPPLYDEMAND & SUPPLYPUTTING THE TWO TOGETHER
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40
DEMAND & SUPPLYDEMAND & SUPPLYINCREASE IN DEMAND
P Q s
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Qd
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$ 2$ 3$ 4$ 5
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2345
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D’
DEMAND & SUPPLYDEMAND & SUPPLYDECREASE IN DEMAND
35201510
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71
How about achange in supply?
DEMAND & SUPPLYDEMAND & SUPPLYPUTTING THE TWO TOGETHER
9585755535
DEMAND & SUPPLYDEMAND & SUPPLYINCREASE IN SUPPLY
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DEMAND & SUPPLYDEMAND & SUPPLYDECREASE IN SUPPLY
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74
How about a change in demand and
a change in supply?
DEMAND & SUPPLYDEMAND & SUPPLYPUTTING THE TWO TOGETHER
DEMAND & SUPPLYDEMAND & SUPPLYDECREASE IN SUPPLYINCREASE IN DEMAND
25201510 2 80 95
55 7035 5020 35
10 25
P Q s
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76 DemandNo Change
Increasein Demand
Decreasein Demand
NoChange
Increasein
Supply
Decreasein
Supply
Price
Quantity
Price
Quantity
Price
Quantity
Price
Quantity
Price
Quantity
Price
Quantity
Price
Quantity
Price
Quantity
?
?
?
?Supp
ly
77 What are the factors which will What are the factors which will determine whether demand or determine whether demand or supply shift will be dominant?supply shift will be dominant?
Relative magnitude of shiftRelative magnitude of shift– Larger shift larger effectLarger shift larger effect
Shape of opposite curveShape of opposite curve– Relatively flat curveRelatively flat curve
» Large effect on Q - Small effect on PLarge effect on Q - Small effect on P– Relatively steep curveRelatively steep curve
» Large effect on P - Small effect on QLarge effect on P - Small effect on Q
78 ANY QUESTIONS?ANY QUESTIONS?