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Competition
Provides consumers with alternativesCompetition by producers to satisfy consumer wants underlies markets which are characterized by demand and supply
Demand
Relates the quantity of a good that consumers would purchase at each of various possible prices over some period of time
Quantity demanded The quantity that
consumers would purchase at a given price
Ceteris paribus Holding all else
constant
Law of Demand
The quantity demanded of a good will move inversely to the price of the goodAs price increases, quantity demanded decreasesAs price decreases, quantity demanded increases.Inverse relationship leads to downward sloping demand curve
Movement along demand curve
Occur when price and only price changesGo from $6 to $4Called movement along the demand curveQuantity demanded changesHappens when ceteris paribus occurs When we hold other things constant
Other things constant“Assumptions”
IncomePrice of related goodsTastesExpected future prices
When any of these change then DEMAND CHANGESWe shift the curveCreate a new relationship to quantity demand at each and every price
Increase in Demand
$4
600 750
D1
D2
At each and every price more of the good is demanded.
Price Q1 Q2
$4 600 750
$5 400 500
$6 350 450
$7 300 400A shift occurs in the Demand curve
Increase in Demand
Increase in consumer incomeMore money consumers have the more they are willing to pay for a goodMore units sold at each and every price
Increase in Demand
Normal goods Demand for these
goods varies directly with income
Inferior Goods Demand for these
goods varies inversely with income
Increase in Demand
Change in tasteIf good becomes in style then consumers are willing to buy more of the good at any price
Increase in Demand
Price of related goodsComplements Two goods that
must be consumed together
Decrease in the price of one will increase demand for the other
Increase in Demand
Substitutes Two goods that
must be consumed separately
Coke and Pepsi Gasoline and diesel Increase in price of
one will cause an increase in the demand of the other
Increases in Demand
Demand will increase to the extent that population increasesA change in consumer expectations about future prices will shift demand in the present
Decrease in Demand
At each and every priceLess of the good will be demanded
Price Q1 Q2
$4 600 500
$5 400 300
$6 350 250
$7 300 200
D1
D2
4
500 600
Demand curve shifts
Decrease in demand
Change in income Income decreases Consumers have
less money to spend and buy less at each and every price
Depends on inferior or normal good
Decrease in demand
Change in taste Something
becomes out of style
Consumers will buy less at each and every price
Decrease in demand
Substitutes As the price of
one substitute decreases, the demand for the other will decrease
Supply
Relates the quantity of a good that will be offered for sale at each of various possible prices, over some period of time, ceteris paribusQuantity supplied: the quantity of that will be offered for sale at a given price.
Law of Supply
There is a direct relationshipbetween the price of a good and the quantity supplied
Upward sloping curve due toDirect relationship
As price increases, quantitySupplied increases
As price decreases, quantity Supplied decreases
Supply
Price Q1
$5 100
$6 200
$7 300
$8 400
Movement along Supply Curve
Caused by changes in price and only in the price of the goodMove from one position on line to another
4
3
100 150
Changes in Supply
Caused by a change in the other things constantAt each and every price a new quantity is suppliedCurve will shift
Increase in Supply
At each and every price, more of the good is suppliedSupply shifts to the right
S1
S2
P Q1 Q2
$5 100 150
$6 200 300
$7 300 400
$8 400 500
7
300 400
Other things constant
Resource pricesTechnologyNumber of sellersPrice of jointly produced goodsProducer expectationsProduction Restrictions
Increase in Supply
Resource pricesIf the price of resources such as land, labor and capital decreases, supply increases
Increase in Supply
Producers expectations of future pricesIf we expect prices to decline in the future, increase production today
Increase in Supply
Price of jointly produced goodsIf it rises then supply increasesPrice of beef rises, causing the supply of leather to increase
Decrease in supply
Decrease in number of sellersIncrease in resource pricesStrike or disaster
Price of substitute risesPrice of jointly produced product fallsProducers expect future prices to rise
Equilibrium
When supply and demand meet in the marketplace, a market price is createdThere is only one price that clears the market, meaning that the quantity supplied equals the quantity demanded.A situation in which there is no tendency for either price or quantity to change
Equilibrium Surplus Situation
If market price is above equilibriumThen surplus occursQd < QsWhat happens? Suppliers drop price to sell inventory
Surplus: Qs > QdPrice drops until we reach equilibrium
S
D
Pa
Pe
Qd Qs
Equilibrium Shortage
D
S
Pe
Qe
Pb
Qs Qd
At Pb, a price belowEquilibrium, Qd > QsWe experience a shortage
Shortage : Qd > Qs
Consumers push the priceuntil we reach equilibrium
Market always moves Toward equilibrium
Changes in Market Equilibrium
Caused by shifts in demand or supplyEquilibrium price not longer holds trueMarket moves toward new equilibrium point
Change in SupplyS1
P1
Q1
S2
P2
Q2
Economy in EquilibriumAt P1 and Q1 (pt. A)
Resource prices dropsThen supply shifts out
At old price, surplus occurs so market priceis dropped by suppliers
New Eq. is lower price And larger quantity
A
B
Government Intervention
When the market failure occurs, government enters the economyPrice controlsSubsidies
Price controls
Government artificially creates the market priceMarket will fail to reach equilibriumShortage or surplus occurs
Price Floor
Pe
Qe
Pf Price floor
S
D
Qd Qs
Government sets Price above equilibriumPrice.Causes a surplus
Price cannot drop
No market equilibriumSurplus is permanent
Price floor – minimumLegal price
Price Ceiling
Pe
Qe
Pc Price ceiling
Qs Qd
Price ceiling – maximum Legal price
If Pc is below Pe theneconomy has a shortage
Price cannot rise andEliminate shortage
Shortage is permanent
Change in Demand
D1
S
D2
P2
P1
Q1 Q2
Economy in equilibriumWhen demand shifts dueTo change in income
At P1, we face a shortageSo market price increasesTo P2
New Eq. is higher price andhigher quantity