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AN INTRODUCTION TOMICROECONOMICS
Dr. Mohammed Migdad
Supply and DemandIn the Market
CHAPTER 2
Chapter 2 content:
2.1 Introduction2.2 What Is the Market? 2.3 Consumer Demand2.4 Firms Supply2.5 Equilibrium between Supply and Demand2.6 Price of Goods and Price Theory2.7 Role of Governments in Economics2.8 Effects of Supply and Demand Change on
Market Equilibrium
2.1 Introduction
• careful study of the market will help in a good forecasting under the random movement of supply and demand
• You will understand how the demand and supply work and derive changes in prices of commodities.
2.2 What Is the Market?
A group of sellers and buyers desiring exchange of products or services. A market economy has at its heart the actions of buyers and sellers who exchange goods and services with one another.
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Market definition
• A market is the institution through which buyers and sellers interact and engage in exchange.
• A market economy has at its heart the actions of buyers and sellers who exchange goods and services with one another.
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A. What Is a Market?
• There is no higher authority that directs the behavior of these economic agents; rather, it is the invisible hand of the marketplace that allocates final goods and services, as well as factors of production.
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Markets
• Buyers and sellers receive signals from one another in the form of prices. If buyers want to buy more of a good, prices rise and sellers respond by supplying more to the marketplace.
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Markets
• If buyers want to buy less of a good, prices fall and sellers respond by supplying less to the marketplace.
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Markets
• Market equilibrium occurs when the price is such that the quantity that buyers are interested in purchasing is equal to the quantity that sellers are interested in supplying to the market.
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Markets
• The market mechanism allows an economy to simultaneously solve the three economic problems of what, how, and for whom.
2.2.1How the Market Works
Buyers and sellers receive signals from in the form of prices
Market equilibrium occurs when the price is such that the quantity that buyers are interested in purchasing is equal to the quantity that sellers are interested in supplying to the market.
2.2.2.The Economic Systems
• Economic systems are the basic arrangements made by societies to solve the economic problem. They are of four systems as follows:
1- Islamic economy2- Laissez-faire economies (Free Market System)3- Command economies4- Mixed systems
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Islamic Economy
• Some people think that Islam has no economic system of its own • Islamic Economics is as Old as
Islam Itself
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Islamic Economy
• Islamic economics is accordance with Islamic law.
• Islamic economics can refer to the application of Islamic law to economic activity either where Islamic rule is in force or where it is not;
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Example
• i.e. it can refer to the creation of an Islamic economic system, or to simply following Islamic law in regards to spending, saving, investing, giving, etc. where the state does not follow Islamic law.
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Definition of Islamic economics
• The Islamic economics is both a science and an art which deals with the daily routine of a Muslim's economic life.
• i.e. how he earns his income and how he spends it. It is a science in the sense that it involves many scientific methods in the production of material goods, their distribution and consumption.
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Principles
• The Islamic economic system is directly guided by Allah Almighty Himself.
• all important aspects of the Islamic economic system and the applicable norms are thoroughly discussed in the Holy Quran
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Principles
• Allah created all needed provisions so that they may consume them and may satisfy their wants
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Other principles
1. All wealth belongs to Allah (SWT(2. The Muslims are the custodians and trustees of the
wealth.3. Hoarding the wealth is forbidden.4. Circulating the wealth is obligatory
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The free market system
• In a laissez-faire economy, individuals and firms pursue their own self-interests without any central direction or regulation.
• The central institution of a laissez-faire economy is the free-market system.
• A market is the institution through which buyers and sellers interact and engage in exchange.
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Consumer sovereignty
• Consumer sovereignty is the idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).
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Free enterprise
• Free enterprise: under a free market system, individual producers must figure out how to plan, organize, and coordinate the production of products and services.
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distribution of output
• In a laissez-faire economy, the distribution of output is also determined in a decentralized way. The amount that any one household gets depends on its income and wealth.
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Free System
• The basic coordinating mechanism in a free market system is price. Price is the amount that a product sells for per unit. It reflects what society is willing to pay.
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Command economies
• In a command economy, a central government either directly or indirectly sets output targets, incomes, and prices.
• And the government determine what to produce and how much and How and for Whom to produce.
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goals of government in mixed economy
• Minimize market inefficiencies• Provide public goods• Redistribute income• Stabilize the macro economy:–Promote low levels of unemployment–Promote low levels of inflation
2.3 Consumer Demand
• In economics, demand is the desire to own anything with an ability and willingness to pay
• The effective demand is the demand which combines between ability and willingness to purchase in a particular period of time.
Major Groups of Expenditures in Gaza 2011, 2012 Gaza strip Major Groups of Expenditure
%Change Feb. 2012 Feb. 2011
-1.21 151.86 153.71 Food and soft drinks
0.07 157.29 157.18 Alcoholic Beverages and tobacco
-7.74 107.28 116.28 Textiles, clothing and footwear
2.85 129.13 125.55 Housing
-5.45 131.94 139.55 Furniture, household goods
1.31 100.31 99.02 Medical care
-0.54 127.16 127.85 Transportation
1.55 107.03 105.40 Communications
-1.60 98.60 100.21 Recreational, cultural goods and services
3.25 111.09 107.59 Education
-0.53 155.54 156.38 Restaurants and cafes
6.94 131.51 122.97 Miscellaneous goods and services
-0.70 133.88 134.83 All items of consumer price index
The Relationship between Price and Quantity Demanded
Quantity demanded (Qd) Price (P)
200 10180 15160 20140 25120 30100 3580 40
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The demand curve
• The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices.
Demand Curve
From Household Demand to Market Demand
2.3.1 Determinants of Demand
The main factors that cause the change in demand and affecting the demand curve to shift to the right or to the left are as following:
1- Consumer Income2- Population3- Expectation of Future4- Price of Related Goods5- Tastes and Preferences
The Difference between the Shift in Demand and the Change in Quantity Demanded
Qd
P
D
D1
D2
Right left
The effect of other factors on the demand curveCalled: Change in demand itself
Qd
p
D
p1
p2
Q1Q2
The change in price and quantityCalled: Change in quantity demanded
Differences between the Change in Demand and the Change in Quantity Demanded
• First: Change in Demand It results from the change in factors other than the price of a product itself. This is what we call determinants of demand.
Differences between the Change in Demand and the Change in Quantity Demanded
• Second: Change in Quantity DemandedIt results from changes in the prices of the product itself with other factors held constant.
2.4 Firms Supply
Supply schedule is a table that clarifies different quantities
suppliers desire and are able to supply to be sold facing a particular price during a given period of time, other things held constant
2.4.1 Supply Schedule
Quantity Supplied (Qs) Price (P)
80 10100 15120 20140 25160 30180 35200 40
2.4.2 The Supply Curve
2.4.2 The Supply Curve
There are some other terms which refer to supply such as:
1) Supply Law.2) Supply Function.3) Supply Equation. 4) Supply Model.
2.4.3 Supply Determinants Shift in Supply Curve
2.4.4 The Main Factors that Cause the Change in Supply and Affect the Supply Curve to Shift to the Right or to the
Left
1) Technology Changes 2) Price of Factors of Production (FoP)3) Number of Sellers 4) Sellers' Expectations5) Tax or Subsidy6) Price of Related Goods Produced
2.4.5 Difference between the Change in Supply and the Change in Quantity Supplied
1. Change in Supply Change in supply results from a change in any of the six supply determinants (mentioned before) in addition to the change in price
Shift in Supply Curve
2.4.5 Difference between the Change in Supply and the Change in Quantity Supplied
2. Change in Quantity Supplied
Such change results from the change in the price of the good itself with other factors held constant.
Change in Quantity Supplied
2.5 Equilibrium between Supply and Demand
Equilibrium is a condition in which economic forces are balanced. These economic forces, supply and demand, will be unchanged from their equilibrium values in the absence of external influences
Simply, equilibrium is the condition where the quantity supplied and demanded meet
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Market Equilibrium
• Market equilibrium is the condition that exists when quantity supplied and quantity demanded are equal.
• At equilibrium, there is no tendency for the market price to change.
An Example of the Demand and Supply Curve and Their Equilibrium Points
Buyer Demand per Consumer
Quantity (Liters) Demanded per Week
Price Per Liter
50 $2.0060 $1.7575 $1.5095 $1.25120 $1.00
Demand of Gasoline
Supply Table
Gas Supply Per Consumer
Quantity (Liters) Demanded per Week
Price Per Liter
50 $1.2060 $1.3075 $1.5095 $1.75120 $2.15
Supply of Gasoline
Market Equilibrium
2.5.1 Determining the Status of Equilibrium
Price (P)
Quantity Demanded (Qd)
Quantity Supplied (Qs)
The Market Status Increase in Supply (+) or Decrease in Supply (-)
10 200 80 -120
15 180 100 -80
20 160 120 -40
25 140 140 0
30 120 160 +40
35 100 180 +80
40 80 200 +120
2.6 Price of Goods and Price Theory
• A measurable value is needed in order to measure the rise and fall of supply and demand
• Price theory, therefore, charts the movement of measurable quantities over time, and the relationship between price and other measurable variables.
2.7Role of Governments in Economics
• Governments could intervene in the market in a direct or an indirect way to achieve economic or social goals.
• Government’s intervention is to protect both parties in the market: the sellers and the buyers.
2.7.1 How Can Governments Monitor and Hold Prices
1) Using price ceiling or2) Price floor or3) Can provide subsidies or4) Impose taxes
2.7.2 Price Ceiling
• Governments impose maximum prices on some basic products that will force suppliers to sell less than or equal to the equilibrium price
• The purpose of imposing a price ceiling is to make sure that the basic products are available to all customers at understandable prices.
The Price Ceiling
2.7.3 Effects of price ceiling
• If the price ceiling is above the market equilibrium price, there would be no effect; however,
• if the price ceiling is below the market equilibrium price, a "shortage" would be created because the quantity demanded will exceed the quantity supplied.
2.7.4 Price Floors
• Price floors prohibit prices below a certain minimum amount. This causes surpluses.
• When the price for a good is very low, this will affect the firms negatively.
• As a result, the government will make an intervention to protect firms, to help them make some profit or to avoid losses
The Price Floor
2.7.5 Effects of Price Floor
• A price floor can be set below the free-market equilibrium price. In this case, the price floor has no practical effect. The government has mandated a minimum price, but the market already bears a higher price
2.7.5 Effects of Price Floor
• By contrast, if the price floor is set above the free-market price, it will have a measurable impact on the market. It ensures prices to stay high so product can continue to be produced.
2.7.5 Effects of Price Floor
• A price floor which is set above the market equilibrium price has several side-effects, one of which is that consumers find that they must pay a higher price for the same product. As a result, they reduce their purchases or drop out of the market entirely.
2.7.6 For the government policy to be efficient and successful, the government must deal with the supply surplus through the following steps:
1) Buy the surplus from the market and either benefit from it by exporting or using it in producing, or even throwing the surplus in the sea as Brasilia deals with coffee.
2.7.6 For the government policy to be efficient and successful, the government must deal with the supply surplus through the following steps:
2) Increasing customs imposed on importing substitute goods which will increase consumption on goods produced locally.
2.7.6 For the government policy to be efficient and successful, the government must deal with the supply surplus through the following steps:
3) Governmental support to producers such as subsidies to farmers in the form of free transportation and providing credit facilities to encourage consumers to increase consumptions
2.8 Effects of Supply and Demand Change on Market Equilibrium
Market equilibrium could change as a result of other factors change, either demand determinants such as number of consumers, consumer taste, and consumer expectations, or supply determinants such as number of suppliers, prices of production resources, taxes, and governmental subsidies.
2.8.1 The Five Basic Laws of Supply and Demand
1) If demand increases and supply remains unchanged, this leads to higher equilibrium price and quantity.
2) If demand decreases and supply remains unchanged, this leads to lower equilibrium price and quantity.
3) If supply increases and demand remains unchanged, this leads to lower equilibrium price and higher quantity.
4) If supply decreases and demand remains unchanged, this leads to higher equilibrium price and lower quantity.
5) If demand and supply change, the final effect will depend on the magnitude and the direction of the change.
The Effect on Market Equilibrium when the Number of Consumers Falls
D2D1
S
P1
P2
Q1 Q2Q
P
E1E2
The Effect on Market Equilibrium when there is a New Technology
The Effect on Market Equilibrium when there is a New Technology and More Population
The Effect when the Magnitude of Change in Supply is Higher than in Demand
The Effect on Market Equilibrium when there is a New Technology and More Population
The Effect when the Magnitude of Change in Demand is Higher than in Supply
THE END of CHAPTER 2
