Harcourt Brace & Company Chapter 4 The Market Forces of Supply and Demand

Harcourt Brace & Company

Chapter 4

The Market Forces of Supply and Demand


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.


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...


Market Types• Perfect Competition:

– Many buyers and sellers (price takers)

– Homogeneous products

• Monopolistic Competition:– Many sellers, differentiated products

• Oligopoly: Few sellers, strategic competition

• Monopoly: – One seller, controls price


The Concept of Demand. . .

• Quantity Demanded refers to the amount (quantity) of a good that buyers are willing and able to purchase at alternative prices at a given point in time.

P

Q


Example: Demand For Ice CreamP

rice

of

Ice

Cre

am

Quantity of Ice Cream

Demand


Demand Schedule and Demand Curve

• Demand Schedule:

A table that shows the relationship between the price of the good and the quantity demanded. (Table 4-1)

• Demand Curve:

The downward-sloping line relating price and quantity demanded. (Figure 4-1)


Determinants of Demand

• Market Price• Consumer Income• Prices of Related Goods• Tastes• Expectations• Number of Consumers


Determinant of Demand: 1. Market Price

Law of Demand:

There exists an inverse

relationship between Price and Quantity Demanded.

P

Q


Determinant of Demand: 2. Income

• As income increases the demand for a normal good will increase.

P

Q


Determinant of Demand: 2. Income

• As income increases the demand for a normal good will increase.

• As income increases the demand for a inferior good decrease.

P

Q


Determinant of Demand: 3. Prices of Related Goods

When the fall in price of one good

reduces the demand for

another good, the two goods are

substitutes.


Determinant of Demand: 3. Prices of Related Goods

When the fall in price of one good

increases the demand for

another good, the two goods are complements.


Other Demand Determinants

4. Tastes: importance of advertising, consumers are fickle

5. Expectations: future events impact current demand

6. Customers: increase in population leads to a demand increase (housing market in Atlanta)


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.


Change in Quantity Demanded verses Change in Demand

• Change in Quantity DemandedMovement along the demand curve.

Caused by a change in the market price of the product. (Table 4-3)

• Change in DemandA shift in the demand curve, either to

the left or right. (Figure 4-3)


Changes in Quantity Demanded

Price

Quantity

$2.00

7


Changes in Quantity Demanded

Price

Quantity

$2.00

7

$1.00

13


Change in Demand

Price

Quantity

$2.00

7


Change in Demand

Price

$2.00

7

Quantity

10


Other Demand Concepts

• Recognizing shifts in demand

(overhead)• Individual to Market Demand

(pp.70-72)• Case Study: Teen Smoking

(pp.73-74)


The Concept of Supply. . .

Quantity Supplied refers to the amount (quantity) of a good that sellers are willing and able to make available for sale at alternative prices for a given point in time.

P

Q


Supply: Schedule and Curve

• Supply ScheduleA table that shows the relationship

between the price of the good and the quantity supplied. (Table 4-4)

• Supply CurveThe upward-sloping line relating price

and quantity supplied. (Figure 4-5)


Supply of Ice Cream

Price

Quantity


Determinants of Supply

• Market Price• Input Prices• Technology• Expectations • Number of Producers


Determinant of Supply: 1. Market Price

Law of Supply

There exists an direct (positive)

relationship between Price and Quantity

Supplied.

P

Q


Other Supply Determinants

2. Input Price : e.g, a sharp increase in resource costs will cause a leftward shift in supply

3. Technology: improvements in technology are associated with a rightward shift in supply


Other Supply Determinants

4. Expectations : future events impact current supply

5. Producers: more producers will expand supply


Change in Quantity Supplied verses Change in Supply

• Change in Quantity Supplied Movement along the supply curve.

Caused by a change in the market price of the product. (Table 4-6)

• Change in Supply A shift in the supply curve, either to

the left or right. (Figure 4-7)


Changes in Quantity Supplied

Price

Quantity

$2.00

7


Changes in Quantity Supplied

Price

Quantity

$2.00

7

$1.00

1


Change in Supply

Price

Quantity

$2.00

7


Change in Supply

Price

Quantity

$2.00

7 11


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.


Forces of Demand. . .

Price

Quantity


Forces of Demand and Supply. . .

Price

Quantity


Forces of Demand and Supply At RestMarket Equilibrium

Price

Quantity

$2.00

7


Actions of buyers and sellers that move toward equilibrium.

• Excess SupplyPrice is above equilibrium price, therefore

producers are unable to sell all they want at the going price.

• Excess DemandPrice is below equilibrium price, therefore

consumers are unable to buy all they want at the going price.



Price

Quantity



Price

Quantity

Excess Supply



Price

Quantity



Price

Quantity

ExcessDemand


Analyzing Changes in Equilibrium Prices

• Determine if event shifts supply curve, the demand curve, or both.

• Determine if curve(s) shift to left or right.

• Determine how shift affects equilibrium price and quantity.

• Example: Demand for ice cream given hot weather.


Change in demand due to hot weather

Price

Quantity

EquilibriumPe

Qe



Price

Quantity

Pe

Qe



Price

Quantity

Pe

Qe

Pe



Price

Quantity

New Equilibrium

Pe

Qe

Pe

Qe


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 service. . .

• Prices in turn are the signals that guide the allocation of resources.

Documents

Harcourt Brace & Company Chapter 4 The Market Forces of Supply and Demand