Upload
juliana-flynn
View
213
Download
0
Tags:
Embed Size (px)
Citation preview
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
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Overview
Market and CompetitionDemandSupplyEquilibriumPrice and Resource Allocation
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.
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.
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...
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
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Market Type: Perfect & OthersPerfectly Competitive:
– Homogeneous Products
– Buyers and Sellers are Price TakersMonopoly:
– One Seller, controls priceOligopoly:
– Few Sellers, not aggressive competitionMonopolistic Competition:
– Many Sellers, differentiated products
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.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Overview
Market and CompetitionDemandSupplyEquilibriumPrice and Resource Allocation
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
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Individual Demand ScheduleCathy’s Demand: Ice Cream Cones
Price PerCone
(P)
DailyQuantity
(Q)
$3.00 0$2.50 2$2.00 4$1.50 6
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Individual Demand CurveCathy’s Demand: Ice Cream Cones
P$ Per Cone
Q # Cones Per Day
$2.50
$2.00
$1.50
2 4 6
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Market Demand ScheduleMarket 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 $2.00 4 + 3 = 7
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Market Demand CurveAll Buyers
P$ Per Cone
Q # Cones Per Day
$2.00
$1.50
$1.00
7 10 13
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?
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Determinants of Demand
Product’s Own PriceConsumer IncomePrices of Related GoodsTastesExpectationsNumber of Consumers
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
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
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.
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
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
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?
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?
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Change in Quantity Demanded vs. Change in Demand
Change in Quantity DemandedMovement 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.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Changes in Quantity Demanded
Price
Quantity
$2.00
7
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Changes in Quantity Demanded
Price
Quantity
$2.00
7
$1.00
13
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 changein Price
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Change in Demand
Price
Quantity
$2.00
7
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Change in Demand
Price
$2.00
7
Quantity
10
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Change in Demand
Price
$2.00
7
Quantity
10
Caused byNon-PriceFactors:Income,Tastes...
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.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Overview
Market and CompetitionDemandSupplyEquilibriumPrice and Resource Allocation
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
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Individual Supply ScheduleBen’s Store: Ice Cream Cones
Price PerCone
(P)
DailyQuantity
(Q)
$3.00 5$2.50 4$2.00 3$1.50 2
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
PPricePer Cone
Q # Cones Per Day
$2.50
$2.00
$1.50
2 3 4
Individual Supply CurveBen’s Store: Ice Cream Cones
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Market Supply ScheduleMarket 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
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
PPricePer Cone
Q # Cones Per Day
$2.00
$1.50
$1.00
1 4 7
Market Supply CurveAll Sellers
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Determinants of Supply
Product’s Own PriceInput PricesTechnologyExpectations Number of Producers
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
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Change in Quantity Supplied vs. Change in Supply
Change in Quantity SuppliedMovement along the supply curve. Caused by a change in the Price of the product.
Change in SupplyA shift in the supply curve, either to the left or right. Caused by changes inNon-Price Factors
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Changes in Quantity Supplied
Price
Quantity
$2.00
3
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Changes in Quantity Supplied
Price
Quantity
$2.00
3
$1.00
1
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Changes in Quantity Supplied
Price
Quantity
$2.00
3
$1.00
1
Caused bya change in Price
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Change in Supply
Price
Quantity
$2.00
3
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Change in Supply
Price
Quantity
$2.00
3 6
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Change in Supply
Price
Quantity
$2.00
3 6
Caused byNon-PriceFactors:Technology,Input Prices
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.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Overview
Market and CompetitionDemandSupplyEquilibriumPrice and Resource Allocation
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.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Forces of Demand. . .
Price
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Forces of Demand and Supply. . .
Price
Quantity
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Forces of Demand and Supply At RestMarket Equilibrium
Price
Quantity
$2.00
7
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
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.
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
4 10
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
4 10
Excess Supply = 6 cones
7
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
4 7 10
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
4 7 10
ExcessDemand=6 cones
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
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Heat Wave Affects Buyers (Demand)
Price
Quantity
P1
Q1
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Heat Wave Will Cause:“Increase in Demand”
Price
Quantity
P1
Q1
P2
Q2
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
An Increase in Demand: Demand Shifts Right
Price
Quantity
P1
Q1
P2
Q2
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
An Increase in Demand: Demand Shifts Right
Price
Quantity
P1
Q1
P2
Q2
AsDemandP Q
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Changes in EquilibriumFour 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
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Overview
Market and CompetitionDemandSupplyEquilibriumPrice and Resource Allocation
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.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 4 Second Canadian Edition
Overview
Market and CompetitionDemandSupplyEquilibriumPrice and Resource Allocation