Topic 2 Part 1

8/7/2019 Topic 2 Part 1

http://slidepdf.com/reader/full/topic-2-part-1 1/31

Copyright McGraw-Hill Australia Pty Ltd Slides modified with permission byGeorge Bredon (2010)

Topic 2

Demand and supply

8/7/2019 Topic 2 Part 1



Learning Objectives

• Examine the nature of markets.

• Carefully develop the concepts of demand

and supply.• Discuss the separate factors that lead to

shifts in the demand and supply curves.

• Distinguish between a movement along

and a shift of demand and supply curves

3-2

8/7/2019 Topic 2 Part 1



Markets Defined

• A market is any institutionalstructure, or mechanism, thatbrings together buyers andsellers of particular goods andservices.

• Markets exists in many forms:local, national, international,and face-to-face.

3-3

8/7/2019 Topic 2 Part 1



• Large numbers of buyers and sellers

• Standardised product

• Market information feely available

• Easy entry and exit of sellers

• Individual sellers are price-takers

• Text page 42

3-4

Perfectly competitivemarkets

8/7/2019 Topic 2 Part 1



Demand

• The various amounts of a productthat consumers are willing and able

to purchase at various pricesduring some specific period, allother things remaining the same(ceteris paribus)

• Demonstrated by demand scheduleand demand curve.

3-5

8/7/2019 Topic 2 Part 1



Law of Demand

• The inverse relationship between theprice and the quantity demanded of a

good or service during some period of time, ceteris paribus

Based on:

1. Common sense and simple observation

2. Income and substitution effects.

3-6

8/7/2019 Topic 2 Part 1



Substitution Effect

• At a lower price, consumershave the incentive tosubstitute the cheaper goodfor similar goods that are nowrelatively more expensive.

3-7

8/7/2019 Topic 2 Part 1



Income Effect

• With a fixed budget, at a lower price,consumers can buy more of a product

without giving up other goods.• This implies

– A decline in price increases the purchasingpower of money income.

– An increase in price decreases the purchasingpower of money income

3-8

8/7/2019 Topic 2 Part 1



The Demand Curve

• Shows the inverse relationshipbetween price and quantitydemanded for a good orservice, ceteris paribus

• Derived from a demand

schedule showing the quantitydemanded at various prices.

3-9

8/7/2019 Topic 2 Part 1



Demand schedule

3-10

5 10

4 20

3 35

2 551 80

Price Quantity demanded

per unit per week

8/7/2019 Topic 2 Part 1


Copyright McGraw-Hill Australia Pty Ltd Slides modified with permission byGeorge Bredon (2010) 3-11

Graphing Demand

d

d

0

5

4

3

2

1

10 20 30 40 50 60 70 80

Price( $

p

er

unit)

Quantity demanded (units per week)

8/7/2019 Topic 2 Part 1



Individual and Market

Demand• Market demand is derived by

horizontally summingindividual demand curves.

• Market demand is derived byadding all the quantities

demanded in a demandschedule which correspond totheir prices.

3-12

8/7/2019 Topic 2 Part 1



Market Demand Curve is theSum of Individual Demand

Curves

8/7/2019 Topic 2 Part 1



Determinants of

Demand• Non-price determinants of demand

– tastes or preferences of consumers

– the number of consumers

– income of consumers

– prices of related goods

– expectations about future prices andincome.

3-14

8/7/2019 Topic 2 Part 1



Changes in Demand

• Caused by changes in non –price determinants of demand.

• Represented as a shift of thedemand curve either to theright or left

3-15

8/7/2019 Topic 2 Part 1



Movement along

a demand curve

P

Q 0

5

4

3

2

1

10 20 30 40 50 60 70 80

D1

Quantity demanded

D1

Price

(

$

pe

runit)

a

b

D2

D2

Increase in

Demand

8/7/2019 Topic 2 Part 1



D1

D1P

Q 0

5

4

3

2

1

10 20 30 40 50 60 70 80

Quantity demanded

Price

($

perunit)

D3

D3

Decrease in

Demand

8/7/2019 Topic 2 Part 1



Changes in Demand

• A shift in the location of the demand curveis called a change in demand.

• A shift in the demand curve to the right or

to the left occurs when each of thedeterminants of demand changes asfollows:– tastes or preferences– number of buyers

– income:▪ normal or superior goods—demand varies

directly with income▪ inferior goods—demand varies inversely with

income

3-18

8/7/2019 Topic 2 Part 1



Changes in Demand

(cont.)• Prices of related goods

– Substitute goods: there is a directrelationship between the price of one good

and the demand for another.– Complementary goods: there is an

indirect relationship between the price of one good and the demand for another.

– Independent goods: a change in the priceof one good will have negligible impact on

the demand for the other.• Consumer Expectations.

3-19

8/7/2019 Topic 2 Part 1



Changes in Quantity

Demand• A ‘change in demand’ is NOT the same

as a ‘change in the quantity demanded’.

• A change in the quantity demanded iscaused by changes in the price of thegood or service only.

• Represented as movement along ademand curve.

• Remember ‘ceteris paribus’ - Otherfactors determining demand are heldconstant.

3-20

8/7/2019 Topic 2 Part 1



Quantity of X demanded (units per period)

Priceof

X

($perunit)

Change in Quantity Demanded

Change in Demand

↑ price of X causes movement up

demand curve

Summary of Determinants of Demand

8/7/2019 Topic 2 Part 1


8/7/2019 Topic 2 Part 1



Law of Supply

• Shows the direct relationship between the priceand quantity supplied.

• Increased price causes increased quantitysupplied.

• Decreased price causes decreased quantitysupplied.

Based on:• common sense and observation

• price as revenue per unit and an incentive toproduce and sell a product

• rising costs and declining productive efficiency.

3-23

8/7/2019 Topic 2 Part 1



An Individual Producer's Supply

of Product X

Price Quantity supplied

per unit ($) per week 5 60

4 50

3 35

2 20

1 5

8/7/2019 Topic 2 Part 1



Change in Supply

• represented as a shift of thesupply curve

• caused by changes indeterminants of supply otherthan price.

3-25

8/7/2019 Topic 2 Part 1



Increase in SupplyS

1

0

5

4

3

2

1

2 4 6 8 10 12 14 16

Price($per

unit

)

Quantity supplied (000/week)

S 1S 2

S 2

a

b

8/7/2019 Topic 2 Part 1



Decrease in Supply

3-27

S 1

0

5

4

3

2

1

2 4 6 8 10 12 14 16

Price($per

unit

)

Quantity supplied (000/week)

S 1

S 2

S 2

a

b

8/7/2019 Topic 2 Part 1



Determinants of Supply

• resource prices

• technology

• prices of other goods

• expectations about future prices and economicactivity

• the number of sellers in the market.

A change in any of these determinants will shift thesupply curve to the left or right.

3-28

8/7/2019 Topic 2 Part 1



Changes in QuantitySupplied

• Caused by changes in priceonly.

• Represented as a movementalong a supply curve.

3-29

8/7/2019 Topic 2 Part 1



Summary: Determinants of Supply

3-30

Quantity of X supplied (units per period)

Priceo

fX

($

perunit)

Change in Quantity supplied

Change in Supply

↑in price of X causes movement

up the supply curve

↓in price of X causes movement

down the supply curve

8/7/2019 Topic 2 Part 1



• Market equilibrium

Next lecture

3-31

Documents

Topic 2 Part 1