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Individual Markets:

3. C H A P T E R. Individual Markets:. Demand & Supply. What is a “market” ?. Buyers or Demanders. Sellers or Suppliers. Good or Service. Price. Markets Defined

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Individual Markets:

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  1. 3 C H A P T E R Individual Markets: Demand & Supply

  2. What is a “market” ? Buyers or Demanders Sellers or Suppliers Good or Service Price

  3. Markets Defined A market is an institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of particular goods and services. • A market may be local, national, or international in scope. • Some markets are highly personal, face-to-face exchanges; others are impersonal and remote. • A product market involves goods and services. • A resource market involves factors of production

  4. What is Demand? • Assume the following: Possible Prices Various amounts In specified time period

  5. Graphing Demand P 5 4 3 2 1 Qd 10 30 40 20 80 50 70 60

  6. Graphing Demand P 5 4 3 2 1 Qd 10 30 40 20 80 50 70 60

  7. Demand Demand is a schedule that shows the various amounts of a product that consumers are willing and able to buy at each specific price in a series of possible prices during a specified time period. • The schedule shows how much buyers are willing and able to purchase at five possible prices. • To be meaningful, the demand schedule must have a period of time associated with it.

  8. Law of demand • Law of demand “other things being equal, as price increases, the corresponding quantity demanded falls”. • Law of demand restated, “there is an inverse relationship between price and quantity demanded”. • Note the “other-things-equal” assumption refers to consumer income and tastes, prices of related goods, and other things besides the price of the product being discussed.

  9. The demand curve • Illustrates the inverse relationship between price and quantity. • The downward slope indicates lower quantity at higher price and higher quantity at lower price, reflecting the Law of Demand.

  10. Individual versus market demand • Transition from an individual to a market demand schedule is accomplished by summing individual quantities at various price levels. 2. Market curve is horizontal sum of individual curves.

  11. P P P DM D1 D2 10KD Qd1 Qd2 QdM 8 13 5 Consumer (2): at price (10) demands (8) units Market Demand: at price (10) the demand is (8) units Consumer (1): at price (10) demands (5) units

  12. Changes in Demand • Recall: as price changes, quantity demanded changes:

  13. P Change in prices of the good will always lead to changes in quantity demanded! D 10KD 7KD Qd This is shown by a movement along the demand curve 5 9 As price falls from 10 to 7, Qd increases from (5) to (9) units Recall: inverse relationship between P and Qd

  14. Determinants of demand This is what we mean by “other things”: • Tastes favorable change leads to an increase in demand; unfavorable change to a decrease. • Number of buyers more buyers lead to an increase in demand; fewer buyers lead to a decrease. • Income more leads to an increase in demand; less leads to a decrease in demand for normal goods. (The rare case of goods whose demand varies inversely with income is called inferior goods).

  15. d. Prices of related goods • Substitute goods (those that can be used in place of each other): The price of the substitute good and demand for the other good are directly related. If the price of Coke rises (because of a supply decrease), demand for Pepsi should increase. • Complementary goods (those that are used together like tennis balls and rackets): When goods are complements, there is an inverse relationship between the price of one and the demand for the other. • Expectations consumer views about future prices, product availability, and income can shift demand.

  16. Changes in determinants of demand will shift the demand curve! P Increase in demand decrease in demand Note that pricesare CONSTANT Qd

  17. A summary of what can cause an increase in demand. a. Favorable change in consumer tastes. b. Increase in the number of buyers. c. Rising income if product is a normal good. d. Falling incomes if product is an inferior good. e. Increase in the price of a substitute good. f. Decrease in the price of a complementary good. g. Consumer expectation of higher prices or incomes in the future.

  18. A summary of what can cause a decrease in demand. a. Unfavorable change in consumer tastes. b. Decrease in number of buyers. c. Falling income if product is a normal good. d. Rising income if product is an inferior good. e. Decrease in price of a substitute good. f. Increase in price of a complementary good. • Consumers expectation of lower prices or incomes in the future. G. Review the distinction between a change in quantity demanded caused by price change and a change in demand caused by change in determinants.

  19. Supply • Supply is a schedule that shows amounts of a product a producer is willing and able to produce and sell at each specific price in a series of possible prices during a specified time period. • A schedule shows what quantities will be offered at various prices or what price will be required to induce various quantities to be offered.

  20. Law of supply. • Law of supply “producers will produce and sell more of their product at a high price than at a low price”. • Law of supply restated “There is a direct relationship between price and quantity supplied”. Explanation: Given product costs, a higher price means greater profits and thus an incentive to increase the quantity supplied.

  21. Supply Schedule Various quantities At different prices

  22. Supply Schedule P 5 1 4 3 2 1 10 20 30 40 50 60 QS

  23. Changes in Qs • Only changes in P will lead to changes in QS • This is a movement along the S curve from one point to the other. • Note that the S curve remains unchanged.

  24. P S As P increasesQs increases New as P increases Qs

  25. P S New as P decreases As P increasesQs increases Qs

  26. Determinants of supply: A change in any of the supply determinants causes a change in supply and a shift in the supply curve. An increase in supply involves a rightward shift, and a decrease in supply involves a leftward shift. Six basic determinants of supply, other than price: a. Resource prices: a rise in resource prices will cause a decrease in supply or leftward shift in supply curve; a decrease in resource prices will cause an increase in supply or rightward shift in the supply curve.

  27. Technology A technological improvement means more efficient production and lower costs, so an increase in supply or rightward shift in the curve results. • Taxes and subsidies A business tax is treated as a cost, so decreases supply; a subsidy lowers cost of production, so increases supply. • Prices of related goods If the price of substitute production good rises, producers might shift production toward the higher-priced good, causing a decrease in supply of the original good.

  28. Expectations Expectations about the future price of a product can cause producers to increase or decrease current supply. • Number of sellers Generally, the larger the number of sellers the greater the supply.

  29. Changes in S determinants: Shifts in S Increase in Supply P S’ S 5 4 3 2 1 o Q 10 20 30 40 50 60 70 80

  30. Changes in S determinants: Shifts in S P S 5 4 3 2 1 S’ decrease in Supply o Q 10 20 30 40 50 60 70 80

  31. Market Equilibrium • Market Equilibrium: where quantity supplied equals the quantity demanded. • This is: Qs=Qd At PE

  32. Recall from D and S tables: If P=3, then Qs = Qdthere is no surplus (nor shortage) !

  33. Recall from D and S tables: This is the marketEquilibrium for our good

  34. The rationing function of prices is the ability of competitive forces of supply and demand to establish a price where buying and selling decisions are coordinated.

  35. MARKET DEMAND & SUPPLY P S 5 4 3 2 1 Market Clearing Equilibrium D 7 o Q 2 4 6 8 10 12 14 16

  36. MARKET DEMAND & SUPPLY P S Surplus 5 4 3 2 1 At a 4 price more is being supplied than demanded D 4 7 o Q 2 4 6 8 10 12 14 16

  37. MARKET DEMAND & SUPPLY P S 5 4 3 2 1 At a 2 price more is being demanded than supplied Shortage D 11 7 o Q 2 4 6 8 10 12 14 16

  38. MARKET DEMAND & SUPPLY P S Surplus 5 4 3 2 1 Shortage D 11 7 o Q 2 4 6 8 10 12 14 16 Quantity of Corn

  39. Application: Government-Set Prices (Ceilings and Floors) Government-set prices prevent the market from reaching the equilibrium price and quantity. A. Price ceilings. • The maximum legal price a seller may charge, typically placed below equilibrium. • Shortages result as quantity demanded exceeds quantity supplied. • Examples: Rent controls and gasoline price controls

  40. B. Price floors. • The minimum legal price a seller may charge, typically placed below equilibrium. • Surpluses result as quantity supplied exceeds quantity demanded. • Examples: Minimum wage, farm price supports Note: The federal minimum wage, for example, will be below equilibrium in some labor markets (large cities). In that case the price floor has no effect.

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