Post on 07-Aug-2018
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The Market Forces of Supply and Demand
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Supply and demand are the two words that economistsuse most often.
Modern microeconomics is about supply, demand, andmarket equilibrium.
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MARKETS AND COMPETITIONA marketis a group of buyers and sellers of a particular
good or service.
The terms supply and demand refer to the behavior ofpeople . . . as they interact with one another in
markets.
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MARKETS AND COMPETITION Buyers determine demand.
Sellers determine supply
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Competitive MarketsA competitivemarketis a market in which there are
many buyers and sellers so that each has a negligibleimpact on the market price.
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Competition: Perfect and Otherwise Perfect Competition
Products are the same
Numerous buyers and sellers so that each has noinfluence over price
Buyers and Sellers are price takers
Monopoly
One seller, and seller controls price
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Competition: Perfect and Otherwise Oligopoly
Few sellers
Not always aggressive competition Monopolistic Competition
Many sellers
Slightly differentiated products
Each seller may set price for its own product
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DEMAND Quantitydemandedis the amount of a good that
buyers are willing and able to purchase.
Law of Demand The law of demandstates that, other things equal, the
quantity demanded of a good falls when the price of thegood rises.
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WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL DEMANDS? Price
Income
Prices of Related Goods Tastes
Expectations
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WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL DEMANDS? Price
law of demand: the claim that, other things equal, the
quantity demanded of a good falls when the price of thegood rises.
Income
normal good: a good for which, other things equal, an
increase in income leads to an increase in demand.inferior good: a good for which, other things equal, an
increase in income leads to a decrease in demand.
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WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL DEMANDS? Prices of Related Goods
Substitutes: two goods for which an increase in the
price of one leads to an increase in the demand for theother.
Complements: two goods for which an increase in theprice of one leads to a decrease in the demand for the
other Tastes
Expectations
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The Demand Curve: The Relationship between
Price and Quantity Demanded Demand Schedule
The demand scheduleis a table that shows therelationship between the price of the good and thequantity demanded.
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Catherines Demand Schedule
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The Demand Curve: The Relationship between
Price and Quantity Demanded Demand Curve
The demand curveis a graph of the relationship betweenthe price of a good and the quantity demanded.
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Catherines Demand Schedule and Demand Curve
Copyright 2004 South-Western
Price of
Ice-Cream Cone
0
2.50
2.00
1.50
1.00
0.50
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
1. A decrease
in price
...
2. ... increases quantity
of cones demanded.
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ceteris paribus a Latin phrase, translated as otherthings being equal, used as a reminder that allvariables other than the ones being studied areassumed to be constant.
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Market Demand versus Individual Demand Market demand refers to the sum of all individual
demands for a particular good or service.
Graphically, individual demand curves are summedhorizontally to obtain the market demand curve.
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Market Demand versus Individual Demand
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Changes in Quantity Demanded
Movement along the demand curve.(caused by a change in the price of the
product)
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0
D
Price of Ice-CreamCones
Quantity of Ice-Cream Cones
A tax that raises theprice of ice-creamcones results in a
movement along thedemand curve.
A
B
8
1.00
$2.00
4
Movement along the demand curve
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Shifts in the Demand Curve Consumer income
Prices of related goods
Tastes
Expectations Number of buyers
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Shifts in the Demand Curve Change in Demand
A shift in the demand curve, either to the left or right.
Caused by any change that alters the quantity demandedat every price.
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Shifts in the Demand Curve
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-CreamCone
Quantity of
Ice-Cream Cones
Increasein demand
Decreasein demand
Demand curve,D3
Demandcurve,D1
Demand
curve,D2
0
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Shifts in the Demand Curve versus Movements
along the Demand Curve
f
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Variables That Influence Buyers
Copyright2004 South-Western
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SUPPLY Quantity suppliedis the amount of a good that sellers
are willing and able to sell.
Law of Supply
The law of supplystates that, other things equal, thequantity supplied of a good rises when the price of thegood rises.
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WHAT DETERMINES THE QUANTITY AN
INDIVIDUAL SUPPLIES? Price
Input prices
Technology Expectations
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The Supply Curve: The Relationship between
Price and Quantity Supplied Supply Schedule
The supply scheduleis a table that shows therelationship between the price of the good and the
quantity supplied.
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Bens Supply Schedule
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The Supply Curve: The Relationship between Price and
Quantity Supplied Supply Curve
The supply curve is the graph of the relationshipbetween the price of a good and the quantity supplied.
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Bens Supply Schedule and Supply Curve
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0
2.50
2.00
1.50
1.00
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
0.50
1. Anincrease
in price ...
2. ...
increases quantity of cones supplied.
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Market Supply versus Individual Supply Market supply refers to the sum of all individual
supplies for all sellers of a particular good or service.
Graphically, individual supply curves are summedhorizontally to obtain the market supply curve.
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Market Supply versus Individual Supply
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Changes in Quantity SupplyMovement along the supply curve.
(caused by a change in the price of the
product)
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1 5
Price of Ice-Cream
Cone
Quantity of
Ice-Cream
Cones0
S
1.00
A
C$3.00
A rise in the priceof ice creamcones results in amovement alongthe supply curve.
Movement along the supply curve
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Shifts in the Supply Curve Input prices
Technology
Expectations Number of sellers
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Shifts in the Supply Curve Change in Supply
A shift in the supply curve, either to the left or right.
Caused by a change in a determinant other than price.
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Shifts in the Supply Curve
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream Cones
0
Increasein supply
Decreasein supply
Supply curve,S3
curve,Supply
S1
Supplycurve, S2
Variables That Influence Sellers
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Variables That Influence Sellers
Copyright2004 South-Western
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SUPPLY AND DEMAND TOGETHER Equilibrium:a situation in which supply and demand
have been brought into balance
Equilibriumrefers to a situation in which the price hasreached the level where quantity supplied equalsquantity demanded.
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SUPPLY AND DEMAND TOGETHER Equilibrium Price
The price that balances supply and demand. On a graph, it is the price at which the supply and demand
curves intersect.
Equilibrium Quantity the quantity supplied and the quantity demanded
when the price has adjusted to balance supply anddemand
The quantity supplied and the quantity demanded atthe equilibrium price. On a graph it is the quantity at which the supply and
demand curves intersect.
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At $2.00, the quantity demandedis equal to the quantity supplied!
SUPPLY AND DEMAND TOGETHER
Demand Schedule Supply Schedule
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The Equilibrium of Supply and Demand
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
13
Equilibrium
quantity
Equilibrium price
Equilibrium
Supply
Demand
$2.00
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Markets Not in Equilibrium
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0
Supply
Demand
(a) Excess Supply
Quantity
demanded
Quantity
supplied
Surplus
Quantity of
Ice-Cream
Cones
4
$2.50
10
2.00
7
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Equilibrium Surplus
a situation in which quantity supplied is greater thanquantity demanded
When price > equilibrium price, then
quantity supplied > quantity demanded. There is excess supply or a surplus.
Suppliers will lower the price to increase sales, therebymoving toward equilibrium.
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Equilibrium Shortage
a situation in which quantity demanded is greater thanquantity supplied
When price < equilibrium price, then
quantity demanded > the quantity supplied. There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers chasingtoo few goods, thereby moving toward equilibrium.
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Markets Not in Equilibrium
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0 Quantity of
Ice-Cream
Cones
Supply
Demand
(b) Excess Demand
Quantity
suppliedQuantity
demanded
1.50
10
$2.00
7
4
Shortage
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Equilibrium Law of supply and demand
The claim that the price of any good adjusts to bring thequantity supplied and the quantity demanded for that
good into balance.
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Three Steps to Analyzing Changes in Equilibrium Decide whether the event shifts the supply or demand
curve (or both).
Decide whether the curve(s) shift(s) to the left or tothe right.
Use the supply-and-demand diagram to see how theshift affects equilibrium price and quantity.
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How an Increase in Demand Affects the Equilibrium
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0 Quantity ofIce-Cream Cones
Supply
Initial
equilibrium
D
D
3.. . . and a higher
quantity sold.
2. . . . resulting
in a higher
price . . .
1. Hot weather increases
the demand for ice cream . . .
2.00
7
New equilibrium
$2.50
10
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Three Steps to Analyzing Changes in Equilibrium Shifts in Curves versus Movements along Curves
A shift in the supply curve is called a change in supply.
A movement along a fixed supply curve is called achange in quantity supplied.
A shift in the demand curve is called a change indemand.
A movement along a fixed demand curve is called achange in quantity demanded.
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How a Decrease in Supply Affects the Equilibrium
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0 Quantity ofIce-Cream Cones
Demand
New
equilibrium
Initial equilibrium
S1
S2
2. . . . resultingin a higherprice of ice
cream . . .
1. An earthquake reduces
the supply of ice cream. . .
3.. . . and a lower
quantity sold.
2.00
7
$2.50
4
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A Shift in Both Supply and Demand
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Summary Economists use the model of supply and demand to
analyze competitive markets.
In a competitive market, there are many buyers andsellers, each of whom has little or no influence on themarket price.
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Summary The demand curve shows how the quantity of a good
depends upon the price.
According to the law of demand, as the price of a good
falls, the quantity demanded rises. Therefore, thedemand curve slopes downward.
In addition to price, other determinants of how muchconsumers want to buy include income, the prices of
complements and substitutes, tastes, expectations, andthe number of buyers.
If one of these factors changes, the demand curve shifts.
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Summary The supply curve shows how the quantity of a good
supplied depends upon the price.
According to the law of supply, as the price of a good
rises, the quantity supplied rises. Therefore, the supplycurve slopes upward.
In addition to price, other determinants of how muchproducers want to sell include input prices, technology,
expectations, and the number of sellers. If one of these factors changes, the supply curve shifts.
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Summary Market equilibrium is determined by the intersection
of the supply and demand curves.
At the equilibrium price, the quantity demandedequals the quantity supplied.
The behavior of buyers and sellers naturally drivesmarkets toward their equilibrium.