PPT (Demand, Supply and Market Equilibrium) [Autosaved]

7/27/2019 PPT (Demand, Supply and Market Equilibrium) [Autosaved]

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Basic Microeconomics

Demand, Supply and Market

Equilibrium


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Firms and Households: Basic

Decision-Making Units Firm: primary producing unit in an economy

Exists when a person or group of people decide to

produce a good or service by transforming inputsinto outputs

Households: consuming unit in an economy

Is a large, heterogeneous group whose tastes find

expression in the marketplace A common constraint among consumers is that

they ultimately have limited income. Incomelevels are constrained by availability of jobs,current wages, capability and wealth.


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Input Markets and Output

Markets: Circular Flow Households and firms interact in both the

product and factor markets

Circular flow of economic activity Goods and services flow from firms to

households through the output market

Labor services flow from households tofirms through input markets.

Payment for goods and services flow in theopposite direction.


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Demand in Product/Output

Markets Households demand for a product depends on the ff:

Price of product

Income available to household Amount of accumulated wealth

Price of other products

Households taste or preferences

Expectation about future income, wealth andprices.


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Markets


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Markets


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Law of Demand A demand schedule shows the quantities of a good

that a household would be willing to buy at differentprice levels. These price and quantity coordinatescan be plotted to form a demand curve.

The Law of Demand states an inverse relationshipbetween quantity demanded and the price

Characteristics of the shape of a demand curve:

Negative slope

Intersects quantity axis as a result of time limitation

Intersects price axis as a result of limited income and wealth


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Other Determinants of Household

Demand Income and Wealth

Income sum of all wages, salaries and

profits, interest payments, rents and otherforms of earnings received by a householdwithin a given period of time

Wealth total value of what a householdowns minus what it owes (also known asnet worth). It is a stock measure (at agiven point in time).


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Demand Prices of Other Goods or Services

Households must apportion their income

over so many different goods and servicesthat the price of any one good will affectthe demand for other goods.

Substitutes and Complements: Substitutes related goods wherein the

increase in the price of one good leads to theincrease in quantity demanded of another good


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Demand Substitutes and Complements:

Complements related goods wherein the

increase in the price of one good leads to thedecrease in the quantity demanded of anothergood

Taste and Preferences

These are volatile and idiosyncratic Expectations

Expectations about the change in price, incomeand wealth affect present and future demand


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Markets Changes in Quantity Demanded vs. Changes

in Demand

Changes in the price of a product affect quantitydemanded per period. Changes in any otherfactor, such an income or preferences, affectdemand or essentially a shift in the demand curve.


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Markets


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Shift of Demand versus Movement

Along a Demand Curve Change in price leads to a change in quantity

demanded or a movement along the same demandcurve

Change in all other factors affecting demand leads toa change in demand or a shift of the entire demandcurve


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From Household Demand to market

Demand Market demand is the sum of all the quantities of a

good or service demanded per period by allhouseholds buying the good in the market

Graphically the market demand is a horizontalsummation of all individual demand curves.


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From Household Demand to marketDemand


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Supply in Product/Output Markets

Supply decisions depend on profit potential. It reactsto changes in revenues and costs

Costs, in turn, depends on other factors whichinclude the following:

Type of inputs necessary to produce the product

Amount of each input required

Prices of these inputs

Firms choose the production technique mostappropriate for product and the level of production.The method of production chosen is one thatminimizes cost within reasonable bounds.


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Supply in Product/Output Markets


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Law of Supply

Quantity supplied is the amount of a particularproduct that firms would be willing and able to offerfor sale at a particular price at a particular period of

time.

A supply schedule shows how much of a product afirm will sell at different levels of prices.

There is a positive relationship between the quantity

of a good supplied and the price.

Determinants of Supply

Cost of Production

Prices of Related Products


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Law of Supply


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Shifts in Supply versus MovementAlong a Supply Curve

A supply curve is derived holding everything constantexcept the price. When the price of a productchanges, ceteris paribus, a change in quantity

supplied follows and a movement along the samesupply curve takes place.

When factors other than the price changes , thesupply curve shifts resulting in a change in supply.


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Shifts in Supply versus MovementAlong a Supply Curve


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From Individual Supply to MarketSupply

Market supply is the sum of all that is supplied eachperiod by all producers of a product.

The market supply curve also depends on thenumber of firms that produce in the market. Profitsattract other firms to enter the same line of businessas other firms that have done so previously.


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From Individual Supply to MarketSupply


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Market Equilibrium

The operation of a market depends on the interactionbetween demand and supply.

Conditions that could prevail in the market:

Quantity demanded exceeds quantity supplied or a situationof excess demand

Quantity supplied exceeds quantity demanded or a situationof excess supply

Quantity demanded just equals quantity supplied or asituation of equilibrium in the market


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Market Equilibrium


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Market Equilibrium

Changes in equilibrium occur every time either thedemand or supply curves shift. Changes in quantity

demand, quantity supplied and price will all dependon how and by how much these curves shift.

PPT (Demand, Supply and Market Equilibrium) [Autosaved]

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