© 2011 thomson south-western. a market is a group of buyers and sellers of a particular good or...


• A market is a group of buyers and sellers of a particular good or service.

• The buyers as a group determine demand for a product• The sellers as a group determine supply of a product

RECAP: What Is a Market?


RECAP: What Is a “Competitive Market”?

• A competitive market is a market in which:• there are many buyers and many sellers so that;• each has a negligible impact on the market price.

(no one is able to control the price)


RECAP: What Is “Perfect Competition”?

• We begin by assuming we have perfect competition:• Products are the same• Numerous buyers and sellers so that each has no

influence over price• Buyers and Sellers are price takers

(no one controls the price)


RECAP: DEMAND• Quantity demanded is the amount of a good

that buyers are willing and able to purchase.

• Law of Demand– The law of demand states that, other things equal,

the quantity demanded of a good falls when the price of the good rises.


Figure 1 Nicholas’s Demand Schedule and Demand Curve

Price ofIce-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.


RECAP: Shifts in the Demand Curve vs. Movements along the Demand Curve

• Shift in the demand curve• When an outside factor changes the demand for a

product• Blizzard increases the demand for snow shovels

• Movement along the demand curve• Caused by a change in the price of the product


0

D

Price of Ice-Cream Cones

Quantity of Ice-Cream Cones

A tax on sellers of ice-cream cones raises the

price of ice-cream cones and results in a movement along the

demand curve.

A

B

8

1.00

$2.00

4

Changes in Quantity Demanded


Shifts in the Demand Curve

Price ofIce-Cream

Cone

Quantity ofIce-Cream Cones

Increasein demand

Decreasein demand

Demand curve, D3

Demandcurve, D1

Demandcurve, D2

0


RECAP: Variables That Influence Buyers


SUPPLY• Quantity supplied is the amount of a good that

sellers are willing and able to sell.

• Law of Supply– The law of supply states that, other things equal,

the quantity supplied of a good rises when the price of the good rises.


The Supply Curve: The Relationship between Price and Quantity Supplied

• Supply Schedule• The supply schedule is a table that shows the

relationship between the price of the good and the quantity supplied.


Ben’s Supply Schedule


The Supply Curve: The Relationship between Price and Quantity Supplied

• Supply Curve• The supply curve is the graph of the relationship

between the price of a good and the quantity supplied.


Figure 5 Ben’s Supply Schedule and Supply Curve

Price ofIce-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.


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 summed horizontally to obtain the market supply curve.


Shifts in the Supply Curve vs. Movements along the Supply Curve

• Shift in the supply curve• When an outside factor changes the cost of making

a product• Innovations in production of hard drives makes

computers cheaper, shifts the supply curve for computers

• Movement along the supply curve• Caused by a change in the price of the product


1 5

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones0

S

1.00A

C$3.00 A rise in the price

of ice cream cones results in a movement along the supply curve.

Change in Quantity Supplied


Figure 7 Shifts in the Supply Curve

Price ofIce-Cream

Cone

Quantity ofIce-Cream Cones

0

Increasein supply

Decreasein supply

Supply curve, S3

curve, Supply

S1Supply

curve, S2


What factors shift the supply curve?

• Input Prices• If iPhone screens became more expensive, what would happen to the

supply of iPhones?

• Technology• If a new invention increases the pace of producing Xboxes, what will

happen to their supply?

• Expectations• If a company producing paper believes that in a year there will be no

more demand for paper, how will they adjust their supply?

• Number of sellers• If Boston sets a limit on the number of food trucks allowed in the city,

how will that affect the supply of food trucks?


Table 2: Variables That Influence Sellers


A C T I V E L E A R N I N G 2:

Supply curve

Draw a supply curve for tax return preparation software. What happens to it in each of the following scenarios?

A. Retailers cut the price of the software.

B. A technological advance allows the software to be produced at lower cost.

C. Three new companies come out with a new tax return preparation software.



A. Fall in price of tax return software

The S curve does not shift.

Move down along the curve to a lower P and lower Q.

The S curve does not shift.

Move down along the curve to a lower P and lower Q.

Price of tax return software

Quantity of tax return software

S1

P1

Q1Q2

P2



B. Fall in cost of producing the software

The S curve shifts to the right:

at each price, Q increases.





S1

P1

Q1

S2

Q2



C. Three new firms enter the market







S1

P1

Q1

S2

Q2


SUPPLY AND DEMAND TOGETHER

Price ofIce-Cream

Cone

0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

13

Equilibriumquantity

Equilibrium price Equilibrium!

Supply

Demand

$2.00


SUPPLY AND DEMAND TOGETHER• Equilibrium refers to a situation in which the

price has reached the level where quantity supplied equals quantity demanded.


SUPPLY AND DEMAND TOGETHER• Equilibrium Price

– The price that balances quantity supplied and quantity demanded.

– On a graph, it is the price at which the supply and demand curves intersect.

• Equilibrium Quantity– The quantity supplied and the quantity demanded

at the equilibrium price. – On a graph it is the quantity at which the supply

and demand curves intersect.


Price ofIce-Cream

Cone

0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

13

Equilibriumquantity

Equilibrium price Equilibrium

Supply

Demand

$2.00


At $2.00, the quantity demanded is equal to the quantity supplied!

SUPPLY AND DEMAND TOGETHERDemand Schedule

Supply Schedule


WHAT HAPPENS WHEN MARKETS ARE NOT IN EQUILLIBRIUM?

Price ofIce-Cream

Cone

0

Supply

Demand

(a) Excess Supply

Quantitydemanded

Quantitysupplied

Surplus

Quantity ofIce-Cream

Cones

4

$2.50

107


What happens when markets are not in equilibrium?

• Surplus• When price > equilibrium price, then

quantity supplied > quantity demanded. • There is excess supply or a surplus. • Suppliers will lower the price to increase sales, thereby

moving toward equilibrium.


Figure 9 Markets Not in Equilibrium

Price ofIce-Cream

Cone

0 Quantity ofIce-Cream

Cones

Supply

Demand

(b) Excess Demand

Quantitysupplied

Quantitydemanded

1.50

104

Shortage


• Shortage• 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

chasing too few goods, thereby moving toward equilibrium.

What happens when markets are not in equilibrium?


How do we get to Equilibrium?

• Law of supply and demand• The claim that the price of any good adjusts to bring

the quantity supplied and the quantity demanded for that good into balance.


Figure 10 How an Increase in Demand Affects the Equilibrium

Price ofIce-Cream

Cone

0 Quantity of Ice-Cream Cones

Supply

Initialequilibrium

D

D

3. . . . and a higherquantity sold.

2. . . . resultingin a higherprice . . .

1. Hot weather increasesthe demand for ice cream . . .

2.00

7

New equilibrium$2.50

10


Figure 11 How a Decrease in Supply Affects the Equilibrium

Price ofIce-Cream

Cone

0 Quantity of Ice-Cream Cones

Demand

Newequilibrium

Initial equilibrium

S1

S2

2. . . . resultingin a higherprice of icecream . . .

1. An increase in theprice of sugar reducesthe supply of ice cream. . .

3. . . . and a lowerquantity sold.

2.00

7

$2.50

4


Table 3: Three Steps for Analyzing Changes in Equilibrium


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 a

change in quantity supplied.

• A shift in the demand curve is called a change in demand.

• A movement along a fixed demand curve is called a change in quantity demanded.



Changes in supply and demand

Use the three-step method to analyze the effects of each event on the equilibrium price and quantity of music downloads.

Event A: A fall in the price of compact discs

Event B: Sellers of music downloads negotiate a reduction in the royalties they must pay for each song they sell.

Event C: Events A and B both occur.


2. D shifts left


A. Fall in price of CDs

P

QD1

S1

P1

Q1

D2

The market for music downloads

P2

Q2

1. D curve shifts

3. P and Q both fall.

STEPS



B. Fall in cost of royalties

P

QD1

S1

P1

Q1

S2


Q2

P2

1. S curve shifts

2. S shifts right

3. P falls, Q rises.

STEPS

(royalties are part of sellers’ costs)



C. Fall in price of CDs AND Fall in cost of royalties

STEPS

1. Both curves shift (see parts A & B).

2. D shifts left, S shifts right.

3. P unambiguously falls.

Effect on Q is ambiguous: The fall in demand reduces Q, the increase in supply increases Q.

STEPS

1. Both curves shift (see parts A & B).

2. D shifts left, S shifts right.

3. P unambiguously falls.

Effect on Q is ambiguous: The fall in demand reduces Q, the increase in supply increases Q.



A & B

P

QD1

S1

P1

Q1

S2


1. D & S curve shifts

2. D shifts left

S shifts right

3. P definitely falls,

Q? ambiguous

STEPS

D2

P2


CONCLUSION: How Prices Allocate Resources

• One of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity.

• In market economies, prices adjust to balance supply and demand.

• These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources.

Summary


• Economists use the model of supply and demand to analyze competitive markets.

• In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.

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, the demand curve slopes downward.

– In addition to price, other determinants of how much consumers want to buy include income, the prices of complements and substitutes, tastes, expectations, and the number of buyers.

– If one of these factors changes, the demand curve shifts.

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 supply curve slopes upward.

– In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers.

– If one of these factors changes, the supply curve shifts.

Summary


• Market equilibrium is determined by the intersection of the supply and demand curves.

• At the equilibrium price, the quantity demanded equals the quantity supplied.

• The behavior of buyers and sellers naturally drives markets toward their equilibrium.

Summary


• To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity.

• In market economics, prices are the signals that guide economic decisions and thereby allocate resources.

© 2011 thomson south-western. a market is a group of buyers and sellers of a particular good or...

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