demand and supply forces
TRANSCRIPT
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44The Market Forces ofSupply and Demand
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Supply and demand are the two words that
economists use most often.
Supply and demand are the forces that make
market economies work.
Modern microeconomics is about supply,
demand, and market equilibrium.
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A marketis a group of buyers and sellers of a
particular good or service.
The terms supply and demand refer to the
behavior of people . . . as they interact with one
another in markets.
MARKETS AND COMPETITION
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MARKETS AND COMPETITION
Buyers determine demand.
Sellers determine supply
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Desire , Want and Demand
DESIRE
It is a wishful thinking.
WANTWhen you have enough money but you are not
willing to spend it.
DEMANDIt is the quantities that buyers are willing and
able to buy at alternative prices during a given
period of time.
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DEMAND
Quantity demandedis the amount of a good
that buyers are willing and able to purchase.
Law of Demand
The law ofdemandstates that, other things equal,
the quantity demanded of a good falls when the
price of the good rises.
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The Demand Curve: The Relationshipbetween Price and Quantity Demanded
Demand Schedule
The demandschedule is a table that shows the
relationship between the price of the good and the
quantity demanded.
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Market Demand versus Individual Demand
Market demand refers to the sum of the
quantities demanded by all buyers at each
price. Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.
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Catherines Demand Schedule
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The Demand Curve: The Relationshipbetween Price and Quantity Demanded
Demand Curve
The demand curve is a graphic statement or
presentation of quantities of a good which will be
demanded by the consumer at various possibleprices at a given point of time.
The demand curve shows how price affects quantity
demanded, other things being equal.
Demand curve slopes downward to the right. i.e. a
demand curve has a negative slope.
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Figure 1 Catherines Demand Schedule and DemandCurve
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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 decreasein price ...
2. ... increases quantityof cones demanded.
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Determinants of Demand
Price of the commodity
Price of related goods
Income of the consumer Tastes and preferences of the consumer
Expectations of the consumer regarding the
change in the price in the future.D = f (Px, Pr , Y , T , E)
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Determinants of DemandPRICES OF RELATED GOODS
SUBSTITUE GOODS
Goods that can be substituted for each other.
e.g. Tea and CoffeeDemand curve is positively sloped
COMPLIMENTARY GOODS
Goods which complete the demand for eachother. e.g. Car and Petrol
Demand curve is negatively sloped.
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DETERMINANTS OF DEMANDINCOME OF THE CONSUMER
NORMAL GOODS
Goods the demand for which tends to increase
following an increase consumers income and
vice versa
INFERIOR GOODS
Goods the demand for which tends to decrease
following an increase consumers income andvice versa
NECESSARIES OF LIFE
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DETERMINANTS OF DEMANDTASTE AND PREFERENCES
Fashion , custom and habit
These are influenced by advertisement, change
in fashion, climate , new inventions
Other things being equal, demand for those goods
increases fro which consumer develop taste and
preferences.
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DETERMINANTS OF DEMANDEXPECTATIONS
Expectation about Product prices, Product
availability and future income
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Why does Demand curve slopedownwards?
Law of Diminishing MarginalUtility
Marginal Utility is addition to total utility made
by consuming one more unit of that one
commodity.
A consumer will buy an additional unit of a
commodity only if he has to pay less price for it
compared to the previous unit.
A consumer will stop his purchase at the point
where his MU = Price
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Why does Demand curve slopedownwards?
Law of Diminishing Marginal Utility
Income effect Substitution effect
Different uses
Size of the consumer group
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Exceptions to the Law of Demand
Articles of distinction or Veblen goods
Inferior goods (giffen goods)
Giffen goods are those goods for which the lawof demand does not hold good.
Ignorance
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TYPES OF DEMAND
JOINT OR COMPLIMENTARY DEMANDWhen to satisfy one want two or more than two goodsare demanded together.
COMPOSITEDEMAND
Demand for one commodity in order to satisfy two ormore wants.
COMPETITIVEDEMANDAn increased demand for one means reduced demandfor the other.(demand for substitutes)
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MOVEMENT OF DEMAND CURVE
Change in price alone
Change in quantity demanded
Movement alongDemand curve
EXTENSION OF DEMAND
CONTRACTION OF DEMAND
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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
Changes in Quantity Demanded
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SHIFT OF THE DEMAND CURVE
Consumer income
Prices of related goods
Tastes
Expectations Number of buyers
Change in demand
Shift in D curve
Increase in demand
Decrease in demand
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INCREASE IN DEMAND/RIGHTWARD SHIFT
Rise in demand in response to change in
determinants of demand other than the price of
the product.
Demand may increase in 2 ways
Same price more demand
More price same demand
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INCREASE IN DEMAND/RIGHTWARD SHIFT
Income increases Demand for normal goods
The price of a complimentary good decreases
The price of substitute good increases A positive change in tastes and preferences
The number of buyers increases
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DECREASE IN DEMAND/DOWNWARD SHIFT
Fall in demand in response to change in
determinants of demand other than the price of
the commodity
Demand may decrease in 2 ways:
Same price less purchase
Less price same purchase
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DECREASE IN DEMANDDOWNWARD SHIFT
Fall in income decreases demand for normal
goods
The price of complementary good increases
The price of substitute goods Decreases.
The number of buyers decreases.
A negative change in tastes and preferences
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Figure 3 Shifts in the Demand Curve
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream Cones
Increasein demand
Decreasein demand
Demand curve,D3
Demandcurve, D1
Demandcurve, D2
0
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Shifts in the Demand Curve
Consumer Income
As income increases the demand for a normalgood
will increase.
As income increases the demand for an inferiorgoodwill decrease.
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$3.00
2.50
2.00
1.50
1.00
0.50
21
3 45 6 7 8 9 1
01
211
Price of Ice-Cream Cone
Quantity ofIce-Cream
Cones0
Increasein demand
An increasein income...
D1
D2
Consumer IncomeNormal Good
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$3.00
2.50
2.00
1.50
1.00
0.50
21
3 45 6 7 8 9 1
01
211
Price of Ice-
Cream Cone
Quantity of
Ice-Cream
Cones0
Decrease
in demand
An increase
in income...
D1
D2
Consumer IncomeInferior Good
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Shifts in the Demand Curve
Prices of Related Goods
When a fall in the price of one good reduces the
demand for another good, the two goods are called
substitutes. When a fall in the price of one good increases the
demand for another good, the two goods are called
complements.
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Table 1 Variables That Influence Buyers
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SUPPLY
Quantitysuppliedis the amount of a good that
sellers are willing and able to sell.
Law of Supply
The law ofsupply states that, other things equal, the
quantity supplied of a good rises when the price of
the good rises.
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The Supply Curve: The Relationship betweenPrice and Quantity Supplied
Supply Schedule
Thesupplyschedule is a table that shows the
relationship 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
Thesupply curve is the graph of the relationship
between the price of a good and the quantity
supplied.
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Figure 5 Bens Supply Schedule and Supply Curve
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-CreamCone
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. Anincreasein 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
summed horizontally to obtain the market
supply curve.
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Shifts in the Supply Curve
Input prices
Technology
Number of sellers( producers)
Prices of other products
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Shifts in the Supply Curve
Change in Quantity Supplied
Movement along the supply curve.
Caused by a change in anything that alters the
quantity supplied at each price.
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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 cream
cones results in amovement alongthe supply curve.
Change in Quantity Supplied
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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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Figure 7 Shifts in the Supply Curve
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-CreamCone
Quantity of
Ice-Cream Cones
0
Increasein supply
Decreasein supply
Supply curve, S3
curve,Supply
S1Supply
curve, S2
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Table 2 Variables That Influence Sellers
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SUPPLY AND DEMANDTOGETHER
Equilibrium refers to a situation in which the
price has reached the level where quantity
supplied equals quantity demanded.
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SUPPLY AND DEMANDTOGETHER
Equilibrium Price
The price that balances quantity supplied and
quantity demanded.
On a graph, it is the price at which the supply anddemand curves intersect.
Equilibrium Quantity
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 DEMANDTOGETHER
Demand Schedule Supply Schedule
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Figure 8 The Equilibrium of Supply and Demand
Copyright2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
13
Equilibriumquantity
Equilibrium price Equilibrium
Supply
Demand
$2.00
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Figure 9 Markets Not in Equilibrium
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0
Supply
Demand
(a) Excess Supply
Quantity
demandedQuantity
supplied
Surplus
Quantity of
Ice-Cream
Cones
4
$2.50
10
2.00
7
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Equilibrium
urplus
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.
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Equilibrium
hortage
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.
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Figure 9 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
74
Shortage
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Equilibrium
Law ofsupply anddemand
The claim that the price of any good adjusts to bring
the quantity supplied and the quantity demanded for
that good into balance.
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Three Steps to Analyzing Changes inEquilibrium
Decide whether the event shifts the supply or
demand curve (or both).
Decide whether the curve(s) shift(s) to the left
or to the right.
Use the supply-and-demand diagram to see how
the shift affects equilibrium price and quantity.
Figure 10 How an Increase in Demand Affects the
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Figure 10 How an Increase in Demand Affects theEquilibrium
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-Cream
Cone
0 Quantity ofIce-Cream Cones
Supply
Initialequilibrium
D
D
3. . . . and a higher
quantity sold.
2. . . . resultingin a higher
price . . .
1. Hot weather increasesthe 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 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.
Figure 11 How a Decrease in Supply Affects the
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Figure 11 How a Decrease in Supply Affects theEquilibrium
Copyright2003 Southwestern/Thomson Learning
Price of
Ice-CreamCone
0 Quantity ofIce-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 lower
quantity sold.
2.00
7
$2.50
4
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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
and sellers, each of whom has little or noinfluence on the market 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,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.
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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 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.
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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.
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Summary
In market economies, prices are the signals that
guide economic decisions and thereby allocate
resources.