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SUPPLY & DEMAND

SUPPLY & DEMAND. Chapter 3. Examining a Market. The market for any good or service consists of all buyers and sellers of that good. As economists, typically represent a basic market in the form of supply and demand. Assumptions.

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SUPPLY & DEMAND

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  1. SUPPLY & DEMAND Chapter 3

  2. Examining a Market The marketfor any good or service consists of all buyers and sellers of that good. As economists, typically represent a basic market in the form of supply and demand.

  3. Assumptions. • The model of Demand and Supply assumes that we are analyzing a perfectly competitive market. • Perfectly Competitive Market. A market that meets the conditions of • Many buyers and sellers • All firms sell identical products and • No barriers to new firms entering the market.

  4. Demand Demand Schedule — a table showing the total quantity of a goof(or service) that buyers wish to buy at each price Demand curve—a graph showing the total quantity of a good (or service) that buyers wish to buy at each price.

  5. Quantity demanded — The amount of a good or service that a consumer is willing and able to purchase at a given price. • Market demand — The demand by all the consumers of a given good or service

  6. The Law of Demand. • States that “all else equal” (ceteris paribus), when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

  7. The ceteris paribus Condition • Ceteris paribus (“all else equal”) condition. Ceteris paribus is the Latin word for all else equal. It is the requirement that when analyzing the relationship between two variables- such as price and qty demanded – other variables be held constant.

  8. Why is the demand curve downward sloping?

  9. A demand curve is downward sloping from left to right because of the inverse relationship b/w price and quantity demanded. This is why consumers consume more of a commodity at lower price.Other reasons include the income and Substitution effects.

  10. A Change in Demand Vs a Change in Quantity Demanded. • A change in quantity demanded is a movement along the demand curve that occurs in response to a change in the price of the product in question ONLY. • A change in demand is a shift of the entire demand curve.

  11. A shift occurs if there is a change in one of the shifter variables, other than the price of the product, that affects the willingness of consumers to buy the product.

  12. Shifts in Demand Curves: 1. Change in the price of a complement. 2. Change in the price of a substitute. 3. Change in consumer income. 4. Change in preferences of demanders of the good. 5. Change in the population of potential buyers. 6. An expectation of future prices.

  13. 1. Change in the Price of a Complement Complements—Goods and services that are used together. Eg. Cars and gas, coffee and sugar, shoe and socks. • two goods are complementsin consumption if an increase in the price of one causes a leftward (inward) shift in the demand curve for the other.

  14. Coffee and Sugar P of Coffee

  15. Coffee Market

  16. Sugar Market

  17. 2. Change in the Price of a Substitute Substitutes— Goods and services that can be used for the same purpose. Eg. Coke and Pepsi,.. • two goods are substitutes in consumption if an increase in the price of one causes a rightward (outward) shift in the demand curve for the other.

  18. Coke and Pepsi P of Coke

  19. Coke Market

  20. Pepsi Market

  21. 3. Change in Consumer Income Normal good—a normalgoodis a good for which the demand increases as income rises and decreases as income falls. For a normal good, the demand curve shifts rightward (outward) when the incomes’ of buyers increase.

  22. Income - Normal Good

  23. Inferior good—an inferiorgoodis a good for which the demand increases as income falls and decreases as income rises. For an inferior good, the demand curve shifts leftward (inward) when the incomes’ of buyers increase.

  24. Income - Inferior Good

  25. 4. Changes in the Preferences of Demanders for the Good If preferences shift away from a good, the demand curve for the good will shift downward.

  26. 5. Change in the Population of Potential Buyers. Increases in population generally shift outward the demand curves for most goods.

  27. Population

  28. 6. An Expectation of Higher Future Prices. Higher expected prices will shift outward the demand curve for a good.

  29. Expected Price

  30. Supply Supply curve—a graph showing the total quantity of a good (or service) that sellers wish to sell at each price. Why is the supply curve upward sloping?

  31. This shape of the supply curve reflects the reality that the number of firms willing to supply that commodity increases as the market price increases.

  32. The only thing we allow to change along a given supply curve is the price of the good itself. If anything else changes, the entire supply curve shifts.

  33. The law of Supply • It states that, holding all else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

  34. Quantity Supplied: The amount of a good or service that a firm is willing and able to supply at a given price.

  35. A change in quantity suppliedis a movement along the supply curve that occurs in response to a change in price.

  36. A change in supply is a shift of the entire supply curve. A change in supply has taken place if, at the same price, a different quantity is supplied.

  37. Shifts in Supply Curves: 1) Changes in the cost of materials, labor, or other inputs used in the production of the good or service. 2) An improvement in technology that reduces the cost of production of the good or service. 3) A change in the weather (especially for agricultural products). 4) A change in the number of producers (suppliers). 5) An expectation of lower future prices.

  38. 1. Changes in Input Costs Changes in the cost of materials, labor, or other inputs used in the production of the good or service.

  39. Cost of a Production Input

  40. 2. Technology An improvement in technology that reduces the cost of production of the good or service.

  41. Technology

  42. 3. Weather A change in the weather (especially for agricultural products).

  43. Better Weather

  44. 4. Change in the Number of Producers As the number of firms within a given market changes, the available supply of the goods or services produced by those firms will also fluctuate.

  45. Number of Producers

  46. 5. Change in Future Expectations An expectation of future prices will influence the firm’s behavior today regarding available supply of goods

  47. Expected Price

  48. Supply = Demand Market equilibriumoccurs when all buyers and sellers are satisfied with their respective quantities at the market price. At equilibrium, QD=QS.

  49. QD = QS

  50. Excess Supply A situation where QS > QD. Surplus: A situation in which the quantity supplied is greater than the quantity demanded.

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