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The Market Forces of Supply and Demand

The Market Forces of Supply and Demand. 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. Market Type: A Competitive Market.

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The Market Forces of Supply and Demand

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  1. The Market Forces of Supply and Demand • 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.

  2. Market Type: A Competitive Market • A Competitive Marketis a market: • with many buyers and sellers • that is not controlled by any one person • in which a narrow “range of prices” are established that buyers and sellers act upon

  3. Individual Demand ScheduleCathy’s Demand: Ice Cream Cones

  4. Individual Demand CurveCathy’s Demand: Ice Cream Cones P $ Per Cone $2.50 $2.00 $1.50 Q # Cones Per Day 2 4 6

  5. Determinants of Demand • Product’s Own Price (Px) • Consumer Income (Y) • Prices of Related Goods (Py) • Tastes (T) • Expectations (Pe) • Number of Consumers (POP)

  6. Ceteris Paribus . . . ...implies that all the relevant variables (e.g. determinants of demand) are held constant, except the one(s) being studied at the time.

  7. Change in Quantity Demanded vs. Change in Demand • Change in Quantity DemandedMovement along the demand curve. Caused by a change in the Price of the product. • Change in Demand A shift in the demand curve, either to the left or right. Caused by changes in Non-Price Factors.

  8. The Concept of Supply. . . Quantity Suppliedrefers to the amount (quantity) of a good that sellers are willing and able to make available for sale at alternative prices for a given period. P Q

  9. Individual Supply ScheduleSak’s Store: Ice Cream Cones

  10. Individual Supply CurveSak’s Store: Ice Cream Cones P Price Per Cone $2.50 $2.00 $1.50 2 3 4 Q # Cones Per Day

  11. Market Supply Schedule • Market supply is the sum of all individualsupplies at each possible price. • Assume the ice cream market has twofirms as follows: Price Per ConeSak’s IceMartMarket Supply $0.00 0 + 0 = 0 $0.50 0 + 0 = 0 $1.00 1 + 0 = 1 $1.50 2 + 2 = 4 $2.00 3 + 4 = 7

  12. Market Supply CurveAll Sellers P Price Per Cone $2.00 $1.50 $1.00 1 4 7 Q # Cones Per Day

  13. Determinants of Supply • Product’s Own Price (Px) • Input Prices (Pf) • Technology (Tech) • Expectations (Pe)

  14. Change in Quantity Supplied vs. Change in Supply • Change in Quantity SuppliedMovement along the supply curve. Caused by a change in the Price of the product. • Change in SupplyA shift in the supply curve, either to the left or right. Caused by changes inNon-Price Factors

  15. Supply and Demand Together • Equilibrium Price The price at which the supply and demand curve intersect. Quantity Supplied and Quantity Demanded are equal. • Equilibrium Quantity The quantity at which the supply and demand curve intersect.

  16. Comparative Statics: Analyzing Changes in Equilibrium • Determine if an event shifts supply curve, the demand curve, or both. • Determine if curve(s) shift to left or right. • Determine how the shift affects equilibrium price and quantity. • Example Event: Heat Wave Product: Ice Cream Cones

  17. Heat Wave Will Cause:“Increase in Demand” Price P2 P1 Quantity Q2 Q1

  18. Changes in EquilibriumFour Principles • An Increase in Demand will cause:PeQe • A Decrease in Demand will cause:PeQe • An Increase in Supply will cause:PeQe • A Decrease in Supply will cause:PeQe

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