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P R I N C I P L E S O F

P R I N C I P L E S O F. F O U R T H E D I T I O N. The Market Forces of Supply and Demand. 4. In this chapter, look for the answers to these questions:. What factors affect buyers’ demand for goods? What factors affect sellers’ supply of goods?

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P R I N C I P L E S O F

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  1. P R I N C I P L E S O F FOURTH EDITION The Market Forces of Supply and Demand 4

  2. In this chapter, look for the answers to these questions: • What factors affect buyers’ demand for goods? • What factors affect sellers’ supply of goods? • How do supply and demand determine the price of a good and the quantity sold? • How do changes in the factors that affect demand or supply affect the market price and quantity of a good? • How do markets allocate resources? CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  3. Markets and Competition 0 • A market is a group of buyers and sellers of a particular product. • A competitive market is one with many buyers and sellers, each has a negligible effect on price. • A perfectly competitive market: • all goods exactly the same • buyers & sellers so numerous that no one can affect market price – each is a “price taker” • In this chapter, we assume markets are perfectly competitive. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  4. Demand other things constant (ceteris paribus) Demand: is a willingness and an ability to pay (comes from the behavior of buyers) The demand function: Demand = f{Price, income, the prices of related goods, tastes, etc.} Prices are the tool by which market coordinates individuals’ desires and limits how much people demand. Thus, price mechanism ensures what people demand matches what’s available Example: when goods are scarce, the market reduces the quantity people demand; as their prices go up, people buy fewer goods, vice versa

  5. Cont,… 0 • The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  6. Quantity Demanded Desired quantity It is the amount that consumers wish to purchase, given the price of the product, other prices, their incomes, their taste and everything else that might matter Effective quantity It is not an idle dream but it is the amounts that people are willing to buy, given the price they must pay for the product Quantity Demanded Continuous flow of purchase It must therefore expressed as so much per period of time: 1 million units per day, etc. Source: Lipsey and Courant

  7. The Law of Demand Quantity demanded rises as price falls, other things constant or alternatively: Quantity demanded falls as price rises, other things constant As price changes, people change how much of a particular good they are willing to buy What accounts for the law of demand? Individual’s tendency to substitute other goods for goods whose relative price has gone up An inverse relationship between price and quantity demanded, other things constant

  8. The Demand Schedule 0 • Demand schedule: A table that shows the relationship between the price of a good and the quantity demanded. • Example: Helen’s demand for lattes. • Notice that Helen’s preferences obey the Law of Demand. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  9. Helen’s Demand Schedule & Curve Price of Lattes Quantity of Lattes 0 CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  10. AlasanKurvaPermintaanBerslopeNegatif Konsumencenderungmembagipendapatannyauntukmengkonsumsibermacambarang. Peningkatanhargasalahsatubarang yang dikonsumsinyaberartilebihsedikitbarang lain yang bisadikonsumsiatauhargarelatifbarang yang naiktersebutmenjadilebihmahaldiukurdengan unit baranglainnya. Hal ini yang mendorongkonsumenuntukmengurangijumlah yang dimintaketikaharganaik Hukumutilitas marginal yang semakinmenurun Semakinbanyak unit barang yang dikonsumsi, tambahankepuasan (utilitas) yang diperolehdarimengkonsumsi unit barangterakhirakansemakinmenurun

  11. From Individual Demand to Market Demand

  12. Price Helen’s Qd Ken’s Qd $0.00 16 + 8 = 24 1.00 14 + 7 = 21 2.00 12 + 6 = 18 3.00 10 + 5 = 15 4.00 8 + 4 = 12 5.00 6 + 3 = 9 6.00 4 + 2 = 6 Market Demand versus Individual Demand 0 • The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price. • Suppose Helen and Ken are the only two buyers in the Latte market. (Qd = quantity demanded) Market Qd

  13. The Market Demand Curve for Lattes 0 P Q CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  14. Another Example Demand for DVD

  15. Cont,… Prices of DVD 3.00 2.50 2.00 Terry Market Demand 1.50 Raul 1.00 Alice 0.50 Quantities of DVD 1 2 3 4 5 6 7 8 9 10 11

  16. Changes in quantity demanded Vs. Changes in demand

  17. Change in quantity demanded Price of X A PA B PB Qd Quantity of X QA QB Happens due to price movements, a change in price changes the quantity demanded Graphically, this situation is showed by a movement along a demand curve

  18. Change in demand Price of X A B PA Qd1 Qd2 Quantity of X QA QB Happens due to the change in anything other than price (the ‘constant factors’) Graphically, this situation is showed by a shift in demand (a shift in entire demand curve)

  19. Demand Curve Shifters 0 • The demand curve shows how price affects quantity demanded, other things being equal. • These “other things” are non-price determinants of demand (i.e., things that determine buyers’ demand for a good, other than the good’s price). • Changes in them shift the D curve… CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  20. Demand Curve Shifters: # of buyers 0 • An increase in the number of buyers causesan increase in quantity demanded at each price, which shifts the demand curve to the right. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  21. P Q Demand Curve Shifters: # of buyers 0 Suppose the number of buyers increases. Then, at each price, quantity demanded will increase (by 5 in this example). CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  22. Demand Curve Shifters: income 0 • Demand for a normal good is positively related to income. • An increase in income causes increase in quantity demanded at each price, shifting the D curve to the right. (Demand for an inferior good is negatively related to income. An increase in income shifts D curves for inferior goods to the left.) CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  23. Demand Curve Shifters: prices of related goods 0 • Two goods are substitutes if an increase in the price of one causes an increase in demand for the other. • Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right. • Other examples: Coke and Pepsi, laptops and desktop computers, compact discs and music downloads CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  24. Demand Curve Shifters: prices of related goods 0 • Two goods are complements if an increase in the price of one causes a fall in demand for the other. • Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left. • Other examples: college tuition and textbooks, bagels and cream cheese, eggs and bacon CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  25. Demand Curve Shifters: tastes 0 • Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right. • Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  26. Demand Curve Shifters: expectations 0 • Expectations affect consumers’ buying decisions. • Examples: • If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now. • If the economy turns bad and people worry about their future job security, demand for new autos may fall now. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  27. Demand Curve Shifters: taxes & subsidies • Taxes • Taxes levied on consumers increase the cost of goods to consumers and therefore reduce demand for those goods • Subsidies • Subsidies have the opposite effect • Subsidies reduce the cost of goods to consumers and therefore increase demand for those goods

  28. Demand Curve Shifters: population growth Population growth does not by itself create new demand. The additional people must have purchasing power (that is, earning income) before demand is change If population growth results in an extra employed people, then the following statement is usually true: An increase in population will shift the demand of most products to the right, indicating that more will be bought at each price

  29. Summary: Variables That Affect Demand 0 Variable A change in this variable… Price …causes a movement along the D curve No. of buyers …shifts the D curve Income …shifts the D curve Price ofrelated goods …shifts the D curve Tastes …shifts the D curve Expectations …shifts the D curve CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  30. Cont,… 0 Variable A change in this variable… Taxes …shifts the D curve Subsidies …shifts the D curve Populationgrowth …shifts the Dcurve CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  31. Additional Information on Demand 0 Each individual has his/her owns limitations on how much of goods or services that they can consume.. The limit is perhaps time constraint, the number of his/her fortunes or the work of the law of diminishing marginal utility—an increase in consuming one good/service will eventually decrease utility derived from that consumption Consequently, these facts are depicted on the graph by the intersection of the demand curve with each of the axis – Case and Fair CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  32. Cont.,… 0 The demand curve will intersect with axis if… Axis causes… Price (Y) the limitation on consumer’s income and wealth Quantity (X) the limitation of time and the work of the law of diminishing marginal utility CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  33. P Q Cont.,… 0 CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  34. KurvaPermintaanMemotongSumbu Kurvapermintaanakanmemotongsumbuharga (Y) sebagaiakibatterbatasnyapendapatandankekayaanrumahtangga. Akanadatingkathargatertentu yang maksimalbisadisanggupiolehkonsumen Kurvapermintaanakanmemotongsumbukuantitas (X) sebagaiakibatketerbatasanwaktudanhukumutilitas marginal yang semakinmenurun. Keterbatasanwaktumenyebabkanjumlah yang dimintakonsumenpadasaathargasuatubarangadalahnolterbatas. Padatingkatkonsumsitertentu, tambahanutilitasygdidapatdarimengkonsumsisuatubarangsamadengan nol. Sehinggamengkonsumsilebihbanyakdarititikinitidakmemberikanmanfaatbagikonsumen.

  35. ACTIVE LEARNING 1: Demand curve A. The price of iPods falls B. The price of music downloads falls C. The price of compact discs falls Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why? 34

  36. Price of music down-loads P1 D2 D1 Q2 Q1 Quantity of music downloads ACTIVE LEARNING 1: A. price of iPods falls Music downloads and iPods are complements. A fall in price of iPods shifts the demand curve for music downloads to the right. 35

  37. P2 Q2 ACTIVE LEARNING 1: B. price of music downloads falls Price of music down-loads The D curve does not shift. Move down along curve to a point with lower P, higher Q. P1 D1 Q1 Quantity of music downloads 36

  38. P1 D1 D2 Q1 Q2 ACTIVE LEARNING 1: C. price of CDs falls CDs and music downloads are substitutes. A fall in price of CDs shifts demand for music downloads to the left. Price of music down-loads Quantity of music downloads 37

  39. Supply 0 • Supply comes from the behavior of sellers. • The quantity supplied of any good is the amount that sellers are willing and able to sell. • Law of supply: the claim that the quantity supplied of a good rises when the price of the good rises, other things equal CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  40. The Supply Schedule 0 • Supply schedule: A table that shows the relationship between the price of a good and the quantity supplied. • Example: Starbucks’ supply of lattes. • Notice that Starbucks’ supply schedule obeys the Law of Supply. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  41. Starbucks’ Supply Schedule & Curve 0 P Q CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  42. Price Starbucks Jitters $0.00 0 + 0 = 0 1.00 3 + 2 = 5 2.00 6 + 4 = 10 3.00 9 + 6 = 15 4.00 12 + 8 = 20 5.00 15 + 10 = 25 6.00 18 + 12 = 30 Market Supply versus Individual Supply 0 • The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price. • Suppose Starbucks and Jitters are the only two sellers in this market. (Qs = quantity supplied) Market Qs

  43. P Q The Market Supply Curve 0 CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  44. Supply Curve Shifters 0 • The supply curve shows how price affects quantity supplied, other things being equal. • These “other things” are non-price determinants of supply. • Changes in them shift the S curve… CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  45. Supply Curve Shifters: input prices 0 • Examples of input prices: wages, prices of raw materials. • A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  46. P Q Supply Curve Shifters: input prices 0 Suppose the price of milk falls. At each price, the quantity of Lattes supplied will increase (by 5 in this example). CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  47. Supply Curve Shifters: technology 0 • Technology determines how much inputs are required to produce a unit of output. • A cost-saving technological improvement has same effect as a fall in input prices, shifts the S curve to the right. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  48. Supply Curve Shifters: # of sellers 0 • An increase in the number of sellers increases the quantity supplied at each price, shifts the S curve to the right. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  49. Supply Curve Shifters: expectations 0 • Suppose a firm expects the price of the good it sells to rise in the future. • The firm may reduce supply now, to save some of its inventory to sell later at the higher price. • This would shift the S curve leftward. CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

  50. Summary: Variables That Affect Supply 0 Variable A change in this variable… Price …causes a movement along the S curve Input prices …shifts the S curve Technology …shifts the S curve No. of sellers …shifts the S curve Expectations …shifts the S curve CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND

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