Kinh tế học - Chapter 4: The market forces of supply and demand

The Market Forces of Supply and DemandChapter 4Markets A market is 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.And Economics, especially Microeconomics is about how supply and demand interact in markets. Market Types or Structures Competitive MarketsProducts are the same,price takersMonopolyMonopolistic CompetitionOligopolyDemand Curve$3.002.502.001.501.000.50213456789101211Price of Ice-Cream ConeQuantity of Ice-Cream Cones0Why does the Demand Curve Slope Downward?Law of DemandInverse relationship between price and quantity.Law of Diminishing Marginal Utility.Utility is the extra satisfaction that one receives from consuming a product.Marginal means extra.Diminishing means decreasing.Market DemandMarket demand refers to the sum of all individual demands for a particular good or service.Graphically, individual demand curves are summed horizontally to obtain the market demand curve.Ceteris ParibusCeteris paribus is a Latin phrase that means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.”The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded!Two Simple Rules for Movements vs. Shifts Rule OneWhen an independent variable changes and that variable does not appear on the graph, the curve on the graph will shift.Rule TwoWhen an independent variable does appear on the graph, the curve on the graph will not shift, instead a movement along the existing curve will occur.Let’s apply these rules to the following cases of supply and demand!Change in Quantity Demanded versus Change in DemandChange in Quantity DemandedMovement along the demand curve.Caused by a change in the price of the product.Changes in Quantity Demanded0D1Price of Cigarettes per PackNumber of Cigarettes Smoked per DayA tax that raises the price of cigarettes results in a movement along the demand curve.AC202.00$4.0012Change in Quantity Demanded versus Change in DemandChange in DemandA shift in the demand curve, either to the left or right.Caused by a change in a determinant other than the price.Determinants of DemandMarket priceConsumer incomePrices of related goodsTastesExpectationsWhat are some examples?Consumer IncomeNormal Good$3.002.502.001.501.000.50213456789101211Price of Ice-Cream ConeQuantity of Ice-Cream Cones0Increasein demandAn increase in income...D1D2Consumer IncomeInferior Good$3.002.502.001.501.000.50213456789101211Price of Ice-Cream ConeQuantity of Ice-Cream Cones0Decreasein demandAn increase in income...D1D2Prices of Related GoodsSubstitutes & ComplementsWhen 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.Change in Quantity Demanded versus Change in DemandVariables that Affect Quantity DemandedA Change in This Variable . . .PriceRepresents a movementalong the demand curveIncomeShifts the demand curvePrices of relatedgoodsShifts the demand curveTastesShifts the demand curveExpectationsShifts the demand curveNumber ofbuyersShifts the demand curveSupply Curve$3.002.502.001.501.000.50213456789101211Price of Ice-Cream ConeQuantity of Ice-Cream Cones0Law of SupplyThe law of supply states that there is a direct (positive) relationship between price and quantity supplied.SupplyQuantity supplied is the amount of a good that sellers are willing and able to sell. Change in Quantity Supplied1 5Price of Ice-Cream ConeQuantity of Ice-Cream Cones0S 1.00AC$3.00A rise in the price of ice cream cones results in a movement along the supply curve.Market SupplyMarket 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.Determinants of SupplyMarket priceInput pricesTechnologyExpectations Number of producersWhat are some examples?Change in SupplyPrice of Ice-Cream ConeQuantity of Ice-Cream Cones0S1S2S3Increase in SupplyDecrease in SupplyChange in Quantity Supplied versus Change in SupplySupplyDemandPrice of Ice-Cream ConeQuantity of Ice-Cream ConesEquilibrium of Supply and Demand2134567891012110$3.002.502.001.501.000.50EquilibriumPrice of Ice-Cream ConeQuantity of Ice-Cream Cones2134567891012110$3.002.502.001.501.000.50SupplyDemandSurplusExcess SupplyExcess DemandQuantity ofIce-Cream ConesPrice ofIce-CreamCone$2.00012345678910111213SupplyDemand$1.50ShortageThree Steps To Analyzing Changes in EquilibriumDecide 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.Examine how the shift affects equilibrium price and quantity.How an Increase in Demand Affects the EquilibriumPrice ofIce-CreamCone2.0007Quantity ofIce-Cream ConesSupplyInitialequilibriumD11. Hot weather increasesthe demand for ice cream...D22. ...resultingin a higherprice...$2.50103. ...and a higherquantity sold.New equilibriumHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.S2How a Decrease in Supply Affects the EquilibriumPrice ofIce-CreamCone2.00012347891112Quantity ofIce-Cream Cones13DemandInitial equilibriumS1101. An earthquake reducesthe supply of ice cream...Newequilibrium2. ...resultingin a higherprice...$2.503. ...and a lowerquantity sold.