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Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
Supply and Demand
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Supply and Demand

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  • 1. The Market Forces of Supply and Demand Lecture 4 1
  • 2. • Demand and supply are two words that economists use most often. • These are the forces that make market economies work. • They determine the quantity of each good produced and the price at which it is sold. 2
  • 3. Markets and Competition • What is a Market? – 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. – Buyers determine demand for the product. – Sellers determine supply of the product. 3
  • 4. Markets and Competition Cont… • What is Competition? – A business relation/rivalry in which two parties compete to gain customers. – Economists use the term competitive market to describe a market in which there are many buyers and sellers so that each has an impact on the market price. 4
  • 5. Markets and Competition Cont… • What is Competition? (Cont.) – Economists believe that in order to be perfectly competitive, markets must have the following characteristics: 1. Products offered for sale are the same. 2. There are numerous buyers and sellers so that no single buyer or seller has any influence over the market price. 5
  • 6. Markets and Competition Cont… • What is Competition? (Cont.) – Not all goods and services are sold in perfectly competitive markets. – Some markets have only one seller, and this seller sets the price. – This situation refers to monopoly. 6
  • 7. Demand • Quantity demanded is the amount of the good that buyers are willing and able to purchase. • Many things determine the quantity demanded, but one determinant plays a central role ---- the price of the good. • Quantity demanded falls as the price rises and rises as the price falls, we say that these two are negatively related. 7
  • 8. Demand Cont… • This relationship is true in most cases, therefore, economists term it as the law of demand. • Law of Demand states that when the price of a good rises, the quantity demanded falls and vice versa. 8
  • 9. The Demand Curve: Relationship between Price and Quantity Demanded • Demand Schedule: – It is a table that shows the relationship between the price of the good and the quantity demanded. 9
  • 10. Demand Schedule for Ice Cream 10
  • 11. The Demand Curve: Relationship between Price and Quantity Demanded (Cont.) • Demand Curve: – It is a graph of the relationship between the price of a good and the quantity demanded. 11
  • 12. Demand Schedule and Demand Curve Price of Ice-Cream $3.00 2.50 1. A decrease 2.00 in price ... 1.50 1.00 0.50 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream 2. ... increases quantity of cones demanded. 12
  • 13. The Demand Curve: Relationship between Price and Quantity Demanded (Cont.) • Market Demand: – To analyze how markets work, we need to determine the market demand. – Market demand is the sum of all the individual demands for a particular good or service. 13
  • 14. Shifts in the Demand Curve • Change in Demand: – A shift in the demand curve, either to the left or right. – Caused by a change that alters the quantity demanded (e.g. increase in tax). 14
  • 15. Shifts in the Demand Curve Price Increase in Demand Decrease in Demand Demand curve, D2 Demand curve, D1 Demand curve, D3 0 Quantity 15
  • 16. Shifts in the Demand Curve • Factors that Cause Shifts in Demand Curve: 1. Consumer Income: • As income increases the demand for a normal good will increase. • As income increases the demand for an inferior good will decrease. 16
  • 17. Shifts in the Demand Curve Cont… • Factors that Cause Shifts in Demand Curve (Cont.): 2. 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 (e.g. cars and fuel). 17
  • 18. Shifts in the Demand Curve Cont… • Factors that Cause Shifts in Demand Curve (Cont.): 3. Tastes. 4. Expectations: • If the prices are expected to fall within a few days. • Expect an increase in salary. 5. Number of Buyers: • Increased number of buyers result in increased demand. 18
  • 19. Supply • Quantity supplied is the amount of a good that sellers are willing and able to sell. • Like demand, many things determine the quantity supplied, but in this also price plays the central role. • Quantity supplied rises as the price rises and falls as the price falls, we say that these two are positively related. 19
  • 20. Supply Cont… • This relationship price and quantity supplied is called the law of supply. • Law of Supply states that when the price of a good rises, the quantity supplied also rises and vice versa. 20
  • 21. The Supply Curve: Relationship between Price and Quantity Supplied • Supply Schedule: – It is a table that shows the relationship between the price of the good and the quantity supplied. 21
  • 22. Supply Schedule 22
  • 23. The Supply Curve: Relationship between Price and Quantity Supplied (Cont.) • Supply Curve: – It is the graph of the relationship between the price of a good and the quantity supplied. 23
  • 24. Supply Schedule and Supply Curve Price $3.00 2.50 1. An increase in price ... 2.00 1.50 1.00 0.50 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity 2. ... increases quantity supplied. 24
  • 25. The Supply Curve: Relationship between Price and Quantity Supplied (Cont.) • Market Supply: – Market supply refers to the sum of the supplies of all sellers. 25
  • 26. Shifts in the Supply Curve • Change in Quantity Supplied: – A shift in the supply curve, either to the left or right. – Caused by a change that alters the quantity supplied. 26
  • 27. Shifts in the Supply Curve Price Supply curve, S3 Supply curve, S1 Supply Decrease curve, S2 in supply Increase in supply 0 Quantity 27
  • 28. Shifts in the Supply Curve • Factors that Cause Shifts in Supply Curve: 1. Input Prices: • When the price of inputs rises, producing that good becomes less profitable, thus, firms reduce supply. 2. Technology: • Use of modern technology increases supply. 28
  • 29. Shifts in the Supply Curve Cont… • Factors that Cause Shifts in Supply Curve (Cont.): 3. Number of Sellers: • When the number of sellers increases, supply also increases. 29
  • 30. Supply And Demand Together: Equilibrium • There is one point at which supply and demand curves intersect. • This point is called the market’s equilibrium. • The price at this intersection is called the equilibrium price. • The quantity at this point is called the equilibrium quantity. 30
  • 31. Supply And Demand Together: Equilibrium (Cont.) • At the equilibrium price, the quantity demanded exactly balances the quantity supplied. • Equilibrium price is also called market-clearing price because at this price, everyone in the market is satisfied: – Buyers have bought all they wanted to buy. – Sellers have sold all they wanted to sell. 31
  • 32. Demand Schedule Supply Schedule At $2.00, the quantity demanded is equal to the quantity supplied! 32
  • 33. Equilibrium of Supply and Demand Price Supply Equilibrium price Equilibrium $2.00 Equilibrium Demand quantity 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity 33

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