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Phuong HM Nguyen - The Market Forces of Supply and Demand

1. Market
2. Demand
3. Supply
4. Equilibrium

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Phuong HM Nguyen - The Market Forces of Supply and Demand

  1. 1. Nguyễn Hoàng Mỹ Phương phuong.hm.nguyen@gmail.com The Market Forces of Supply and Demand
  2. 2. Summary 1. Market 2. Demand 3. Supply 4. Equilibrium
  3. 3. 1. Market
  4. 4. Market  A market(place) is a place where buyers and sellers meet and arrange sales. [Place-ness, i.e. how culture, social relation, and history have shaped the specific forms and meanings of economic activity that occur there -- economic anthropology; economic sociology]  A market is an exchange mechanism that allows buyers to trade with sellers.  A market is the collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products.
  5. 5. Forms of Markets  Markets take many forms:  Some markets are highly organized, such as the markets for many agricultural commodities.  More often, markets are less organized, such as the market for ice cream in a particular town
  6. 6. Market Definition  Market definition: Determination of the buyers, sellers, and range of products that should be included in a particular market.  Extent of a market: boundaries of a market, both geographical and in terms of range of products produced and sold within it.  Two reasons of its importance:  Market definition can be important for public policy decisions.  A company must understand who its actual and potential competitors are for the various products that it sells or might sell in the future; must also know the product boundaries and geographical boundaries of its market to set price, determine advertising budgets, and make capital investment decisions.
  7. 7. Market Structure  Market structure: the number of firms in the market, the ease with which firms can enter and leave the market, and the ability of firms to differentiate their products from those of their rivals.  Market power: the ability to affect price, either by a seller or a buyer.  Types of market structures:  Competitive market  Monopoly  Monopolistic competition  Oligopoly
  8. 8. Competitive Market  Competitive market (sometimes called perfectly competitive market): a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.  Characteristics:  There are many buyers and sellers in the market  The goods offered by the various sellers are largely the same  Firms can freely enter or exit the market  We use the term competition to refer to all markets in which no buyer or seller can significantly affect the market price.
  9. 9. Monopoly  Monopoly: a firm that is the sole seller of a product without close substitutes (price maker).  The fundamental cause of monopoly is barriers to entry which have 3 main sources:  Monopoly resources: a key source required for production is owned by a single firm.  Government regulation: the government gives a single firm the exclusive right to produce some good or service.  The production process (natural monopoly): a single firm can produce output at a lower cost than can a larger number of firms.
  10. 10. Monopolistic Competition  Monopolistic competition: a market structure in which many firms sell products that are similar but not identical.  Characteristics:  Many sellers: there are many firms competing for the same group of customers.  Product differentiation: each firm produces a product that is at least slightly different from those of other firms. Thus, rather than being a price taker, each firm faces a downward-sloping demand curve.  Free entry and exit: Firms can enter or exit the market without restriction.
  11. 11. Oligopoly  Oligopoly: a market structure in which only a few sellers offer similar or identical products.  Concentration ratio: the percentage of total output in the market supplied by the four largest firms.  Ex.: In US economy, electric lamp bulbs (75%), breakfast cereal (80%), aircraft manufacturing (81%), cigarettes (98%), etc.
  12. 12. Source: Mankiw, N.G. Principles of Microeconomics, 7th edition. US: Cengage Learning, 2015.
  13. 13. 2. Demand
  14. 14. Demand vs. Quantity Demanded  Demand: the quantities of a good that buyers are willing and able to purchase at each possible price during a given period of time, holding constant the other factors that influence purchases (ceteris paribus).  The quantity demanded is a specific amount of a good that buyers are willing and able to purchase at one price.
  15. 15. Demand Schedule Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded. Price of Ice-Cream Cone Quantity of Cones Demanded $0,00 12 cones 0,50 10 1,00 8 1,50 6 2,00 4 2,50 2 3,00 0
  16. 16. Demand Curve Demand curve: a graph of the relationship between the price of good and the quantity demanded Because a lower price increases the quantity demanded, the demand curve slopes downward.
  17. 17. Market Demand vs. Individual Demand Market demand: the sum of all the individual demands for a particular good or service.
  18. 18. One of the most important things to know about a graph of a demand curve is what is not shown. All relevant economic variables that are not explicitly shown on the demand curve graph – income of customers, price of related goods, tastes, expectations, number of buyers, etc. – are held constant. Thus the demand curve shows how quantity varies with price but not how quantity varies with income of customers, price of related goods, tastes, expectations, number of buyers, or other variables. Determinants of Demand
  19. 19. Law of Demand  Law of demand: other things being equal (ceteris paribus), when the price of good rises, the quantity demanded of a good falls, and when the price falls, the quantity demanded rises. P↑ → QD↓ P↓ → QD↑
  20. 20. Shift in the Demand Curve vs. Movement along the Demand Curve
  21. 21. Shifts in the Demand Curve  Income:  Normal good: a good for which, other things being equal, an increase in income leads to an increase in demand.  Inferior good: a good for which, other things being equal, an increase in income leads to a decrease in demand.  Prices of related goods:  Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other  Complements: two goods for which an increase in the price of one leads to an decrease in the demand for the other
  22. 22. Shifts in the demand curve  Tastes  Expectations: expectations about the future may affect the demand for a good or service today.  Numbers of buyers: if there are more buyers, the quantity demanded in the market will be higher at every price, and market demand will increase.
  23. 23. Shifts in the Demand Curve vs. Movements along the Demand Curve
  24. 24. 3. Supply
  25. 25. Supply vs. Quantity Supplied  Supply: the quantities of a good that sellers are willing and able to supply at each possible price during a given period of time, holding constant the other factors that influence purchases (ceteris paribus).  The quantity supplied is a specific amount of a good that sellers are willing and able to supply at one price.
  26. 26. Supply Schedule Supply schedule: a table that shows the relationship between the price of a good and the quantity supplied. Price of Ice-Cream Cone Quantity of Cones Supplied $0,00 0 cones 0,50 0 1,00 1 1,50 2 2,00 3 2,50 4 3,00 5
  27. 27. Supply Curve  Supply curve: a graph of the relationship between the price of good and the quantity supplied. Because a higher price increases the quantity supplied, the supply curve slopes upward.
  28. 28. Market Supply vs. Individual Supply Market supply is the sum of the supplies of all sellers.
  29. 29. Law of Supply  Law of supply: Other things being equal, when the price of the good rises, the quantity supplied of the good also rises, when the price falls, the quantity supplied falls as well. P↑ → QS↑ P↓ → QS↓
  30. 30. Shifts in the Supply Curve Any change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left.
  31. 31. Shifts in the Supply Curve  Input prices: the supply of a good is negatively related to the price of the inputs used to make the good.  Technology: the advance in technology raised the supply by reducing firms’ costs.  Expectations: expectations about the future may affect the supply for a good or service today.  Numbers of sellers: If there are less suppliers, the supply in the market will fall.
  32. 32. Shifts in the Supply Curve vs. Movements along the Supply Curve
  33. 33. 4. Equilibrium
  34. 34. Equilibrium  Equilibrium: a situation in which the market price has reached the level at which quantity supplied equals quantity demanded.  Equilibrium price (market-clearing price): the price that balances quantity supplied and quantity demanded.  Equilibrium quantity: the quantity supplied and the quantity demanded at the equilibrium price.
  35. 35. P PE = $2,00 0 QE = 7 Q D S Equilibrium Equilibrium price Equilibrium quantity E Equilibrium
  36. 36. Equilibrium At equilibrium:  QD = QS  No surplus (excess supply)  No shortage (excess demand)  No upward or downward pressure on the price. -> What happens when the market price is not equal to the equilibrium price?
  37. 37. P PE o QE Q D SSurplus QD QS P1 • Market price > Equilibrium price • QS > QD (excess supply) • Sellers reduce their prices until QS = QD Surplus (excess supply)
  38. 38. 38 P PE o QE Q D S Shortage QS QD P1 • Market price < Equilibrium price • QS < QD (excess demand) • Sellers raise their prices until QS = QD Shortage (excess demand)
  39. 39. Law of Supply and Demand  Law of supply and demand: the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.
  40. 40. Changes in Equilibrium  Changes in demand (shifts in the demand curve)  Changes in supply (shifts in the supply curve)  Changes in both demand and supply (shifts in both the demand and supply curves)
  41. 41. Analysis of Changes in Equilibrium 1. Decide whether the event shifts the supply or demand curve (or perhaps both). 2. Decide in which direction the curve shifts. 3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity.
  42. 42. Change in Demand P P1 o Q1 Q D1 S Initial equilibrium Q2 P2 D2 New equilibrium Changes in Equilibrium
  43. 43. Change in Supply P P1 o Q1 Q S1 D Initial equilibrium Q2 P2 S2 New equilibrium Changes in Equilibrium
  44. 44. Change in Demand and Supply S2 Q2 P2 New equilibrium D2 P P1 o Q S1 Initial equilibrium Q1 D1 Changes in Equilibrium
  45. 45. 45 Change in Demand and Supply S2 New equilibrium Q2 P2 D2 P P1 o Q1 Q S1 Initial equilibrium D1 Changes in Equilibrium
  46. 46. References  Mankiw N.G. Principles of Microeconomics, 7th edition. US: Cengage Learning, 2015.  Perloff J.M. Microeconomics, 6th edition. Boston: Addison-Wesley, 2012.  Pindyck R.S. and Rubinfeld D.L. Microeconomics, 8th edition. US: Prentice Hall, 2013.  Jain, T.R. and Sandhu A.S. Microeconomics. Delhi: Prince Print Process 2010.  Leshkowich, Ann M. Essential Trade: Vietnamese Women in a Changing Marketplace. Honolulu: University of Hawai’i Press, 2014.

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