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  • Some markets local, national, some international Wheat market ,stock market
  • Economics 2 last

    1. 1. Demand, Supply,and MarketEquilibriumNTU Sajjad Ahmad Baig
    2. 2. McConnell, Brue,Economics, NineteenthEdition/EighteenNTU Sajjad Ahmad Baig
    3. 3. Demand, Supply,and MarketEquilibriumNTU Sajjad Ahmad Baig
    4. 4. Objectives• Demand and its determinants• Supply and its determinants• Supply, demand, & marketequilibrium• Changes in supply and demand3-4
    5. 5. A Market• Interaction between buyers andsellers• Buyers demand goods• Sellers supply goods•In a market economy, the price of agood is determined by the interactionof demand and supplyMarkets may be• Local• National• International3-5
    6. 6. People commonly think ofconsumer demands as fixedamounts
    7. 7. Demand• Demand is a schedule or a curve thatshows the various amounts of a productthat consumers are willing and able topurchase at each of a series of possibleprices during a specified period.• Demand is simply a statement of abuyer’s plans, or intentions, with respectto the purchase of a product.• Demand shows the quantities of aproduct that will be purchased at variouspossible prices, other things equal .3-7
    8. 8. Demand schedule
    9. 9. Demand curve
    10. 10. Law of Demand• Other things equal, as pricefalls quantity demanded rises• An inverse relationship existsbetween the price of a goodand the quantity demanded in agiven time period,• Explanations:• Common sense• Law of diminishing marginal utility• Income effect and substitutioneffects 3-10
    11. 11. 6543210 10 20 30 40 50 60 70 80Quantity Demanded (bushels per week)Price(perbushel)P Qd$543211020355580PQDThe Demand CurveLO1The Demand Curve3-11
    12. 12. Determinants of Demand• Price is the most importantinfluence on the amount of anyproduct purchased. ButEconomists know that other factorscan and do affect purchases. Thesefactors, called determinants ofdemand , are assumed to beconstant when a demand curve isDrawn3-12
    13. 13. Determinants of Demand• Factors that shift the demandcurve• Tastes• Number of buyers3-13
    14. 14. Determinants of Demand• Income–Normal goods–Inferior goods• Price of related goods–Substitute good–Complementary good–Unrelated goods• Consumer expectations3-14
    15. 15. Demand6543210Quantity Demanded (bushels per week)Price(perbushel)P Qd$543211020355580PQD12 4 6 8 10 12 14 16 18D2D3Change in DemandChange in QuantityDemanded3-15
    16. 16. Change in quantity demanded vs.change in demandChange in quantity demanded Change in demand
    17. 17. Change in demand• Income is sometimes called “demandshifters”• Be sure to understand difference betweena “change in demand” and a “change inquantity demanded”– change in demand --- shift of the function– change in quantity demanded --- move on the function– MPrinciples of Microeconomicsslide17
    18. 18. Market DemandPrinciples of Microeconomicsslide18
    19. 19. Supply• Schedule or curve• Amount producers willingand able to sell at a givenprice in a specific period.3-19
    20. 20. Supply• Schedule or curve• Amount producers are willing andable to sell at a given price• Individual supply• Market supplyLO2 3-20
    21. 21. Supply Schedule• A supply schedule is a tableshowing how the quantity suppliedof some product changes as theprice of that product changes duringa specified period of time, holding allother determinants of quantitysupplied constant.3-21
    22. 22. Supply Curve• A supply curve is a graphicalrepresentation of a supply schedule. Itshows how the quantity supplied of aproduct will change as the price of thatproduct changes during a specifiedperiod of time, holding all otherdeterminants of quantity suppliedconstant3-22
    23. 23. Law of Supply• Other things equal, as pricerises the quantity suppliedrises• Explanations:–Revenue implications–Marginal cost3-23
    24. 24. The Supply CurveLO2543210Price(perbushel)Quantity supplied (bushels per week)S10 20 30 40 50 60 70Supply of CornPriceperBushelQsperWeek$5 604 503 352 201 5PQ3-24
    25. 25. Determinants of Supply• Resource prices• Technology• Taxes and subsidies• Prices of other goods• Producer expectations• Number of sellers3-25
    26. 26. Price of resources• As the price of a resource rises, profitabilitydeclines, leading to a reduction in the quantitysupplied at any price.
    27. 27. Technological improvements• Technological improvements (and any changes that raisethe productivity of labor) lower production costs andincrease profitability.
    28. 28. Taxes & Subsidies• Businesses treat most taxes as costs• Subsidies are “taxes in reverse.
    29. 29. Prices of other goods• Firms produce and sell more than onecommodity.• Firms respond to the relative profitability of thedifferent items that they sell.• The supply decision for a particular good isaffected not only by the good’s own price butalso by the prices of other goods and servicesthe firm may produce.
    30. 30. Producer Expectations and supply• An increase in the expected future priceof a good or service results in a reductionin current supply.• Wheat
    31. 31. Increase in # of sellers
    32. 32. Individual Supply6543210Quantity Supplied (bushels per week)Price(perbushel)P Qs$54321605035205PQS1S2S310 20 30 40 50 60 70Change in QuantitySuppliedChange in Supply3-32
    33. 33. Change in supply vs. change inquantity suppliedChange in supply Change in quantity supplied
    34. 34. Market Equilibrium• Equilibrium price and quantity• Surplus and shortage• Rationing function of price3-34
    35. 35. Equilibrium1. a state of rest or balance due to the equal action ofopposing forces. 2. equal balance between any powers,influences, [Webster’s Encyclopedic Unabridged Dictionary of the EnglishLanguage]•In a market an Equilibrium is said to exist when theforces of supply [sellers] and demand [buyers] are in balance:the actions of sellers and buyers are coordinated. Thequantity supplied equals the quantity demanded!slide35
    36. 36. Market Equilibrium• Equilibrium occurs where the demandcurve and supply curve intersect• Surplus and shortage• Rationing functions of prices• The ability of the competitive forces ofdemand and supply to establish a priceat which selling and buying decisionsare consistentLO3 3-36
    37. 37. Market EquilibriumLO36543210 2 4 6 8 10 12 14 16 18Bushels of Corn (thousands per week)Price(perbushel)P Qd$543212,0004,0007,00011,00016,000P Qs$5432112,00010,0007,0004,0001,00073DS6,000 BushelSurplus7,000 BushelShortage3-37
    38. 38. `Changes in Demand and EquilibriumLO40PD4D3`Changes in Demand and EquilibriumLO40PD1D2SIncrease in demandD increase:P↑, Q↑D decrease:P↓, Q↓Decrease in demandS3-38
    39. 39. `Changes in Demand and EquilibriumLO40PDS4`Changes in Supply and EquilibriumLO4S30PDS2S1Increase in supplyS increase:P↓, Q↑S decrease:P↑, Q↓Decrease in supply3-39
    40. 40. Government-Set Prices• Price Ceilings•Set below equilibrium price•Rationing problem•Black markets• Example: Rent controlLO5 3-40
    41. 41. Government-Set PricesLO5SPQDP0PCQ0ShortageQdQsCeiling$3.503.003-41
    42. 42. Government-Set PricesLO5SPQDP0PfQ0SurplusQsQdFloor2.00$3.003-42
    43. 43. Market Equilibrium• Supply increase;Demand decrease• Supply decrease;Demand increase• Supply increase;Demand increase• Supply decrease;Demand decreasePrice Quantity????3-43
    44. 44. Government-Set Prices• Price ceilings• Maximum Legal Price• gasoline• Rent controls• Price floors on wheat• Minimum Price Fixed ByGovt3-44