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Competitive markets demand and supply

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IB Economics Demand and Supply

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Competitive markets demand and supply

  1. 1. Suresh Madhavan AKAH
  2. 2.   The term market means any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange. Suresh Madhavan AKAH Market
  3. 3.  Markets Product market(goods and services bought and sold) Factor market(factors of production bought and sold) Suresh Madhavan AKAH Types of markets
  4. 4.   The competitive market is the market for a good with large number of buyers and sellers, where the single seller has very little or no market power. Suresh Madhavan AKAH Competitive markets
  5. 5.   Demand is concerned with the behaviour of buyers. Demand Suresh Madhavan AKAH
  6. 6.   The demand is the quantity of a good or service that consumers are willing and able to buy at a given price during a specific time period ceteris paribus. Meaning of demand Suresh Madhavan AKAH
  7. 7.   Willing ……want to buy.  Able….Afford to buy. Willingness and ability Suresh Madhavan AKAH
  8. 8.   Demand schedule is a table listing the quantity demanded at various prices Demand Schedule Suresh Madhavan AKAH
  9. 9. Price of chocolate bars $ Quantity of chocolate bars demanded per week 5 2 4 4 3 6 2 8 1 10 Demand Schedule Suresh Madhavan AKAH
  10. 10.   Price on vertical axis.  Quantity on horizontal axis.  It shows the relationship between price and quantity demanded. Drawing a demand curve Suresh Madhavan AKAH
  11. 11.   Market demand is the sum of all individual demands for a good.  The market demand is also the sum of consumer’s marginal benefits. Market demand Suresh Madhavan AKAH
  12. 12.  Suresh Madhavan AKAH
  13. 13.  Drawing a market demand Suresh Madhavan AKAH
  14. 14.   The law of demand states that as the price of a good increases, the quantity demanded of the good decreases, ceteris paribus.  As the price of a good decreases, the quantity demanded of the good increases, ceteris paribus.  It shows the negative relationship between the two variables of price and quantity demanded. The law of demand Suresh Madhavan AKAH
  15. 15.  Why the demand curve slopes downward? Income effect Substitution effect Law of diminishing marginal utility Suresh Madhavan AKAH
  16. 16.   Real income= the actual buying power of a consumer.  As the price of a good decreases, the quantity demanded increases because consumers now have more real income to spend. The income effect Suresh Madhavan AKAH
  17. 17.   As the price of a good decreases, consumers switch from other substitute goods to this good because of its low price. Thus the quatity demanded increases. The substitution effect Suresh Madhavan AKAH
  18. 18.   As we consume additional units of something, the satisfaction(utility) we derive for each additional unit(marginal unit) diminishes. The law of diminishing marginal utility Suresh Madhavan AKAH
  19. 19.   A consumer would only buy a second or third unit of good when the price is lower.(reflects the diminishing utility)  At lower prices, more are demanded. Why do they buy more when the price falls? Suresh Madhavan AKAH
  20. 20.   These are variables other than price that can influence demand.  Variables assumed to be unchanging(ceteris paribus)  These factors lead to a shift in demand curve either leftward or rightward.(also known as demand shifters) Non-price determinants of demand Suresh Madhavan AKAH
  21. 21.   Income(the effect is different for normal goods and inferior goods)  Preferences and tastes.  Price of substitute goods.  Price of complementary goods.  Demographic changes.  Future Expectations.  Season. Demand shifters Suresh Madhavan AKAH
  22. 22.   Normal goods are any goods for which demand increases when income increases, and falls when income decreases but price remains constant.  Demand has a direct relationship with income. Normal goods Suresh Madhavan AKAH
  23. 23.   An inferior good is a good that decreases in demand when consumer income rises.  Demand has an inverse relationship with income. Inferior good Suresh Madhavan AKAH
  24. 24.   A product or service that satisfies the need of a consumer that another product or service fulfills. Substitute good Suresh Madhavan AKAH
  25. 25.   A good or service that is used in conjunction with another good or service. Complementary goods Suresh Madhavan AKAH
  26. 26.   Whenever the price of a good changes, ceteris paribus, it leads to a movement along the demand curve.  It is also known as an increase or decrease in quantity demanded. Movement along the demand curve Suresh Madhavan AKAH
  27. 27.   An change in a non-price determinant of demand results in a shift in the entire demand curve.  It is also known as change in demand. Shift of the demand curve Suresh Madhavan AKAH
  28. 28.   The Veblen goods: Thorsten Veblen’s contribution.  Some times the quantity demanded will rise as price rise.  This arise from conspicuous consumption.  (Expenditure on or consumption of luxuries on a lavish scale in an attempt to enhance one's prestige). Suresh Madhavan AKAH Exceptions to the law of demand
  29. 29.  Suresh Madhavan AKAH The demand for a Veblen good.  As the price of a Veblen good rises, people with high incomes begin to buy more of the product because it has a “snob value”. (the value of owning somethi ng that is very expensive or ra re, for the supposed status one gains by owning it)
  30. 30.   Other than the veblen goods, find the examples for other exceptions for the law of demand. Suresh Madhavan AKAH Explore and Explain
  31. 31.   Using diagrams, show the impact of changes on the demand curve for product A  The number of consumers in the market for a product increases.  Consumer income increases and product A is an inferior good.  Consumer income decrease and product A is a normal good.  A new report claims that use of product A has harmful effects on health.  The price of substitute good B falls.  The price of complementary good B increases. Test yourself Suresh Madhavan AKAH
  32. 32.   Supply is the quantity of a good or service that producers are willing and able to offer for sale/supply at a given price during a specific time period, ceteris paribus. Supply Suresh Madhavan AKAH
  33. 33.   The law of supply states that as price increases, more of a good is offered for sale by firms. As price decreases, less of a good is offered for sale. Suresh Madhavan AKAH The law of supply
  34. 34.  Suresh Madhavan AKAH Draw a supply curve
  35. 35.   Market supply is the sum of all individual firm’s supplies for a good. Suresh Madhavan AKAH Market supply
  36. 36.   Higher price is an incentive for the producers to produce more.  Lower price means lower profitability.  This leads to a positive relationship between price and quantity supplied of a good/service. Suresh Madhavan AKAH Why slopes upward?
  37. 37.   A vertical supply curve means, even as price increases, the quantity supplied cannot increase; it remains constant.  This may be due to:  Fixed quantity of the good supplied because there is no time to produce more of it. Ex; Theatre tickets in a theatre.  There is no possibility of ever producing more of it. Ex; Original painting and sculptures of famous artists. Suresh Madhavan AKAH The vertical supply curve
  38. 38.   Any change in price leads to change in quantity supplied, shown as the movement along the supply curve.  Any change in non-price determinants of supply leads to a change in supply, represented by a shift of supply curve. Suresh Madhavan AKAH Movement along the supply curve & shift of the supply curve
  39. 39.  Suresh Madhavan AKAH Change in quantity supplied and change in supply
  40. 40.   Costs of factors of production.  Technology.  Price of related goods: competitive supply.  Price of related goods: joint supply.  Producer expectations.  Taxes(indirect or taxes on profits).  Subsidies.  The number of firms.  ‘Shock’s or unpredictable events. Suresh Madhavan AKAH The non-price determinants of supply(Explore and Explain)
  41. 41.   Using diagrams, show the impact of each of the following on the supply curve of product A.  (a) The number of firms in the industry producing product A decreases.  (b) The price of oil, a key input in the production of product A, increases.  (c) Firms expect that the price of product A will fall in the future.  (d) The government grants a subsidy on each unit of A produced.  (e) The price of product B falls, and B is in competitive supply with A.  (f) The price of product B increases, and B is in joint supply with A.  (g) A new technology is adopted by firms in the industry producing A. Suresh Madhavan AKAH Test your understanding
  42. 42.  Suresh Madhavan AKAH Market Equilibrium  Equilibrium: a state in which opposing forces or influences are balanced.  When the market is in equilibrium, quantity demanded equals quantity supplied and there is no tendency for the price to change.
  43. 43.  AT THE ORIGINAL PRICE LEVEL THERE IS….. A NEW TECHNOLOGICAL DEVELOPMENT LEADING TO LOWER PRODUCTION COSTS? EXCESS DEMAND A EXCESS SUPPLY B
  44. 44.  AT THE ORIGINAL PRICE LEVEL THERE IS….. A RISE IN WAGE RATES IN CHINA (WHERE MOST PRODUCTS ARE MADE)? EXCESS DEMAND A EXCESS SUPPLY B
  45. 45.   If a quantity demanded of a good is a smaller than quantity supplied, the difference between the two is called a surplus (excess supply).  If quantity demanded of a good is larger than quantity supplied, the difference is shortage (excess demand). Suresh Madhavan AKAH Surplus and Shortage(excess supply and excess demand)
  46. 46.  Suresh Madhavan AKAH Market equilibrium
  47. 47.  Suresh Madhavan AKAH Market equilibrium
  48. 48.  equilibrium  where the supply and demand curves meet  equilibrium price: P where QD = QS  equilibrium quantity: Q where QD = QS
  49. 49.  0 20 40 60 80 100 0 100 200 300 400 500 600 700 800 Quantity (tonnes: 000s) E D C B Aa b c d e Supply Demand Price(penceperkg) SHORTAGE (300 000) Shortage
  50. 50.  0 20 40 60 80 100 0 100 200 300 400 500 600 700 800 Quantity (tonnes: 000s) E C B Aa b c e Supply Demand Price(penceperkg) D dSURPLUS (330 000) Surplus
  51. 51.  The Market Price (£) Quantity Bought and Sold (000s) S D £5 600 D1 300 Surplus £3 450 A shift in the demand curve to the left will reduce the demand to 300 from 600 at a price of £5. Suppliers do not have the information or time to adjust supply immediately and still offer 600 for sale at £5. This results in a market surplus (S > D) In an attempt to get rid of surplus stock, producers will accept lower prices. Lower prices in turn attract some consumers to buy. The process continues until the surplus disappears and equilibrium is once again reached.
  52. 52. The Market Price (£) Quantity Bought and Sold (000s) S D £5 600 S1 100 Shortage £8 350 A shift in the supply curve to the left would lead to less products being available for sale at every price. Suppliers would only be able to offer 100 units for sale at a price of £5 but consumers still desire to purchase 600. This creates a market shortage. (S < D) The shortage in the market would drive up prices as some consumers are prepared to pay more. The price will continue to rise until the shortage has been competed away and a new equilibrium position has been reached.
  53. 53.  Suresh Madhavan AKAH Change in demand and new equilibrium
  54. 54.  Suresh Madhavan AKAH Change in supply and new equilibrium
  55. 55.   Assuming a competitive market, use demand and supply diagrams to show in each of the following cases how the change in demand or supply for product A creates a disequilibrium consisting of excess demand or excess supply, and how the change in price eliminates the disequilibrium.  (a) Consumer income increases (A is a normal good).  (b) Consumer income falls (A is an inferior good).  (c) There is an increase in labour costs.  (d) The price of substitute good B falls.  (e) The number of fi rms in the industry producing product A increases.  (f) A successful advertising campaign emphasises the health benefi ts of product A. Suresh Madhavan AKAH Test your understanding
  56. 56.   Economics Course companion  Economics for IB Diploma  Economics Pearson Baccalaureate  Ib economics blogspot.com  Investopedia.com  ibguides.com Suresh Madhavan AKAH References
  57. 57.  Suresh Madhavan AKAH Thank you

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