[PRINECON] MODULE 2: The Market Forces of Supply and Demand

Supply and Demand

words that economists use most often. It refers to the behavior of the people as they interact with one another in competitive markets.

Market

a group of buyers and sellers of a particular good or service.

Buyers as group

They determine the demand for the product.

Sellers and group

They determine the supply of the product.

1. Highly Organized

2. Less Organized

Forms of Markets (2)

Competitive Market

Market in which there are many buyers and sellers

Price and Quantity

_____ and _____ are determined by all buyers and sellers as they interact in the marketplace.

Perfectly competitive market

Goods offered for sale are all exactly the same.

Monopoly

The only seller in the market. Sets the price.

Other markets

between perfect competition and monopoly.

Quantity Demanded

Amount of a good that buyers are willing and able to purchase.

Law of Demand

Other things equal, Price of Good Rise=Quantity Demanded Falls (vise versa).

Demand

Relationship between the price of a good and quantity demanded.

Demand Schedule: a Table

Demand Curve: a Graph (Price on Vertical Axis

and Quantity on Horizontal Axis)

Demand _____: a Table

Demand ____: a Graph (Price on Vertical Axis and Quantity on Horizontal Axis)

Individual Demand

An individual’s demand for a product.

Market Demand

Sum of all individual demands for a good or service.

Market Demand Curve

Sum of the individual demand curves horizontally

1. Increase in Demand: Demand Curve Shifts

RIGHT.

2. Decrease in Demand: Demand Curve Shifts LEFT.

Shifts in Demand Curve (2)

Income

Normal Good and Inferior Good

Prices of related goods

Substitutes and Complements

Tastes

Change in Taste=Change in Demand

Number of Buyers

More ________ = Increased Market Demand

Income

Prices of related goods

Tastes

Expectations

Number of Buyers

Variables that can shift the demand curve (5)

Quantity Supplied

Amount of a good that sellers are willing to sell.

Law of Supply

Other things equal. When the price of the good rises, the quantity supplied of the good also rises (vise-versa).

Supply

Relationship between the price of a good and the quantity supplied

Supply Schedule: a Table

Supply Curve: a Graph

Supply _____: a Table

Supply _____: a Graph

Individual Supply

a seller’s individual supply.

Market Supply

Sum of the supplies of all sellers for a good or service.

Market Supply Curve

Sum of individual supply curves horizontally

1. Increase in Supply: Supply Curve Shifts RIGHT.

2. Decrease in Supply: Supply Curve Shifts LEFT.

Shifts in Supply Curve (2)

o Input Prices

o Technology

o Expectations about Future

o Number of Sellers

Variables that can shift the supply curve (4)

Equilibrium

various forces are in balance. Qs=Qd, Supply and Demand Curves intersect.

Equilibrium Price

Balances Quantity Supplied and Quantity Demanded.

Equilibrium Quantity

Quantity supplied and Quantity Demanded at the Equilibrium Price

Surplus

Quantity Supplied> Quantity Demanded, Excess Supply, Downward Pressure of Price.

Shortage

Quantity Demanded>Quantity Supplied, Excess Demand, Upward Pressure on Price.

Law of Supply and Demand

The Price of any good adjusts to bring Qs and Qd to balance. In most markets, surpluses and shortages are temporary.

1. Decided whether the event shifts the supply or demand curve or 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.

Three Steps for Analyzing Changes in Equilibrium

1. Shift in the Supply Curve

2. Movement along a fixed supply curve

3. Shift in Demand Curve

4. Movement along a fixed demand curve

Shifts vs. Movements along Curves (4)

Supply and Demand Together

Determine the prices of the economy’s many different goods and services

Prices

Signals that guide the allocation of resources. Mechanism for rationing scarce resources. Determine who produces each good and how much is produced