Demand and Supply - Chapter 2 Economics (copy)

Economic Problem

exists to deal with the economic problem

Market

When buyers and sellers exchange goods, services or resources

• buyers (demand)

• sellers (supply)

• something to exchange (good, service or resource)

Product Market

Deals with the buying and selling of goods and services

Factor Markets

Deals in the buying and selling of factors of production or resources such as the labour market, capital market, natural resource market

Competitive Market

• large number of buyers and sellers

• firms are price takers - must take the price established by markets

• very similar products

• easy entry into the market

price is determined by the interaction between buyers and sellers

Imperfect Market

Non-competitive market

• small number of firms

• product differentiation

• firms are price setters -have market power

• entry into the market is restricted

Demand

the buying intentions of consumers, the quantity consumers are willing to purchase at a particular time and price

Law of Demand

as the price of a good rises, people buy less of it. There are no exceptions, it applies to all goods and services.

• income effect

• substitution effect

Income Effect

when the price of a good rises, consumers are not willing to buy as much of the good because their real income or purchasing power has decrease

Substitution Effect

when the price of one good rises, other goods become more attractive to buyers because they are relatively cheaper

Demand Schedule/curve

a table showing the relationship between the price and quantity of a particular product demanded

• has a negative slope, as the price rises quantity demanded falls. inverse/negative relationship

• downward sloping from left to right

Non-price Factors Affecting Demand

• levels of disposable income

  • normal good - good in which demand increases as income rises

  • inferior good - a goods in which demand increases as income falls

• price of related foods

  • substitues

    • goods that satisfy the same goods

  • complements

    • consumed with other goods

• tastes and preferences

• expectations of consumers

• demographic factors (size and age, nursing homes vs. schools)

Changes in Demand

change in price - movement along the curve

• change in quantity demanded

• increase/expansion ←

• decrease/contraction →

change in non-price factors - shift of the entire curve

• change in demand

• increase - shift to the right →

• decrease - shift to the left ←

Supply

the amount of a good or service that producers are willing and able to sell at a particular price and time

Law of Supply

As the price of a good or service rises the wuantity supplied will also rise

• rational self-interest: producers would prefer to sell their output at a higher price than lower price due to profit motive

  • as you produce more costs and input is required so higher price is needed

Non-price Factors Affecting Supply

• costs of production

• technology improvement

• price of other goods

  • producers can shift resources from one good to another to respond to changes in price

• number of sellers

• expectation of future prices

  • decrease supply now if selling price increases later

• supply distribution

Changes in Supply

change in price - movement along the curve

• change in quantity supplied

• increase in price → expansion

• decrease in price ← contraction

change in non-price factors - shift

• change in supply

• increase in supply →

• decrease in supply ←

Market Equilibrium

• when demand equals supply (curves intersects)

• price that clears the market

• balances buying intentions of consumers with selling intentions of producers

Surplus

Excess supply

• supply>quantity

Shortage

Excess Demand

• supply<quantity

Equilibrium

a state of balance or no tendency to change

Simultaneous Shifts

Increase in demand and supply - quantity supplied increase P stays the same

Increase in demand and increase in supply - P rises quantity stays the same

price makers

firms with market power can set their own price

quantity demanded

the quantity of a good/service that consumers and willing and able to purchase at a particular price and a particular time

supply curve

shows the quantity supplied of a good producers are willing to sell at various prices,

• illustrate the law of supply price and quantity supplied are positively related

Quantity increase, Price increase =

increase in demand and no change in supply

Quantity decrease, Price decrease =

decrease in demand and no change in supply

Quantity increase, Price decrease =

Increase in supply and no change in demand

Quantity decrease, Price increase =

Decrease in supply and no change in demand

Quantity increase, Price indeterminate =

Increase in demand and increase in supply

Quantity indeterminate, Price increase =

Increase in demand and decrease in supply

Quantity indeterminate, Price decrease =

Decrease in demand and increase in supply

Quantity decrease, Price indeterminate =

decrease in demand and decrease in supply