Demand_and_supply_2022 (8)

Real-World Issue

• How do consumers and producers make choices in trying to meet their economic objectives?

Competitive Markets: Demand and Supply

• Understanding competitive markets: All transactions of a given good or service occur within a competitive market.

  • Product Market: Focuses on consumer goods and services.

  • Factor Market: Involves factors of production, e.g., the labor market.

Key Learning Topics

• Demand and its Determinants: Understand the principles governing demand.

• Law of Demand: Analysis of the relationship between price and quantity demanded.

• Assumptions Underlying the Law of Demand: Higher learning levels focus on underlying assumptions.

• Supply and its Determinants: Examine factors affecting supply in the market.

• Law of Supply: Exploration of how price influences supply.

• Assumptions Underlying the Law of Supply: Advanced learning delves into foundational assumptions.

Alfred Marshall

• Notable Work: Economics of Industry (1879), which contributed to foundational economic theories regarding supply and demand.

Demand Characteristics

• Price vs. Quantity Demanded:

  • Demonstrated through graphs showing quantities at varying price points, such as cappuccino demand.

  • Law of Demand: As price rises, quantity demanded falls; as price falls, quantity demanded rises (ceteris paribus).

Determinants of Demand

• Key Determinants:

  • Price: Significant influence on demand.

  • Income: Higher income level generally increases demand.

  • Population Size: More consumers lead to higher demand.

  • Preferences: Changes in consumer preferences can shift demand.

  • Expectations: Anticipations about future prices can affect current demand.

  • Random Factors: Unexpected variables that can modify demand levels.

Law of Demand Explained

• Price decreases lead to increased demand and vice versa (ceteris paribus).

• Illustrated in graphical representation of cappuccino pricing.

Demand Shifts

• Changes in determinants can shift demand curves (D1, D2, D3).

Individual and Market Demand

• Cappuccino Demand: Analyzed through individual contributions (local residents, tourists) leading to total market demand.

Thorsten Veblen

• Influential Work: The Theory of the Leisure Class (1899), introducing concepts relevant to consumer behavior regarding luxury goods.

Veblen Paradox

• Concept Overview: Consumers may prefer purchasing expensive luxury goods as a way to signify status rather than for their intrinsic utility.

Cash Outflows: Economic Effects

• Key Effects:

  1. Income Effect: Price changes affecting consumers' purchasing power.

  2. Substitution Effect: Change in relative attractiveness of goods affecting consumer choices.

  3. Law of Diminishing Marginal Utility: Additional units consumed provide less satisfaction than the initial units.

Income Effect Detailed

• Price decreases lead to an increase in real income, motivating more purchases of the product.

Substitution Effect Detailed

• A decrease in price increases attractiveness compared to other unchanged goods, leading to higher purchasing rates of the discounted product.

Law of Diminishing Marginal Utility Explained

• As consumption of a product increases, the additional satisfaction derived from each subsequent unit decreases, influencing willingness to pay.

Supply Characteristics

• Price vs. Quantity Supplied: Relationship between price and quantity supplied of goods (like bottles of wine).

• Law of Supply: Quantity supplied increases as price rises and decreases as price falls (ceteris paribus).

Determinants of Supply

• Key Determinants:

  • International Trade: External market influences on supply.

  • Costs of Production: Input costs directly affect supply capacity.

  • Number of Firms: More firms generally increase supply.

  • Technology Factors: Technological advancements can improve supply efficiency.

  • Expectations: Producers' anticipations can influence current supply levels.

Law of Supply Explained

• Higher prices result in increased quantities supplied; lower prices result in decreased quantities supplied (ceteris paribus).

Supply Shifts

• Different price levels (S2, S3) demonstrate how supply shifts can occur due to various economic factors.

Individual and Market Supply Analysis

• Evaluating supply responses from individual vineyards to total wine supply in the market.

Assumptions Underlying the Law of Supply

1. Law of Diminishing Marginal Returns: Variable factors yield decreased additional output after a certain point.

2. Increasing Marginal Costs: The cost to produce additional units typically rises with output quantity.