Demand_and_supply_2022 (7)

REAL-WORLD ISSUE

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

• Focus on competitive markets: demand and supply.

KEY LEARNING TOPICS

• Demand and its determinants

  • Law of demand

  • Assumptions underlying the law of demand (Higher Level)

• Supply and its determinants

  • Law of supply

  • Assumptions underlying the law of supply (Higher Level)

ALFRED MARSHALL

• Known for his influential work "Economics of Industry" published in 1879.

COMPETITIVE MARKET

• Definition: All transactions of a given good or service.

• Product Market: Market for consumer goods and services.

• Factor Market: Market for factors of production; e.g., labor market.

DEMAND

• Table of demand:

  • Quantity of cappuccinos demanded at various prices.

    • Price: 3 cups at $30, 4 cups at $20, 5 cups at $10.

DEMAND RELATIONSHIP

• Price ($/cup): The relation between price and quantity of good/service consumers are willing to buy in a specific timeframe, ceteris paribus.

  • Price levels: $5, $3 -> Demand increases as prices fall.

DETERMINANTS OF DEMAND

• Price Determinants:

  • Economic policies.

  • Prices of goods.

• Non-Price Determinants:

  • Income of population,

  • Age and size of population,

  • Preferences and expectations.

LAW OF DEMAND

• Statement: Quantity demanded of a good/service declines as price rises and increases as price falls, ceteris paribus.

• Demand curves illustrated with price and quantity intersections.

DEMAND SHIFTS

• Illustration of shifts in demand curves (D1, D2, D3) due to price changes.

• Visual representation on price vs. quantity of cappuccinos.

INDIVIDUAL AND MARKET DEMAND (CAPPUCCINO)

• Depicts two distinct demand curves for local residents and tourists, merging into total demand.

THORSTEN VEBLEN

• Authored "The Theory of the Leisure Class" (1899).

• Discusses consumer behaviors in luxury goods purchasing.

VEBLEN PARADOX

• Explanation: Higher-priced and high-quality goods are viewed as status symbols, driving higher demand despite cost.

CASH OUTFLOWS: EXAMPLES

• 1. Income Effect

  • Changes in purchasing power with price alterations.

• 2. Substitution Effect

  • Consumer shifts preferences toward lower-priced alternatives.

• 3. Law of Diminishing Marginal Utility

  • Less satisfaction derived from additional units consumed.

INCOME EFFECT (HIGHER LEVEL)

• Explanation: Price decrease leads to increased real income, fostering more purchasing of the product.

SUBSTITUTION EFFECT (HIGHER LEVEL)

• Explanation: Attractive pricing leads to consumers favoring the cheaper product over unchanged alternatives.

LAW OF DIMINISHING MARGINAL UTILITY

• Concept: With increasing consumption, the additional satisfaction per unit declines, leading to lower willingness to pay for more.

SUPPLY

• Table showing supply at various price points for bottles of wine.

  • Price ($/bottle) vs. Quantity supplied.

SUPPLY RELATION

• Represents relationship between price and the quantity suppliers are willing to sell.

DETERMINANTS OF SUPPLY

• Price Determinants:

  • Economic policy impacts.

  • Costs of production.

• Non-Price Determinants:

  • Technology, international trade influences, number of firms and expectations.

LAW OF SUPPLY

• Statement: Quantity supplied of a good/service rises with price increases and falls with price decreases, ceteris paribus.

SUPPLY SHIFTS

• Shifts illustrated with price changes affecting supply across different curves (S1, S2, S3).

INDIVIDUAL AND MARKET SUPPLY (WINE)

• Depicts individual vineyard contributions to the overall market supply.

ASSUMPTIONS UNDERLYING THE LAW OF SUPPLY (Higher Level)

• Key assumptions include:

  • Law of Diminishing Marginal Returns

  • Increasing Marginal Costs

LAW OF DIMINISHING (MARGINAL) RETURN

• Explanation: Adding variable factors of production marginally reduces output per additional unit at some point.

INCREASING MARGINAL COSTS

• Marginal cost represents the cost of producing one additional unit of a given product.