Ch+4+slides

The Market Forces of Supply and Demand

Key Concepts

• Market: A group of buyers and sellers of a particular good or service.

  • Buyers: Determine the demand for the product.

  • Sellers: Determine the supply of the product.

Types of Markets

• Competitive Market: Many buyers and sellers, with negligible impact on market price.

• Perfectly Competitive Market: Goods are all the same, price takers where market price allows buyers to buy all they want and sellers to sell all they want.

Demand

• Quantity Demanded: Amount of a good that buyers are willing and able to purchase.

• Law of Demand:

  • Quantity demanded falls when price rises (other things being equal).

  • Quantity demanded rises when price falls.

Demand Schedule and Demand Curve

• Demand Schedule: Table showing the relationship between price and quantity demanded.

• Demand Curve: Graph of the relationship between price and quantity demanded.

Example of Demand

• Sofia’s Demand for Muffins:

  • Prices ranging from $0 to $6 with quantities from 16 to 4 muffins demonstrate the law of demand.

Market Demand

• Market Demand: Sum of all individual demands for a good or service.

• Market Demand Curve: Aggregate of individual demand curves, determining total quantity demanded at any price.

Changes in Demand

• Non-price Determinants: Factors causing shifts in demand curve.

  • Number of Buyers: Increase shifts the curve to the right; decrease shifts it to the left.

  • Income Effects:

    • Normal Goods: Demand increases with income.

    • Inferior Goods: Demand decreases with income.

  • Prices of Related Goods:

    • Substitutes: An increase in the price of one increases the demand for another.

    • Complements: An increase in the price of one decreases the demand for another.

  • Tastes and Preferences: Advertising can shift demand towards certain goods.

  • Expectations: Anticipated income or price changes can alter current demand.

Supply

• Quantity Supplied: Amount of a good sellers are willing and able to sell.

• Law of Supply: Quantity supplied rises as the price of the good rises, and vice versa.

Supply Schedule and Supply Curve

• Supply Schedule: Table illustrating the relationship between price and quantity supplied.

• Supply Curve: Graph showing price versus quantity supplied.

Example of Supply

• Starbucks’ Supply of Muffins: Exhibits the law of supply.

Changes in Supply

• Non-price Determinants: Factors shifting supply curve.

  • Input Prices: A decrease in input prices increases supply.

  • Technology: Improvements can lower production costs, shifting supply right.

  • Number of Sellers: More sellers increase supply; fewer decrease it.

  • Expectations: Anticipation of future prices can change current supply decisions.

Equilibrium

• Equilibrium Price: The price where quantity supplied equals quantity demanded.

• Surplus: Occurs when quantity supplied exceeds quantity demanded; prices tend to fall.

• Shortage: Happens when quantity demanded exceeds quantity supplied; prices generally rise.

Final Considerations

• Market Dynamics: Prices adjust to ensure supply and demand are balanced, acting as signals for resource allocation in a market economy.

• Important Steps in Analysis:

  1. Identify which curve shifts (supply or demand).

  2. Determine the direction of the shift.

  3. Analyze the new equilibrium and its implications on price and quantity.