Market Forces of Supply and Demand

Chapter Overview

  • Examine the market forces of supply and demand.
  • Explore factors affecting demand and supply, and how they determine price and quantity sold.

Key Questions

  • What affects buyers’ demand for goods?
  • What affects sellers’ supply of goods?
  • How do supply and demand influence price and quantity sold?
  • How do changes in demand and supply factors affect market price and quantity?
  • How do markets allocate resources?

Market Basics

  • Market Definition: A group of buyers and sellers of a specific product.
  • Competitive Market: Many buyers and sellers, each has a negligible effect on market price.
  • Types of markets include:
    • Perfect competition
    • Monopoly
    • Monopolistic competition
  • Characteristics of each market type will be explored later.

Demand

  • Quantity Demanded ( extbf{QD}): Amount buyers are willing and able to purchase at a given price.
  • Demand Curve: Graphical representation showing various quantities demanded at corresponding prices.
  • Law of Demand: Quantity demanded falls when the price rises (ceteris paribus).

Demand Schedule

  • Demand Schedule: A table illustrating relationships between the price of a good and the quantity demanded.
    • Example: Tom's demand for lattes as price changes.

Market Demand

  • Total quantity demanded in the market is the sum of QD from all buyers at each price point.

Demand Curve Shifters

  1. Number of Buyers: Increase in buyers shifts demand curve to the right.
  2. Income:
    • For normal goods, an increase in income shifts D curve right.
    • For inferior goods, demand decreases with increased income, shifting D curve left.
  3. Prices of Related Goods:
    • Substitutes: Higher price of one leads to increased demand for the other (e.g., Crest and Colgate).
    • Complements: Higher price of one leads to lower demand for the other (e.g., computers and software).
  4. Tastes and Preferences: Changes in consumer preferences directly shift the D curve.
  5. Expectations: Future expectations of prices and incomes affect current consumer demand.

Demand Curve Shifts

due to non-price determinants result in changes:

  • Right shift = Increase in demand
  • Left shift = Decrease in demand

Supply

  • Quantity Supplied ( extbf{QS}): Amount sellers are willing to sell at a specific price.
  • Supply Curve: Graph showing quantities supplied at varying prices.
  • Law of Supply: Quantity supplied increases as price rises (ceteris paribus).

Supply Schedule

  • Supply Schedule: Tables showing relationships between the price of a good and the quantity supplied.
  • Example: Starbucks’ supply of lattes.

Market Supply

  • Total quantity supplied is the sum of all sellers' supplies at each price level.

Supply Curve Shifters

  1. Input Prices: Decrease in input costs shifts supply curve right.
  2. Technology: Technological advancements that reduce the cost of production shift supply curve right.
  3. Number of Sellers: An increase in the number of sellers shifts supply curve right.
  4. Expectations: If future prices are expected to rise, current supply may decrease, shifting curve left.

Supply Curve Shifts

due to non-price determinants result in changes:

  • Right shift = Increase in supply
  • Left shift = Decrease in supply

Equilibrium

  • Equilibrium: The point where quantity supplied equals quantity demanded.
  • Equilibrium Price: Price where QS = QD.
  • Equilibrium Quantity: Quantity at which desired supply meets demand.

Surplus & Shortage

  • Surplus: When QS > QD; sellers reduce prices to eliminate excess.
    • Example: At price $5, QD = 9 lattes, and QS = 25 lattes → Surplus of 16 lattes.
  • Shortage: When QD > QS; sellers increase prices to decrease demand.
    • Example: At price $1, QD = 21 lattes, and QS = 5 lattes → Shortage of 16 lattes.

Analyzing Changes in Equilibrium

  1. Determine which curve shifts (supply or demand).
  2. Identify direction of the shift (right or left).
  3. Use supply-demand diagrams to assess how changes affect equilibrium price and quantity.

Conclusion

  • Prices help allocate resources efficiently in markets. Adjustments in price signal changes in supply and demand, effectively guiding economic decisions.