Supply & Demand

Competitive Markets

• Characteristics of a Competitive Market:

  • Many buyers and sellers exist within the market.

  • No single individual has the power to influence the price of the good.

  • The price is set based on the interactions of the entire market.

• Example: A singular fisherman cannot dictate the price of fish at the market.

Demand

• Law of Demand:

  • States that, all other factors being equal, there exists an inverse relationship between the price of a good and the quantity demanded.

Demand Schedule Example

• Meredith's Demand Schedule for Salmon Fillets:
  

  Price of Salmon	Salmon Fillets Demanded
  $20.00	0
  $17.50	1
  $15.00	2
  $12.50	3
  $10.00	4
  $7.50	5
  $5.00	6
  $2.50	7
  $0.00	8
  Observations from the Demand Schedule:

  • Higher prices lead to lower quantity demanded.

  • Lower prices lead to higher quantity demanded.

Demand Curve

• Price vs. Quantity:

  • As price decreases, quantity demanded increases.

  • Graph Points (Price per pound of salmon):

  • (0, $0.00)

  • (1, $17.50)

  • (2, $15.00)

  • (3, $12.50)

  • (4, $10.00)

  • (5, $7.50)

  • (6, $5.00)

  • (7, $2.50)

  • (8, $0.00)

• Visual representation includes the characteristics of demand, showing shifts in response to price changes.

Market Demand

• Market Demand Example:
  

  Price of Salmon	Meredith’s Demand	Derek’s Demand	Market Demand
  $20.00	0	0	0
  $17.50	1	0	1
  $15.00	2	1	3
  $12.50	3	1	4
  $10.00	4	2	6
  $7.50	5	2	7
  $5.00	6	3	9
  $2.50	7	3	10
  $0.00	8	4	12
  The combined market demand is derived by adding the individual demands of Meredith and Derek.
  Shifts in Demand

  • Movement along a Demand Curve:

    • Caused by changes in the price of the good.

    • Generally, there is an inverse relationship between price and quantity demanded.

  • Shift in Demand:

    • Caused by changes in non-price factors, which results in the entire demand curve shifting left or right.

  Increase in Demand

  • Caused by non-price factors leading to a rightward shift in the demand curve.

  • Consumers are willing to buy more at any price level.

  Decrease in Demand

  • Also a consequence of non-price factors leading to a leftward shift in the demand curve.

  • Consumers are willing to buy less at any price level.

  Demand Shifters

  1. Changes in Income:

     • Normal Good: A good for which demand increases as income increases.

     • Inferior Good: A good for which demand decreases as income increases.

  2. Price of Related Goods:

     • Complements: Goods that are consumed together (e.g., biscuits and gravy).

     • Substitutes: Goods that can replace each other (e.g., Coke and Pepsi).

  3. Changes in Tastes and Preferences:

     • Variability based on consumer trends and seasonal factors that might affect demand.

  4. Future Expectations:

     • Consumer behavior can depend on anticipated future prices, impacting current demand.

  5. Number of Buyers:

     • More individual buyers means more market demand

     • Aging, immigration, war, and birth rates can affect the number of buyers for various goods

  Supply

  • Law of Supply:

    • Asserts that, all other factors being equal, there is a direct relationship between the price of a good and the quantity supplied.

  Supply Schedule Example

  • Pure Food Fish’s Supply Schedule:
    

    Price of Salmon	Salmon Fillets Supplied
    $20.00	800
    $17.50	700
    $15.00	600
    $12.50	500
    $10.00	400
    $7.50	300
    $5.00	200
    $2.50	100
    $0.00	0
    Observations from the Supply Schedule:

    • Higher prices lead to greater quantity supplied.

    • Lower prices result in lower quantity supplied.

  Market Supply

  • 
    

  • Market Supply Example:
    

    Price of Salmon	Pure Food Fish’s Supply	City Fish’s Supply	Market Supply
    $20.00	800	200	1000
    $17.50	700	175	875
    $15.00	600	150	750
    $12.50	500	125	625
    $10.00	400	100	500
    $7.50	300	75	375
    $5.00	200	50	250
    $2.50	100	25	125
    $0.00	0	0	0
    Shifts in Supply

    • Movement along a Supply Curve:

      • Resulting from a change in the price of the good, showing a direct relationship between these variables.

    • Shift in Supply:

      • Influenced by non-price factors, leading to the whole supply curve shifting left or right.

    Supply Shifters

    1. The Cost of Inputs:

       • Reduction in input costs can lead to increased supply.

    2. Changes in Technology:

       • Improvements may enhance production efficiency, increasing supply.

    3. Taxes and Subsidies:

       • Tax: Imposes additional costs on producers, potentially decreasing supply.

       • Subsidy: Government incentives to produce can increase supply.

    4. Number of Sellers:

       • More sellers generally increase market supply.

    5. Future Price Expectations:

       • If sellers anticipate higher prices in the future, they may withhold current supply.

    Supply and Demand Equilibrium

    • Equilibrium Point:

      • The point of intersection of the supply and demand curves in a graphical representation.

    • Equilibrium Price:

      • The price level at which the quantity supplied equals the quantity demanded, often described as the price "clearing the market."

    • Equilibrium Quantity:

      • The quantity at which supply and demand are equal at the equilibrium price.

    Price Controls

    • Definition of Price Controls:

      • Government interventions aimed at manipulating market prices.

    • Price Ceiling:

      • A legally imposed maximum price for a good or service.

    • Price Floor:

      • A legally imposed minimum price for a good or service.

    Case Study on Price Ceilings: Rent Control

    • Description and Goal:

      • Rent control serves as a ceiling on apartment rents, aimed at helping low-income renters secure affordable housing.

    Rent Control in Short Run vs Long Run

    • Visual representation showing:

      • Short-run effects (SR)

      • Long-run effects (LR), noting the potential for shortages.

    Unintended Consequences of Rent Control

    • Consequences include:

      • Shortages (where demand exceeds supply).

      • Decreased long-term investment in new housing units.

      • Reduction in the overall quality of rented accommodations.

      • Emergence of underground markets with inflated prices.

      • Landlords may implement fees to enhance revenues in response to regulation.

    Price Floors

    • Nature of Price Floors:

      • Set as minimum legal prices designed to ensure sellers can cover production costs.
        

      • Example of a Price Floor in Milk Market:
        

    Binding Price Floor Example

• Impact of Taxes on Market:

  • Comparison of consumer surplus (C.S.) and producer surplus (P.S.) before and after the implementation of a tax.

  • Graphical representation illustrating changes in equilibrium and potential deadweight loss (D.W.L).