Chapter 3_Demandaamp;Supply

Principles in Economics - Chapter 3: The Market Forces of Supply and Demand

Overview

• Professor: Dr. Markus Fredebeul-Krein, Faculty of Business Studies, Aachen University of Applied Sciences.

• Focus on understanding the forces that drive supply and demand in competitive markets.

Learning Objectives

By the end of this chapter, you should understand:

• The concept of a competitive market.

• Factors determining demand for a good in a competitive market.

• Factors determining supply of a good in a competitive market.

• Interaction of supply and demand in setting prices and quantities sold.

• Changes in supply and demand and their effects on market equilibrium.

• The role of prices in allocating scarce resources in market economies.

Market Dynamics

Key Concepts

• Market Price: The price at which buyers and sellers transact.

• Competitive Market: A market where no individual buyer or seller can influence market prices due to the presence of many competitors.

Assumptions for Efficient Outcomes in Markets

1. Many Buyers and Sellers: Ensures no single entity can affect prices.

2. Identical Goods: Prevents one seller from charging a higher price for a unique product.

3. Freedom of Entry and Exit: New sellers can enter markets to compete for profits.

4. Perfect Information: All sellers and buyers have complete knowledge about the price and quality.

5. Self-interest: Agents act in their own best interest.

Buyer Behavior

Quantity Demanded

• Definition: Amount of a good that buyers are willing to purchase at a specific price.

• Demand Schedule: Table showing quantity demanded at various prices, holding other factors constant.

• Demand Curve: Graphical representation of the demand schedule.

• Law of Demand: States that as price increases, quantity demanded decreases, holding all else constant.

Willingness to Pay

• Variability in willingness to pay reflects differences in individual preferences and circumstances.

Market Demand Curve

• The market demand curve aggregates the individual demand curves of all potential buyers.

• It slopes downwards, indicating that higher prices lead to lower quantity demanded.

Shifts in Demand Curve

Shifts occur due to:

1. Changes in consumer tastes and preferences.

2. Changes in income and wealth.

3. Alterations in prices and availability of related goods.

4. Variations in the number of buyers.

5. Changes in expectations about the future.

Seller Behavior

Quantity Supplied

• Definition: Amount of a good that sellers are willing to sell at a specific price.

• Supply Schedule: Table reporting quantity supplied at different prices.

• Supply Curve: Graph representing the relationship between price and quantity supplied.

• Law of Supply: As price increases, quantity supplied also increases, leading to an upward slope.

Market Supply Curve

• The market supply curve plots the total quantity supplied at each price, aggregating individual supply curves.

Shifts in Supply Curve

Shifts occur due to changes in:

1. Input prices.

2. Technology advancements.

3. Number and scale of sellers.

4. Seller expectations about the future.

Equilibrium Analysis

Competitive Equilibrium

• Definition: The point where the market agrees on price and quantity.

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

• Equilibrium Quantity: Quantity at which supply and demand meet.

Excess Supply and Demand

• Excess Supply: Occurs when suppliers provide more than consumers wish to buy at a price, leading to a surplus.

• Excess Demand: Occurs when consumers want more than suppliers can provide at a price, leading to a shortage.

Analyzing Changes in Equilibrium

1. Identify if an event shifts supply, demand, or both.

2. Determine if the shift is left or right.

3. Use diagrams to analyze the effect on equilibrium price and quantity.

Impacts of Demand and Supply Curve Shifts

• Shifts result in new equilibrium prices and quantities, influenced by multiple market factors.

• Prices signal market conditions to buyers and sellers, facilitating the allocation of scarce resources.

Summary of Key Principles

• In competitive markets, identical goods prevent any individual from influencing prices.

• The demand curve slopes downward; the supply curve slopes upward.

• Competitive equilibrium balances quantity supplied with quantity demanded.

• Changes in non-price determinants can shift demand and supply curves, affecting overall market dynamics.

• Prices serve as crucial signals that guide economic activities and resource allocation.