ECO2013 CH4

Price Fluctuation of Avocados

• Reasons for price fluctuations of avocados can be attributed to various factors such as supply and demand dynamics, seasonal production, and global market trends.

Study Objectives of the Chapter

1. Distinguish between Quantity Demanded and Demand, and identify determinants of demand.

2. Differentiate between Quantity Supplied and Supply, and recognize factors affecting supply.

3. Explain how demand and supply interact to determine market price and quantity, alongside effects of demand and supply changes.

Competitive Markets

Definition

• A market is an arrangement that connects buyers and sellers, which can be in a physical location or virtual spaces.

Characteristics of Competitive Markets

• In competitive markets, multiple buyers and sellers exist so that no single entity can influence the price.

Understanding Demand

Quantity Demanded

• Definition: The amount that consumers are willing and able to purchase at a specified price in a specific time frame (e.g., cups of coffee/day).

The Law of Demand

• If the price of a good increases, the quantity demanded decreases (↑ → ↓).

• If the price decreases, the quantity demanded increases (↓ → ↑).

Demand Schedule and Demand Curve

• Demand Schedule: A tabulation of quantities demanded at different prices.

• Demand Curve: Graphical representation detailing the relationship between quantity demanded and price when other factors are constant.

Key Concepts in Demand

Individual vs. Market Demand

• Individual Demand: Quantity one consumer is willing to purchase at different prices.

• Market Demand: The aggregate of all individual demands in the market, illustrated by a combined demand curve.

Changes in Demand

• A change in demand indicates a shift of the demand curve and new demand schedules occur due to:

  • Prices of related goods

  • Expected future prices

  • Income changes

  • Changes in the number of buyers

  • Shifts in consumer preferences

Substitutes and Complements

Substitutes

• When the price of a substitute rises, the demand for a related good increases (e.g., coffee and tea).

Complements

• When the price of a complement falls, demand for the main good increases (e.g., coffee and sugar).

Income Effects on Demand

Normal Goods

• Demand increases as income increases.

Inferior Goods

• Demand decreases as income increases.

Distinction between Changes in Quantity Demanded and Demand

Change in Quantity Demanded

• Result of price changes leading to movement along the demand curve.

Change in Demand

• Results from changes in non-price factors shifting the entire demand curve.

Supply Fundamentals

The Law of Supply

• If the price of a good increases, the quantity supplied increases (P↑ ⇒ QS↑).

• If the price falls, quantity supplied decreases (P↓ ⇒ QS↓).

Supply Definition

• Relationship between quantity supplied and price, with constant external influences.

Individual vs. Market Supply

• Individual Supply: Quantity one seller is willing to supply at various prices.

• Market Supply: Total supply from all sellers, represented by a combined supply curve.

Changes in Supply

Supply Shifters

Factors that cause shifts in the supply curve include:

• Prices of related goods (substitutes in production)

• Prices of inputs/resources

• Expected future prices

• Number of sellers

• Productivity effects (e.g., technology changes)

Distinction Between Change in Quantity Supplied and Change in Supply

• Change in Quantity Supplied: Movement along the supply curve due to price change.

• Change in Supply: Shift of the supply curve due to changes in external factors.

Market Equilibrium

Definition

• Occurs when the quantity demanded equals the quantity supplied, establishing an equilibrium price and quantity.

Adjusting to Market Forces

• Shortages lead to price increases, while surpluses lead to price decreases.

Predicting Price Changes

• Analyze how events influence demand or supply.

Effects of Demand Changes

• Increased demand shifts the demand curve right, increasing equilibrium price and quantity.

• Decreased demand shifts the demand curve left, resulting in lower equilibrium prices.

Effects of Supply Changes

• Increased supply shifts the supply curve right, lowering prices and increasing quantity.

• Decreased supply shifts the supply curve left, raising prices and lowering quantity.

Combined Changes in Demand and Supply

• Analyze effects simultaneously to understand shifts in price and quantity with real-world examples.