Ch 4 Supply Demand and Markets

Chapter 4: Demand, Supply and Markets

Learning Outcomes

• Construct a demand curve using a given demand schedule.

• Describe the relationship between price and quantity demanded using the law of demand.

• Determine movement or shift in the demand curve based on scenarios.

• Construct a supply curve using a given supply schedule.

• Describe the relationship between price and quantity supplied using the law of supply.

• Determine movements or shifts in the supply curve.

• Determine equilibrium price and quantity using supply and demand models.

• Explain the effect of surpluses on prices and how shortages affect prices.

• Predict the impact of changes in demand and/or supply on equilibrium price and quantity.

• Apply demand and supply model to real-world scenarios to assess equilibrium price and quantity under market shocks.

Economics in the Real World

• Examples of real-world applications of concepts:

  • The Price of Owning a Pooch

  • Toilet Paper Shortages

  • U.S. Market for Gasoline During COVID-19 Lockdowns

  • Impact of Avian Flu on Egg Prices and Supply

Markets and Economic Activity

• Definition of a Market:

  • A group of buyers and sellers.

  • Organizes economic activity by determining:

    • What goods to produce

    • How to produce them

    • How much to produce

    • Who gets them

• Market Economy: Allocates resources through decentralized decisions by households and firms interacting.

• Adam Smith's Invisible Hand: Individuals acting in self-interest lead to economic well-being.

• Centrally Planned Economy: Decisions made by the state or dictator, contrasting with decentralized market economies.

Price System and Invisible Hand

• Prices determined by buyer-seller interaction reflect:

  • The good’s value to buyers

  • Production costs

• Prices guide decision-making and can maximize societal economic well-being.

Types of Markets

• Perfect Competition, Monopolistic Competition, Oligopoly, Duopoly, Monopoly, Monopsony

• Markets categorized by competition levels:

  • Less Concentration: More competition

  • More Concentration: Less competition

Perfectly Competitive Market Characteristics

• Numerous Buyers and Sellers: Both are price takers.

• Identical Goods: Homogeneous products.

• Free Entry and Exit: No restrictions on market entry or exit.

• Perfect Information: Both buyers and sellers have complete knowledge about prices and products.

Market Structures: Comparison

Monopsony Explained

• Single buyer acting as a price maker.

• Exists in situations with little competition for labor or goods.

  • Example: Mining town with one employer.

  • Current Example: School districts where teachers have limited mobility.

Free Market Views

• No True Free Market Without Government: Government creates market rules.

  • Quote by Robert Reich: "Rules create markets."

Demand Characteristics

• Quantity Demanded: Amount buyers are willing to purchase.

• Law of Demand: Quantity demanded decreases as price increases, holding other factors constant.

Demand Schedule Example

• Table: Shows price relationship and quantity demanded for lattes (e.g., $1.00 = 14 lattes).

Market Demand vs. Individual Demand

• Market quantity demanded = sum of quantities demanded by all individual buyers.

Demand Curve Shifters

• Non-price determinants include:

  • Number of Buyers: Increase shifts demand to the right.

  • Income: Higher income shifts demand for normal goods right; inferior goods left.

  • Prices of Related Goods: Substitutes increase demand when one goes up; complements decrease demand.

  • Tastes: Preferences shifting towards the good increase demand.

  • Expectations: Anticipated changes in income can increase or decrease demand for various goods.

Supply Characteristics

• Quantity Supplied: Amount sellers are willing to sell.

• Law of Supply: Quantity supplied increases as price increases, holding other factors constant.

Supply Schedule Example

• Table: Relationship between price and quantity supplied for Starbucks’ lattes.

Market Supply vs. Individual Supply

• Market supply = sum of individual supplies from all sellers.

Supply Curve Shifters

• Non-price determinants include:

  • Input Prices: Lower input costs shift supply right.

  • Technology: Cost-saving improvements shift supply right.

  • Number of Sellers: Increase in sellers shifts supply right.

  • Expectations: Changes in future price expectations can shift supply.

Market Equilibrium

• Equilibrium Price: Price at which quantity supplied equals quantity demanded.

• Surplus: Quantity supplied exceeds quantity demanded causing price drops.

• Shortage: Quantity demanded exceeds quantity supplied leading to price increases.

Analyzing Changes in Equilibrium

• Steps: 1. Identify if event shifts S or D curve. 2. Determine direction of shift. 3. Use diagram to analyze effect on equilibrium P and Q.

Summary of Variables Influencing Buyers and Sellers

• Buyers: Price causes movements; non-price factors cause shifts.

• Sellers: Price causes movements; shifts driven by input prices, technology, expectations, and number of sellers.

Conclusion: Allocating Resources through Prices

• Prices in market economies adjust to equilibrate supply and demand, guiding economic decisions and resource allocation.

Key Takeaways

• Competitive markets have many participants with no pricing power.

• Supply and demand model helps analyze competitive markets.

• Price—quantity relationship for demand is negative; for supply is positive.

• Market equilibrium occurs where S and D intersect, determining price and quantity outcomes.