Module 2.ppt the Market demand and Supply

Basic Of the Demand and Supply ,
Law of Demand and Law of Supply

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2. ©2007 Thomson South-Western
MARKETS AND COMPETITION
•Supply and demand are the two words that
economists use most often.
•Supply and demand are the forces that make
market economies work.
•Modern microeconomics is about supply,
demand, and market equilibrium.

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•A marketis a group of buyers and sellers of a
particular good or service.
•The terms supply and demand refer to the
behavior of people . . . as they interact with one
another in markets.
What Is a Market?

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What Is a Market?
•Buyers determine demand.
•Sellers determine supply.

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What Is Competition?
•A competitive marketis a market in which there
are many buyers and sellers so that each has a
negligible impact on the market price.

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DEMAND
•Quantitydemandedis the amount of a good
that buyers are willing and able to purchase.
•Law of Demand
–The law of demandstates that, other things equal,
the quantity demanded of a good falls when the
price of the good rises.

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The Demand Curve: The Relationship
between Price and Quantity Demanded
•Demand Schedule
•The demand scheduleis a table that shows the
relationship between the price of the good and the
quantity demanded.

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Catherine’s Demand Schedule

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The Demand Curve: The Relationship
between Price and Quantity Demanded
•Demand Curve
•The demand curveis a graph of the relationship
between the price of a good and the quantity
demanded.

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Catherine’s Demand Schedule and Demand Curve
Price of
Ice-Cream Cone
0
2.50
2.00
1.50
1.00
0.50
1234567891011 Quantity of
Ice-Cream Cones
$3.00
12
1. A decrease
in price...
2. ...increases quantity
of cones demanded.

11. ©2007 Thomson South-Western
Market Demand versus Individual Demand
•Market demand refers to the sum of all
individual demands for a particular good or
service.
•Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.

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Price of Ice-
Cream Cone
Price of Ice-
Cream Cone
Price of Ice-
Cream Cone
2.00 2.00
2.00
4
3 7
1.00 1.001.00
8
5
13
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
Quantity of Ice-Cream Cones
Catherine’s Demand Nicholas’s Demand Market Demand+ =
When the price is $2.00,
Catherine will demand 4
ice-cream cones.
When the price is $2.00,
Nicholas will demand 3
ice-cream cones.
The market demand at
$2.00 will be 7 ice-cream
cones.
When the price is $1.00,
Catherine will demand 8
ice-cream cones.
When the price is $1.00,
Nicholas will demand 5
ice-cream cones.
The market demand at
$1.00, will be 13 ice-
cream cones.
The market demand curve is the horizontal sum of the
individual demand curves!

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Shifts in the Demand Curve
•Change in Quantity Demanded
•Movement along the demand curve.
•Caused by a change in the price of the product.

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0
D
Price of Ice-
Cream
Cones
Quantity of Ice-Cream Cones
A tax on sellers of ice-
cream cones raises the
price of ice-cream
cones and results in a
movement along the
demand curve.
A
B
8
1.00
$2.00
4
Changes in Quantity Demanded

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Shifts in the Demand Curve
•Change in Demand
–A shift in the demand curve, either to the left
or right.
–Caused by any change that alters the quantity
demanded at every price.

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Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream Cones
Increase
in demand
Decrease
in demand
Demand curve, D3
Demand
curve, D1
Demand
curve, D2
0

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ASSUMPTION OF LAW OF DEMAND :
●Nochangeinconsumer’sincome
●Nochangeindistributionofincome
●Nochangeintasteandpreferences
●Nochangeinpriceofrelatedgoods
●Nochangeinfashion

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Determinants of Demand
•Consumer income
•Prices of related goods
•Tastes
•Expectations
•Number of buyers

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Variables That Influence Buyers

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Consumer Income
•Consumer Income
•As income increases the demand for a normal good
will increase.
•As income increases the demand for an inferior
goodwill decrease.

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$3.00
2.50
2.00
1.50
1.00
0.50
21 345678910 1211
Price of Ice-
Cream Cone
Quantity of
Ice-Cream
Cones
0
Increase
in demand
An increase
in income...
D
1
D
2
Consumer Income Normal Good

22. ©2007 Thomson South-Western
$3.00
2.50
2.00
1.50
1.00
0.50
21 345678910 1211
Price of Ice-
Cream Cone
Quantity of
Ice-Cream
Cones0
Decrease
in demand
An increase
in income...
D
1D
2
Consumer Income Inferior Good

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Prices of Related Goods
•Prices of Related Goods
•When a fall in the price of one good reduces the
demand for another good, the two goods are called
substitutes.
•When a fall in the price of one good increases the
demand for another good, the two goods are called
complements.

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Prices of Related Goods
●Substitute’sgoods:whenwantcanbesatisfiedalternativesimilargoods,
theyarecalledsubstitutesgoods.
●E.g.Teaandcoffee.Ifthepriceofteaincreases,thendemandofcoffee
increase.
●IfPriceofteadecreasesthendemandofcoffeedecreases.
●Complementarygoods:wheninordertosatisfyagivenoutput,twoor
moregoodsareneededincombination,thesegoodsarereferredtoas
complementarygoods.Ifagivencommodityiscomplementarygoods,its
demandwillberelativelylowerwhenitsrelatedcommodity’spriceis
higherandvice-versa

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SUPPLY
•Quantity suppliedis the amount of a good that
sellers are willing and able to sell.
•Law of Supply
–The law of supplystates that, other things equal,
the quantity supplied of a good rises when the
price of the good rises.

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The Supply Curve: The Relationship
between Price and Quantity Supplied
•Supply Schedule
•The supply scheduleis a table that shows the
relationship between the price of the good and the
quantity supplied.

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Ben’s Supply Schedule

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The Supply Curve: The Relationship
between Price and Quantity Supplied
•Supply Curve
•The supply curveis the graph of the relationship
between the price of a good and the quantity
supplied.

29. ©2007 Thomson South-Western
Ben’s Supply Schedule and Supply Curve
Price of
Ice-Cream
Cone
0
2.50
2.00
1.50
1.00
1234567891011 Quantity of
Ice-Cream Cones
$3.00
12
0.50
1. An
increase
in price ...
2. ...increases quantity of cones supplied.

30. ©2007 Thomson South-Western
Market Supply versus Individual Supply
•Market supply refers to the sum of all
individual supplies for all sellers of a particular
good or service.
•Graphically, individual supply curves are
summed horizontally to obtain the market
supply curve.

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Determinants of Supply
•Input prices
•Technology
•Expectations
•Number of sellers

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Variables That Influence Sellers

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Shifts in the Supply Curve
•Change in Quantity Supplied
•Movement along the supply curve.
•Caused by a change in anything that alters the
quantity supplied at each price.

34. ©2007 Thomson South-Western
1 5
Price of Ice-
Cream
Cone
Quantity of
Ice-Cream
Cones0
S
1.00
A
C
$3.00
A rise in the price
of ice cream
cones results in a
movement along
the supply curve.
Change in Quantity Supplied

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Shifts in the Supply Curve
•Change in Supply
•A shift in the supply curve, either to the left or right.
•Caused by a change in a determinant other than
price.

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Shifts in the Supply Curve
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream Cones
0
Increase
in supply
Decrease
in supply
Supply curve, S
3
curve,
Supply
S
1
Supply
curve, S
2

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SUPPLY AND DEMAND TOGETHER
•Equilibriumrefers to a situation in which the
price has reached the level where quantity
supplied equals quantity demanded.

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SUPPLY AND DEMAND TOGETHER
•Equilibrium Price
–The price that balances quantity supplied and
quantity demanded.
–On a graph, it is the price at which the supply and
demand curves intersect.
•Equilibrium Quantity
–The quantity supplied and the quantity demanded
at the equilibrium price.
–On a graph it is the quantity at which the supply
and demand curves intersect.

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At $2.00, the quantity demanded
is equal to the quantity supplied!
SUPPLY AND DEMAND TOGETHER
Demand Schedule Supply Schedule

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The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
0123456789101112
Quantity of Ice-Cream Cones
13
Equilibrium
quantity
Equilibrium price
Equilibrium
Supply
Demand
$2.00

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Equilibrium
•Surplus
•When price > equilibrium price, then quantity
supplied > quantity demanded.
•There is excess supply or a surplus.
•Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.

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Markets Not in Equilibrium
Price of
Ice-Cream
Cone
0
Supply
Demand
(a) Excess Supply
Quantity
demanded
Quantity
supplied
Surplus
Quantity of
Ice-Cream
Cones
4
$2.50
10
2.00
7

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Equilibrium
•Shortage
•When price < equilibrium price, then quantity
demanded > the quantity supplied.
•There is excess demand or a shortage.
•Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.

44. ©2007 Thomson South-Western
Markets Not in Equilibrium
Price of
Ice-Cream
Cone
0 Quantity of
Ice-Cream
Cones
Supply
Demand
(b) Excess Demand
Quantity
supplied
Quantity
demanded
1.50
10
$2.00
74
Shortage

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Equilibrium
•Law of supply and demand
•The claim that the price of any good adjusts to bring
the quantity supplied and the quantity demanded for
that good into balance.

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1.Rent (house, office etc.)
2.Education
3.Shopping (clothes,
fashion accessories, books,
electronic items)
4.Personal Care (salon )
5.Health and medicine
6.Fitness and gym
7.Dog / pets
8.Food & Grocery
9.Dining at restaurants
10.Gifts & Donations
11.Investments
12.Bills (mobile, electricity,
cable TV etc.)
13.Vacations and holidays
14.Travel/ fuel
15.Entertainment
16.Maintenance

47. Summary
©2007 Thomson South-Western
•Economists use the model of supply and
demand to analyze competitive markets.
•In a competitive market, there are many buyers
and sellers, each of whom has little or no
influence on the market price.

48. Summary
©2007 Thomson South-Western
•The demand curve shows how the quantity of a
good depends upon the price.
–According to the law of demand, as the price of a good
falls, the quantity demanded rises. Therefore, the demand
curve slopes downward.
–In addition to price, other determinants of how much
consumers want to buy include income, the prices of
complements and substitutes, tastes, expectations, and the
number of buyers.
–If one of these factors changes, the demand curve shifts.

49. Summary
©2007 Thomson South-Western
•The supply curve shows how the quantity of a
good supplied depends upon the price.
–According to the law of supply, as the price of a good rises,
the quantity supplied rises. Therefore, the supply curve
slopes upward.
–In addition to price, other determinants of how much
producers want to sell include input prices, technology,
expectations, and the number of sellers.
–If one of these factors changes, the supply curve shifts.

50. Summary
©2007 Thomson South-Western
•Market equilibrium is determined by the
intersection of the supply and demand curves.
•At the equilibrium price, the quantity
demanded equals the quantity supplied.
•The behavior of buyers and sellers naturally
drives markets toward their equilibrium.

51. Summary
©2007 Thomson South-Western
•To analyze how any event influences a market,
we use the supply-and-demand diagram to
examine how the event affects the equilibrium
price and quantity.
•In market economics, prices are the signals
that guide economic decisions and thereby
allocate resources.