Supply and Demand

Sunday, March 22, 2009

2:57 PM

Market (defn)
- A market can be a physical place where a product is bought and sold
- Can be used in a collective sense to refer to all buyers and sellers of a particular good or service. EG.
Global market.
- Can be the demand that exists for a particular product or service
- Can also describe the process by which a buyer and seller arrive at a mutually acceptable price and
quantity.

Market
- A market then can be a location, the network of buyers and sellers for a product, the demand for a
product, or a price determination process

Competitive Market
- Is a market in which there are many buyers and many sellers

Perfectively Competitive
Defined by 2 primary characteristics
1) The goods being offered for sale are all the same.
2) There are so many buyers and sellers that no single buyer or seller can influence the market price.
- Buyers and sellers in a perfectly competitive market must accept the price the market determines. They
are PRICE TAKERS.
Examples: Wheat market

Other Markets
- Monopoly - only one seller, this seller sets the price. E.g. Cable TV - Rogers
- Oligopoly - Have a few sellers that do not always compete aggressively. e.g. Airline routes ( to keep
prices competitive and high)
- Monopolistically competitive - it contains many sellers, each offering a slightly different product.
Because the products are not exactly the same the sellers have the ability to set their own price for their
product. E.G. Restaurants.

-----------------

Perfect Competition

- There are many sellers in this market

- Sellers have no control over price
- The sellers are all price takers
- Price is determined by interaction of demand and supply
- Goods that are sold similar in nature
- No restriction t enter this market
- Marginal revenue curve is flat
- Price = marginal revenue
- e.g. Farmers

Monopolistic Competition

- There are a lot of sellers in this market, not as many as perfect competition
- Sellers have a little control over price
- Products are similar, but can be different in packaging and style
- There are few restrictions for entry
- Competition occurs through advertising
- Price > marginal revenue
- E.g. Restaurants, convenience stores

Oligopoly Competition

- There are a few sellers in the market place, 3-10

- Have a fair amount of control over price
- Products are different in model or style, example is cars
- There are many restrictions in this area by the government
- Competition occurs through advertising
- Demand curve is kinked
- E.g. Car manufacturing, telephone companies

Monopoly

Unit 6 - Micro Page 1

 Monopoly

- Only one seller in the market

- This seller has complete control over price
- The product that is sold is very unique
- Heavy government regulations and restriction of entry into this market
- Marginal revenue is downward sloping
- Price is . Marginal revenue
- E.G. Ontario Hydro

Unit 6 - Micro Page 2

Demand
March-25-09
8:33 AM

What determine the quantity and individual demands?

1. Price - The quantity demanded falls as the price rises and (Qd) rises as the price falls. Quantity
demanded is negatively related to price.
2. Income - A lower income means that you have less to spend in total, so you will have to spend less on
some or probably most goods
3. Prices of related goods - when a fall in the price of one good reduces the demand for another goods
(substitutes) e.g. Frozen yogurt and ice-cream
4. Tastes - determinant of your demand for a particular product.
5. Expectations - your expectations about the future may affect your demand for a good or service today -
e.g. If you expect the price of a product to fall tomorrow you may be less willing to buy it at today's
prices

Terminology

Law of demand -other things being equal, the quantity demanded of a good falls when the price of the
good rises
Normal Goods - a good for which, other things equal, an increase in income leads to an increase in
demand
Inferior Goods - a good for which, other tings equal, and increase in income leads to a decrease in
demand
Substitutes - two goods for an increase in the price of one leads to an increase in the demand for the
other
Complements - two goods for which an increase in the price of one leads to a decrease in the demand
for the other

Demand Schedule:
One method of portraying the relationship between price and quantity demanded for a particular
product is a DEMAND SCHEDULE.

T-Shirt Price Quantity demanded

20 4
24 3
28 2
32 1
36 0

$36

Price Demand

0 4

Quantity Demanded

Unit 6 - Micro Page 3

 Market Demand Schedule:
The sum total of the entire consumer demands for a product. The market demand is the total of each of
individual demands.

5 basic changes that can take place in consumer demand for a product (non price factors):
1. Income
2. Population
a. demographics
3. Tastes and preferences
4. Expectations
a. Consumer expectations
5. Price of substitute goods

Shift in Demand
Shift to right = Increase in demand
Shift to left = decrease in demand

Ceteris Paribus - All other things being equal; only quantity demanded changes if price changes no
other factors such as number of buyers that may effect quantity demanded.

1. -
a. Population
Tastes and preferences
Price of substitute goods
b. Vary price, keep others constant

CYU
1. Market is the physical place where buy/sell, refer to all buyers and sellers, demand, describe process by
which buyers and sellers agree to a price. Economy encompasses all, market is small part of economy.
2. -
a. Yes
b. Yes
c. Yes
d. No
e. No
3. -
a. Rises, income
b. Substitution
4. As demand decreases, supply increases, they are inverse fucking idiot.

Unit 6 - Micro Page 4

Supply and Demand
March-31-09
8:18 AM

Variable A change in this variable

Price Represents a movement along the demand curve
Income Shifts the demand curve
Prices of related goods Shifts the demand curve
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Buyers Shifts the demand curve

Supply

- Quantity supplied is the amount of a good that sellers are willing and able to sell
- Law of Supply:
○ The law of supply states that, other things equal, the quantity supplied of a good rises when the
price of the good rises

Prices

Quantity

Shifts in the Supply Curve

- Input prices
- Technology
- Expectations
- Number of sellers

- Change in Quantity Supplied

○ Movement along the supply curve
○ Caused by a change in anything that alters the quantity supplied at each price.
- Change in Supply
○ A shift in the supply curve, either to the left or right
○ Caused by a change in a determinant other then price

Variable A change in this variable

Price Shifts the supply curve
Input Prices Shifts the supply curve

Unit 6 - Micro Page 5

 Input Prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of Sellers Shifts the supply curve

- Equilibrium
○ Refers to a situation in which the price has reached the level where quantity supplied equals
quantity demanded
- Equilibrium Price
○ Price that balances quantity supplied and demanded
○ On a graph, it is the price at which the supply and demand intersect
- Equilibrium Quantity
○ The quantity supplied and demanded at equilibrium price
○ Is the quantity where they intersect

- Surplus
○ When price > equilibrium price, then quantity supplied > quantity demanded
 There is a excess supply or a surplus
 Supplier will lower the price to increase sales, thereby moving toward equilibrium
- Shortage
○ When price < equilibrium price, then quantity demanded > the quantity supplied
 Excess demand or shortage
 Supplier will raise price due to demand thereby moving toward equilibrium

- Law of supply and demand

○ The claim that the price of any good adjusts to bring the quantity supplied and demanded for that
good into balance

3 steps to analyzing changes in Equilibrium

- Decide whether the event shifts the supply or demand curve

- Decide whether the curve shift left or right
- Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.

- Shift in supply curve called change in supply

- Movement along curve called change in quantity supplied
- Shift in the demand curve called change in demand
- Movement along a demand curve is called change in quantity demanded

No change in supply An increase in supply Decrease in supply

No change in demand P same P down P up
Q same Q up Q down
An increase in demand P up P ambiguous P up
Q up Q up Q ambiguous
A decrease in demand P down P down P Ambiguous
Q down Q ambiguous Q down

Unit 6 - Micro Page 6

 Elasticity
March-31-09
9:02 AM

Elasticity
- Allows us to analyze supply and demand with greater precision
- Is a measure of how much buyers and sellers respond to changes in market conditions

Price elasticity of Demand

- Is a measure of how much the quantity demanded of a good responds to a change in the price of that
good
- Price elasticity of demand is the percentage change in quantity demanded given a percent change in
price

Determinants

- Availability of close substitutes

- Wants vs. Needs
- Definition of the Market
- Time Horizon

Demand tends to be more elastic

○ Larger number of close substitutes
 If the good is a luxury
 The more narrowly defined the market
 Longer the time period
○ Price of elasticity of demand is computed as the percentage change in quantity demanded divided
by the percentage change in price

Price elasticity of Demand = Percentage change in quantity demanded

Percentage change in price

Inelastic Demand
- Quantity demanded does not respond strongly to price change
- Price elasticity of demand is less than one

Elastic Demand
- Quantity demanded responds strongly to changes in price
- Price elasticity of demand is greater than one

Perfectly inelastic < 1 Perfectly Elastic > 1 Unitary = 1

Quantity demanded des not Quantity demanded changes Quantity demanded changes by the
respond to price changes infinitely with any change in price same percentage as the price

5 22% increase in
Price
4

67 % Decrease in quantity demanded

67% / 22% > 1

Unit 6 - Micro Page 7

 Income elasticity of Demand
- measures how much the quantity demanded of a good responds to a change in consumers' income.
- Computed as a % change in the quantity demanded divided by the % change in income

Income Elasticity of Demand = Percentage Change in Quantity Demanded

Percentage change in Income

- Goods consumers regard as necessities tend to be income inelastic

○ Food, fuel, clothes, shelter
- Goods consumers regard as luxuries tend to be income elastic
○ Lambo, Ferrari, M16

- Price elasticity of supply

○ Measure of how much the quantity supplied of a good responds to a change in the price of that
good
○ Price elasticity of supply is the percentage change in quantity supplied resulting from a % change
in price

Inelastic Supply always = 0

Supply

Quantity supplied unchanged

Elasticity is less than 1

Supply

100 -> 110

10% increase

Elasticity Equals 1

Unit 6 - Micro Page 8

 1. Find the difference
2. Find the average
3. Calculate the percentage

5-4 = 1
(4+5) / 2 = 4.5
1 /4.5 x100 = 22.2222 (% CHANGE IN PRICE)

22/22 = 1 unitary elastic

100 -> 125

22% Increase in quantity supplied

Elasticity is Greater than 1

Supply

Big change in quantity supplied

100 -> 200

- Ability of sellers to change the amount of the good they produce

○ Beach-front land is inelastic
○ Books, cars, or manufactured goods are elastic
- Time period
○ Supply is more elastic in the long run

Price elasticity of supply = Percentage change in quantity supplied

Percentage change in price

Unit 6 - Micro Page 9