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# The Market Forces of Supply and Demand

Markets
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market is a group of buyers and sellers of f a particular ti l good d or service. i  The terms supply and demand refer to the b h i of behavior f people l . . . as they th i interact t t with one another in markets.  And A dE Economics, i especially i ll Microeconomics is about how supply and demand interact in markets. markets

Market a et Types ypes o or Structures
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Competitive Markets
ÊProducts are the same,price takers

Monopoly  Monopolistic Competition  Oligopoly

50 2.50 1.50 Quantity of Ice-Cream Cones 0 1 2 3 4 5 6 7 8 9 10 11 12 .00 1.Demand Curve Price of Ice-Cream Cone \$3.00 0.00 2.

 Law of Diminishing Marginal Utility. . ÊUtility is the extra satisfaction that one receives ece ves from o consuming co su g a product. ÊMarginal means extra. ÊDiminishing means decreasing.Why y does t the e Demand e a d Curve Slope Downward?  Law of Demand ÊInverse relationship between price and quantity. p oduct.

M k tD Market Demand d Market demand refers to the sum of all individual demands for a particular good or service. G i individual i i i demand curves are summed horizontally to obtain the market demand curve. Graphically. .

Literally.Ceteris Paribus Ceteris p paribus is a Latin p phrase that means all variables other than the ones being studied are assumed to be constant. lower prices imply a greater quantity demanded! .” equal ” The demand curve slopes downward because. ceteris paribus means “other things being equal. ceteris paribus.

Two o Simple S p e Rules u es for o Movements vs. the curve on the graph will not shift.  Let’s apply these rules to the following cases of supply and demand! . instead a movement along the existing curve will occur. the curve on the graph will shift.  Rule Two Ê When an independent variable does appear on the graph. Shifts  Rule One Ê When an independent variable changes and that variable does not appear on the graph graph.

Change in Quantity Demanded versus Change in Demand Ch Change i in Quantity Q tit Demanded D d d  Movement along the demand curve. .  Caused by a change in the price of p the product.

00 2.00 A D1 0 12 20 Number of Cigarettes Smoked per Day .Price of Cigarettes per Pack Changes in Quantity Demanded C A tax that raises the price of cigarettes results in a movement along the demand curve. \$4 00 \$4.

. either to the left or right.  Caused by y a change g in a determinant other than the price.Change in Quantity Demanded versus Change in Demand Ch Change i in Demand D d A shift in the demand curve.

D t Determinants i t of fD Demand d  Market price  Consumer income  Prices of related goods  Tastes T  Expectations  What are some examples? .

00 1.50 2.00 2.50 D1 0 1 2 3 4 5 6 7 8 9 10 11 12 D2 Quantity of Ice-Cream Cones ..00 0.50 1.Consumer Income Price of Ice-Cream Cone N Normal lG Good d An increase in income.. Increase in demand \$3.

.Consumer Income Price of Ice-Cream Cone I f i Good Inferior G d \$3.50 1. D2 0 1 D1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones .50 2.50 Decrease in demand An increase in income.00 2..00 1.00 0.

.Prices of Related Goods Substitutes & Complements When Wh a fall f ll in i the th price i of f one good d reduces the demand for another good. complements. When a fall in the price of one good increases the demand for another good the two goods are called good. the two goods are called substitutes.

Represents R t a movement t along the demand curve Shifts the demand curve Shifts the demand curve Shifts the demand curve Shifts the demand curve Shifts the demand curve P i Price Income Prices of related goods Tastes Expectations Number of buyers . . .Change in Quantity Demanded versus Change in Demand Variables that Affect Quantity Demanded A Change in This Variable .

50 Quantity of Ice-Cream Cones 0 1 2 3 4 5 6 7 8 9 10 11 12 .00 0.50 1.00 1.Price of Ice-Cream Cone S Supply l Curve C \$3.00 2.50 2.

Law of Supply The law of supply states that there is a direct (positive) relationship between price and q p quantity y supplied. pp .

.S Supply l Quantity supplied is the amount of a good that sellers are willing i i and able to sell.

Change in Quantity Supplied Price of Ice-Cream C Cone S C A rise in the price p of ice cream cones results in a movement along the supply curve. \$3.00 1.00 A 0 1 5 Quantity of Ice-Cream Cones .

G i individual i i i supply curves are summed horizontally to obtain the market supply curve.M k tS Market Supply l Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically. .

Determinants of Supply Market price Input I t prices i Technology gy Expectations Number N b of f producers d What are some examples? p .

Change in Supply Price of Ice-Cream C Cone S3 Decrease in Supply Increase in i Supply S1 S2 0 Quantity of Ice-Cream Cones .

Price Input prices Technology Expectations Number of sellers Represents a movement along the supply curve Shifts the supply curve Shifts the supply curve Shifts the supply curve Shifts the supply curve . . .Change in Quantity Supplied versus Change in Supply Variables that Affect Quantity Supplied A Change in This Variable .

00 1.Price of Ice-Cream C Cone Equilibrium of Supply and Demand Supply \$3.50 0 1 2 3 4 5 6 7 8 9 10 11 12 Demand Quantity of Ice-Cream Cones Equilibrium ilib i .50 2.50 1.00 0.00 2.

50 1.Price of Ice-Cream C Cone E Excess S Supply l Surplus Supply \$3.00 0.50 0 Demand 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones .00 2.50 2.00 1.

50 Shortage g Demand 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of Ice-Cream Cones .00 \$1.Excess Demand Price of o Ice-Cream Cone Supply pp y \$2.

 Examine how the shift affects equilibrium price and quantity. th)  Decide whether the curve(s) shift(s) to the left or to the right. .Three Steps To Analyzing Changes in Equilibrium  Decide whether the event shifts the supply l or demand d d curve ( (or b both).

.. How an Increase in Demand Affects the Equilibrium Price of I Ice-Cream C Cone 1.50 \$ 2. . items and derived items copyright © 2001 by Harcourt.. Supply \$2.and a higher quantity sold. Inc. Inc.resulting in a higher price. ...00 2. Hot weather increases the demand for ice cream..Harcourt.. Initial equilibrium ilib i New equilibrium D2 D1 0 3.. 7 10 Quantity of Ice-Cream Cones .

. .. Initial equilibrium Demand 0 1 2 3 4 7 8 9 10 11 12 13 3..and a lower quantity sold.resulting in a higher price... An earthquake reduces 1 the supply of ice cream. S1 New equilibrium \$2.00 2... Quantity of Ice-Cream Cones .How a Decrease in Supply Aff t the Affects th Equilibrium E ilib i Price of Ice Cream Ice-Cream Cone S2 1. ..50 2.