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Demand and Supply

• Demand and Supply
• Market Equilibrium


Competitive Market …
In neoclassical economics and A market in which there enough
microeconomics, perfect small buyers and sellers of an
competition describes a identical product that no single
market in which there are many buyer or seller is sufficiently large
small firms, all producing to affect the market prices.


What is Price Mechanism?
“Prices act as a signal to firms and consumers
to adjust their economic behaviour.
For example, a rise in price encourages
producers to switch into making that good but
encourages consumers to use an alternative
substitute product.”


assume ceteris paribus.” Quantity demanded is the amount of a good that a consumer is willing and able to buy at a given price over a given period of time. it means all the variables that might affect the equilibrium in the model. are held constant unless we explicitly say otherwise.Demand is … “the amount of a good that a person is willing and able to buy at various prices over a given period of time. 5 Ceteris Paribus Some Economist's Jargon "Ceteris paribus" is a Latin phrase often used by economists. 6 . literally meaning "other things equal" Used in the context of an economic model.” 4 The law of demand states that … “the quantity of a good demanded per period of time will fall as price rises and will rise as price falls.

Ceteris Paribus Some Economist's Jargon If toll rates for North-South Expressway (PLUS) increases. consumers’ income. then the number of road users are expected to decrease. 7 The demand curve: The demand for potatoes (monthly) (1) (2) (3) (4) Price Tracey's Darren's Total market (pence per kg) demand demand demand (kg) (kg) (tonnes: 000s) A 20 28 16 700 B 40 15 11 500 C 60 5 9 350 D 80 1 7 200 E 100 0 6 100 Market demand for potatoes (monthly) E Point Price Market demand 100 (pence per kg) (tonnes 000s) A 20 700 D Price (pence per kg) 80 B 40 500 C 60 350 C D 80 200 60 E 100 100 B 40 A 20 Demand 0 0 100 200 300 400 fig 500 600 700 800 Quantity (tonnes: 000s) . the users’ taste and preferences do not change. This is only true if we hold other things constant (or ceteris paribus) – the price of automobiles.

Instant noodles form the basis of many college students’ diets. Change in demand • Consumer preferences • Consumers’ information • Consumers’ incomes – Normal goods vs. Which good is an inferior good and which is a normal good? 12 . inferior goods • Number of consumers in the market • Consumers’ expectations of future prices • Prices of closely related goods – Complementary vs. • If the price of football tickets goes up. inferior goods For examples.36-7 11 Normal goods vs. consumers have shown a great deal of interest in buying “organically grown” fruits and vegetables. This has caused an increase in demand for “organically grown” fruits and vegetables. However. you may decide to stop going to see the match every week and spend your money on Sky TV instead.62-3 • A wet winter increases the demand for umbrellas. Rainy bank holiday weekends can have a significant effect on retailers’ revenues. many of them will switch over to eating microwavable meals or to eating out in restaurants. after these students leave college and start working and earning a salary. substitute goods 10 Change in demand • Over the last decades. . p. . p.Gillespie.Taylor and Weerapana.

substitute goods CDs Butter CD player Coffee Tea Socks Shoes What will happen to the demand of the good if the price of the related good change? 13 Movement along vs. Shift in a Demand curve 14 Supply … “is defined as quantities of a good that producers are willing and able to supply at various prices over a given time.Complementary vs.” 15 .

Subsidies and Regulations 18 . The Law of Supply states that … “When the price of a good rises. Quantity supplied is the amount of a good that a producer is willing and able to supply for sale at a given price over a given period of time. 16 Market supply of potatoes (monthly) 100 e Supply d P Q 80 a 20 100 Price (pence per kg) b 40 200 c c 60 350 60 d 80 530 e 100 700 b 40 a 20 0 0 100 200 300 400 500 600 700 800 Quantity (tonnes: 000s) Change in Supply • Technology • Weather Conditions • The price of Inputs Used in Production • The number of Firms in the Market • Expectations of Future Prices • Government Taxes. and assume ceteris paribus.” This applies to both individual producers’ supply and to the whole market supply. the quantity supplied per period of time will usually also rise.

62-3 19 Movement along vs. while Toyota needed only 28 hours per vehicle. there is no innate tendency for the price of the item to change. Shift in a Supply curve 20 Market Equilibrium & Incentives “Situation where the supply of an item is exactly equal to its demand.” 21 . Suppose an improvement in technology enable General Motor to reduce the time it took to produce a car by 6 hours per vehicles. Such events had caused an increase in the price of inputs. . a study that examines the number of labour hours needed to produce an automobile. Economics. General motors needed 34 hours per vehicle.Change in Supply • An unusually cold winter in 2006 destroyed over a billion dollars worth of citrus fruit in California. This improvement in technology would correspond to an increase in supply. Hurricanes Katrina and Rita disrupted oil drilling and refining activities in Texas and Lousiana. p.Taylor and Weerapana. calculated that in 2005. Since neither there is surplus nor shortage in the market. • The Harbour Report.

” (Business Week. including Mexico. a surplus may emerge and depress the market. … As warmer weather helps crop growth. … The losses pushed up prices. damped demand and encouraged buyers to turn to alternative sources. Group Say by Elizabeth Campbell “Tomato growers in Florida may lose $7 million a week in the next several months if crops create a surplus following a devastating cold snap in January … Freezing conditions in early January killed about 70 percent of the state’s winter crop. Mar 2010) 23 Changes in Demand/ Supply Coffee Market Coffee Market What are the possible reasons that could explain the change? 24 . Market Disequilibrium Shortages and Surplus Surplus (or Excess Supply) Shortages (or Excess Demand) 22 Changes in Demand/ Supply Florida Tomato Growers May Lose $7 Million a Week.