Lecture 8

Economic operations
 Contents

1. What is the market?

2. Demand

3. Supply

4. Equilibrium price
1. What is the market?
 The Market

• The market is a place where buyers and sellers of a

product are brought together.
 The Market

• In the product market, the buyer is the household and the

seller is the firm.

• In economic language the household demands the good

or service and the firm supplies the good or service.
 Economic scarcity

Limited resources Scarcity of goods and Unlimited

services wants

Choices have to be made

What to use the How to best use How to best distribute the
resource for? the resources? goods and services?
2. Demand
2.1 What is the “demand”?
 Demand

• The quantity demanded refers to the quantity of a good or

service that households are willing and able to purchase

at a particular price.
 Demand

The demand for a good or service depends on a number of factors, the most
important of which are:

• The price of the good

• The prices of other goods

• Disposable income

• Tastes

• The number of buyers

2.2 What influences the “Demand”?
 Demand

The price of goods

 Demand curve

The demand curve for draught beer

1.6

1.5

1.4

1.3
The demand

Price (£)
1.2 curve
1.1

0.9

0.8
20 30 40 50 60 70 80 90
Quantity demanded (000s pint/week)
 Demand curve

• The law of demand: if all factors which

influence demand are constant then as price
goes up, quantity demanded goes down

• However, this may not be always true. For

example: the stock market, crypto currency in
2017, real estate, etc …

• Changes in prices are shown by a

movement along the demand curve.
Movement of the demand curve
 Demand

The price of OTHER goods

 Price of Sustitute goods

• A substitute (hàng hóa thay thế) is a product that can offer the
same benefits as the goods being consumed.

• The price of a substitute has a negative correlation with

the price of the current good
Example of
substitute
goods

Source: https://marketbusinessnews.com/financial-glossary/substitute-goods-definition-meaning/
 Price of Complementary goods

• A complementary good (hàng hóa bổ sung) is one which tends

to be consumed with another good

• The price of a complementary goods has a positive

correlation with the price of the demanded goods.
Example of
complementary
goods

Source: https://jackiekchantal.weebly.com/complementary--supplementary-goods.html
 Demand

Disposable income
(Thu nhập khả dụng)
 Disposable Income

• Disposable income is income remaining after deduction

of taxes and other mandatory charges, available to be
spent or saved as one wishes.

• Higher disposable income will lead to increased

consumption of most goods
 Disposable income

Source: https://www.wallstreetmojo.com/disposable-income/
 Disposable Income

• Normal goods (hàng hóa thông thường) are goods that are
consumed less as incomes fall

• Inferior goods (hàng hóa thứ cấp) are goods that experience a
fall in demand as income raise
 Income elasticity of demand

Source: https://marketbusinessnews.com/financial-glossary/normal-goods-definition-meaning/
Incomes: Customers tends to Inferior
low product

Customers tends to Normal

Incomes:
rise product

Source: https://marketbusinessnews.com/financial-glossary/normal-goods-definition-meaning/
 Demand

What is Tastes?
 Tastes

• Taste includes attitudes and preferences of consumers,

and will be affected by such things as fashion, and
advertising campaigns by producers or by governments
 Examples for Tastes
For example: https://www.youtube.com/watch?v=jdSKIOWNtZ8
https://www.youtube.com/watch?v=_1s0TsywfeY

removed on television during Press

conference of Euro 2000

The stock price goes down to 4 billions USD (around 1,6%)

3. Supply
3.1 What is “Supply”?
 What is Supply

• The quantity supplied of a good is defined as the quantity

that firms are willing and able to sell to the market at a
particular price.
 Supply

The quantity supplied to the market depends on a number of factors, the most
important of which are
• The price of the good
• The prices of other goods;
• The prices of the resources used to produce the good
• Technology
• Expectations
• Number of suppliers.
 Supply curve

The supply curve for draught beer

1.6

1.5

1.4

1.3

Price (£)
1.2

1.1
The supply curve
1

0.9

0.8
Why doesn’t the supply 20 30 40 50 60
Quantity demanded (000s pint/week)
70 80

curve start at 0?
3.2 What influences “Supply”?
 Supply

Price of goods
 Supply curve

• The law of supplies: as the prices of

one good rises, the quantity that firm are
The supply curve for draught beer
1.6
willing to supplies will rise
1.5

1.4 • This is because if costs are constant as

1.3
we have assumed, then higher prices
Price (£)

1.2

1.1
must mean higher profits to the firm.

• Changes in prices are shown by a

1

0.9

0.8 movement along the demand curve

20 30 40 50 60 70 80
Quantity demanded (000s pint/week)
Movement of the supply
curve
 Market system

Price of OTHER goods

 Other prices

• The supply of one good can be influenced by the price of

another.

• If the substitute goods increase in price, more firms will

supply that good to the market

→ an increase in supply (supply curve shift to the right)

 Other prices

• Goods can also be complements in their production

process
For example: beef and leather hides. An increase in the price of
beef would increase not only the supply of beef but also the
supply of hides
 Supply

Price of Resources
 Prices of the resources used in the
production of the good

• Assuming the price stays constant:

Production
Lower Supply
cost
profitability decrease
increase

Production
Higher Supply
cost
profitability increase
decrease
 Supply

Technology
 Technology

• Technical development in all aspects of production has

led to great improvements in output per workers which
generally result in either more being produced with the
same resources, or the same being produced with fewer
resources
Technology
 Supply

Business expectation
 Business expectations

• Good expectations of the future would encourage firms to

invest in new plant and machinery, which would increase
their productive potential. The reverse would shift it to the
left.
 Business expectations

• For example:

The mortgage supply in 2021 crisis, the housing bubble in

Vietnam, the US etc…
 Supply

The numbers of suppliers

 The number of suppliers

• As the number of suppliers in a market increases the

supply will rise; the supply curve shifts to the right

• If suppliers leave the market, supply will fall and the

supply curve moves to the left
 The number of suppliers

• For example:

Vietnamese agriculture products: due to poor planning,

which results in lower market price of pepper; more and
more Vietnamese farmers stop growing them.
4. Equilibrium price
(Giá cân bằng thị trường)
 The equilibrium price

• Equilibrium price is the price at which the amount that

consumers wish to buy is the same as the amount that
producers wish to sell

• The quantity being bought and sold is called the

equilibrium quantity.
The
equilibrium
price
 The equilibrium price

Market for Beer

1.60

1.50
Excess supply
1.40

Price (£ per pint)

1.30
Equilibrium
1.20

1.10

1.00
Excess demand
0.90

0.80
20 30 40 50 60 70 80 90
Quantity

Supply curve Demand curve

 Discussion

1. Show the effects on the market for houses of the

following:

(a) a fall in income levels;

(b) a rise in the rate of interest;

(c) the lack of a ‘feel good factor’ in the economy

 Discussion

2. Considering the market for automobile, show the effects of

the following changes using demand and supply diagrams:

(a) an increase in the number of people owning automobile;

(b) a fall in the cost of producing automobile; and

(c) a movement away from personal transportation and

toward public transportation
 Discussion

3. Have the changes you predicted in your answers to

questions 1 and 2 actually happened in the real world? If
not, why not?
THE END