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THE MARKET FORCES OF DEMAND

AND SUPPLY
Markets and Competition
Demand
Supply

Markets
A market is 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.
And Economics, especially Microeconomics is
about how supply and demand interact in
markets.

Markets and Competition


A market is a group of buyers and sellers of a

particular product.
A competitive market is one with many buyers
and sellers, each has a negligible effect on price.
In a perfectly competitive market:
All goods exactly the same

Buyers & sellers so numerous that no one can

affect market price each is a price taker

Market Types or Structures


Competitive Markets
Products are the same, price takers

Monopoly
Monopolistic Competition
Oligopoly

Markets and Competition


Market
A group of buyers and sellers of a particular good

or service
Can be highly organized
E.g.: agricultural commodities

Can be less organized


E.g.: ice cream

Competitive market
Many buyers and many sellers
Each has a negligible impact on market price
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Markets and Competition


Perfectly competitive market
Goods offered for sale - exactly the same
Buyers and sellers numerous
No single buyer or seller has any influence over the
market price
Must accept the price determined on the market
Price takers

At the market price


Buyers - buy all they want
Sellers - sell all they want
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Markets and Competition


Monopoly
The only seller in the market
Sets the price

Other markets
Between perfect competition and monopoly

What characteristics or
requirements must be met for
a market to be considered as
each of the following?
1. perfectly competitive
2. a monopoly
3. an oligopoly
4. monopolistic competition

(1) The goods being offered for sale must all be the
same. The buyers and sellers must be so
numerous that no single buyer or seller
influences the market price.
(2) A monopoly is a market in which there is only
one seller.
(3) An oligopoly is a market in which there are only
a few sellers, and the sellers do not always
compete aggressively.
(4) Monopolistic competition is a market
containing many sellers offering slightly
different products.

In Economics, it is the utility for a good or service


of an economic agent, relative to his/her income.

Demand can be a listing or graphing quantity


demanded at each possible price.

In contrast to demand, quantity demanded is


exact at a certain price.

Changing the actual price will change the


quantity demanded but not the demand.

Demand is a buyers willingness and ability to


pay a price for a specific quantity of a good or

service.

The quantity demanded is the amount of a

product that people are willing to buy at a


certain price.

The relationship between price and quantity


demanded is known as DEMAND.

Economists

record demand on a
demand schedule and plot it on a
graph as a demand curve that is
usually DOWNWARD sloping.

The

downward slope reflects the


negative or inverse relationship
between price and quantity demanded.

Change

in demand and not just


quantity-demanded could come
from changes in consumer
wealth, from consumer
preferences, or from the prices of
substitutes or complements for
the product.

Goods

own price:
- The basic demand relationship is
between potential prices of a good and
the quantities that would be purchased at
those prices.

Price

of related goods:
- The principal related goods are
complements and substitutes. A
complement is a good that is used with
the primary good.
*If the price of the complement goes up,
the quantity demanded of the other good
goes down.

Quantity Demand
of the other good

Price of the
complement

* Substitutes are goods that can be used in place


of the primary good.
Personal
-

Disposable Income
In most cases, the more disposable income
(income after tax and receipt of benefits) a
person has the more likely that person is to
buy.

Tastes
-

or preferences:
The greater the desire to own a good the
more likely one is to buy the good.

Consumer expectations

about prices

and income:
- If a consumer believes that the price of
the good will be higher in the future,
he/she is more likely to purchase the
good now.

Population:
-

If the population grows, this


means that demand will also
increase.

Nature

of the good:
If the good is a basic commodity,
it will lead to higher demand.

Demand

Curve is a graphical representation


showing different quantities of a good.

In

economics, the demand curve is the graph


depicting the relationship between the price of
a certain commodity and the amount of it that
consumers are willing and able to purchase at
that given price.

A consumer is

willing to buy at different


prices, assuming that no change in other
factors influencing demand, is called a
demand curve of that consumer.

Price

Elasticity of Demand is a measure


of the sensitivity of the quantity variable,
Q, to changes in the price variable, P.

Elasticity

answers the question of the


percent by which the quantity demanded
will change relative to (divide by) a
given percentage change in the price.

For infinitesimal changes the formula for


calculating PED is the absolute value of

(aQ/aP) x(P/Q)

The overriding factor in determining PED


is the willingness and ability of consumers
after a price changes to postpone
immediate consumption decisions
concerning the good and to search for
substitutes.

Demand management in Economics is the art


or science of controlling economic or aggregate
demand to avoid a recession. Such management
is inspired by Keynesian macroeconomics.

Keynesian macroeconomics is sometimes


referred to as demand-side economics.

Negative

Demand
- If the market response to a product is
negative, it shows that people are not
aware of the features of the service and
the benefits offered. Under such
circumstances, the marketing unit of a
service firm has to understand the psyche
of the potential buyers and find out the
prime reason for rejection of the service.

No

Demand
If people are unaware, have insufficient
information about a service or due to the
consumers indifference, this type of a
demand situation could occur.

Latent

Demand
- Latent demand is a phenomenon of any
economy at any given time, it should be
looked upon as a business opportunity by
service firms and they should orient
themselves to identify and exploit such
opportunities at the right time.

Seasonal

demand
- Seasons all over the world are very
diverse. Seasonal demands create many
problems to service organizations, such
as idling the capacity, fixed cost and
excess expenditure on marketing and
promotions.

Demand

patterns need to be studied in


different segments of the market. Service
organizations need to constantly study
changing demands related to there
service offerings over various time
periods.

Must

develop a system to chart these


demand fluctuations, which helps them
in predicting the demand cycles.

Refers

to the relationship between the price


of a commodity and the quantity of the
commodity that producers are willing and
able to sell per period of time.

It states that, other things being equal, the


quantity supplied of a good per period of time
rises when the price of the good rises and the
quantity supplied per period of time falls when
the price falls.

table that shows the relationship between


the price of a good or service and the
quantity supplied of such.
Points

Price per Pack


(Php)

Quantity
Supplied of Puto
(packs)

50

40

40

30

30

20

20

10

10

Supply Curve for Puto


60
50
40
30

Supply Curve for Puto

20
10
0

10

20

30

40

Number

of producers
Change in the price of factors of production
Change in the price of related products
Technological Improvement
Expectation

The

price and quantity demanded are


inversely related while the price and
quantity supplied are directly related.