Demand Supply Markets in Action
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Transcript of Demand Supply Markets in Action
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Objectives
After studying this section you will be able to:
Describe a competitive market and think about a price asan opportunity cost
Explain the influences on demand
Explain the influences on supply
Explain how demand and supply determine prices and
quantities bought and sold Use demand and supply to make predictions about
changes in prices and quantities
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Slide, Rocket, Roller Coaster
Some prices slide, some rocket, and some roller coaster.
This section explains how prices are determined and how
markets guide and coordinate choices.
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Markets and Prices
A marketis any arrangement that enables buyers andsellers to get information and do business with each other.
A competitive market is a market that has many buyers
and many sellers so no single buyer or seller can influencethe price.
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Demand
If you demand something, then you:
Want it,
Can afford it, and
Have made a definite plan to buy it.
Wants are the unlimited desires or wishes people have forgoods and services. Demand reflects a decision about
which wants to satisfy.The quantity demanded of a good or service is theamount that consumers plan to buy during a particulartime period, and at a particular price.
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Demand
What Determines Buying Plans?
The amount of any particular good or service thatconsumers plan to buy is influenced by
1. The price of the good,
2. The prices of other goods,
3. Expected future prices,
4. Income,
5. Population, and
6. Preferences.
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Demand
The Law of Demand
The law of demand states:
Other things remaining the same, the higher the price of a
good, the smaller is the quantity demanded.
The law of demand results from
a substitution effect
an income effect
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Demand
Substitution effectwhen the relative price(opportunity cost) of a good or service rises, people
seek substitutes for it, so the quantity demandeddecreases.
Income effectwhen the price of a good or servicerises relative to income, people cannot afford all the
things they previously bought, so the quantitydemanded decreases.
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Demand
Demand Curve and Demand Schedule
The term demand refers to the entire relationship betweenthe price of the good and quantity demanded of the good.
A demand curve shows the relationship between thequantity demanded of a good and its price when all otherinfluences on consumers planned purchases remain the
same.
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Demand
Figure 3.1 shows ademand curve forrecordable compact discs(CD-Rs).
A rise in the price, otherthings remaining the same,brings a decrease in thequantity demanded and a
movement along thedemand curve.
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Demand
A demand curve is alsoa willingness-and-ability-to-paycurve.
The smaller the quantityavailable, the higher isthe price that someoneis willing to pay foranother unit.
Willingness to paymeasures marginalbenefit.
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Demand
A Change in Demand
When any factor that influences buying plans other thanthe price of the good changes, there is a change in
demand for that good. The quantity of the good thatpeople plan to buy changes at each and every price, sothere is a new demand curve.
When demand increases, the quantity that people plan to
buy increases at each and every price so the demandcurve shifts rightward.
When demand decreases, the quantity that people plan tobuy decreases at each and every price so the demand
curve shifts leftward.
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Demand
Table 3.1 (page 62) summarizes the factors that changedemand. They are:
Prices of related goods
A substitute is a good that can be used in place ofanother good.
A complement is a good that is used in conjunction withanother good.
When the price of substitute for CD-Rs rises or when theprice of a complement for CD-Rs falls, the demand for CD-Rs increases.
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Demand
Figure 3.2 shows theshift in the demand
curve for CD-Rs whenthe price of CD burnerfalls.
Because a CD burner
is a complement of aCD-R, the demand forCD-Rs increases.
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Demand
Expected future prices
If the price of a good is expected to rise in the future,current demand increases and the demand curve shifts
rightward.Income
When income increases, consumers buy more ofmostgoods and the demand curve shifts rightward. A normalgood is one for which demand increases as incomeincreases. An inferior good is a good for which demanddecreases as income increases.
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Demand
Population
The larger the population, the greater is the demand forall goods.
Preferences
People with the same income have different demands ifthey have different preferences.
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Demand
A Change in the Quantity
Demanded Versus a
Change in Demand
Figure 3.3 illustrates thedistinction between achange in demand and achange in the quantitydemanded.
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Demand
When the price of thegood changes and
everything else remainsthe same, there is achange in the quantitydemanded and amovement along the
demand curve.
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Demand
When one of the otherfactors that influence
buying plans changes,there is a change indemand and a shift of thedemand curve.
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Supply
If a firm supplies a good or service, then the firm:
Has the resources and the technology to produce it,
Can profit form producing it, and
Has made a definite plan to produce and sell it.
Resourcesand technology determine what it is possibleto produce. Supply reflects a decision about which
technologically feasible items to produce.The quantity supplied of a good or service is the amountthat producers plan to sell during a given time period at aparticular price.
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Supply
What Determines Selling Plans?
The amount of any particular good or service that a firmplans to supply is influenced by
1. The price of the good,
2. The prices of resources needed to produce it,
3. The prices of related goods produced,
4. Expected future prices,
5. The number of suppliers, and
6. Available technology.
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Supply
The Law of Supply
The law of supply states:
Other things remaining the same, the higher the price of a
good, the greater is the quantity supplied.
The law of supply results from the general tendency for themarginal cost of producing a good or service to increaseas the quantity produced increases (Chapter2, page 35).
Producers are willing to supply only if they at least covertheir marginal cost of production.
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Supply
Supply Curve and Supply Schedule
The term supply refers to the entire relationship betweenthe quantity supplied and the price of a good.
The supply curve shows the relationship between thequantity supplied of a good and its price when all otherinfluences on producers planned sales remain the same.
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Supply
Figure 3.4 shows a supplycurve of recordablecompact discs (CD-Rs).
A rise in the price, otherthings remaining the same,brings an increase in thequantity supplied and amovement along the
supply curve.
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Supply
A supply curve is also aminimum-supply-pricecurve.
The greater the quantityproduced, the higher is theprice that a firm mustoffered to be willing toproduce that quantity.
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Supply
A Change in Supply
When any factor that influences selling plans other thanthe price of the good changes, there is a change insupply of that good. The quantity of the good thatproducers plan to sell changes at each and every price, sothere is a new supply curve.
When supply increases, the quantity that producers plan
to sell increases at each and every price so the supplycurve shifts rightward.
When supply decreases, the quantity that producers planto sell decreases at each and every price so the supply
curve shifts leftward.
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Supply
Table 3.2 (page 67) summarizes the factors that changesupply. They are:
Prices of productive resources
If the price of resource used to produce a good rises, theminimum price that a supplier is willing to accept forproducing each quantity of that good rises. So a rise in theprice of productive resources decreases supply and shifts
the supply curve leftward.
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Supply
Prices of related goods produced
A substitute in production for a good is another goodthat can be produced using the same resources. Goods
are compliments in production if they must be producedtogether.
The supply of a good increases and its supply curveshifts rightward if the price of a substitute in production
falls or if the price of a complement in production rises.
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Supply
Expected future prices
If the price of a good is expected to fall in the future,current supply increases and the supply curve shifts
rightward.The number of suppliers
The larger the number of suppliers of a good, thegreater is the supply of the good. An increase in the
number of suppliers shifts the supply curve rightward.
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Supply
Technology
Advances in technology create new products and lowerthe cost of producing existing products, so they
increase supply and shift the supply curve rightward.
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Supply
Figure 3.5 shows how anadvance in the technologyfor producing recordable
CDs increases the supplyof CD-Rs and shifts thesupply curve for CD-Rsrightward.
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Supply
A Change in the Quantity
Supplied Versus a
Change in Supply
Figure 3.6 illustrates thedistinction between achange in supply and achange in the quantitysupplied.
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Supply
When the price of thegood changes and other
influences on sellingplans remain the same,there is a change in thequantity supplied and amovement along the
supply curve.
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Supply
When one of the otherfactors that influence
selling plans changes,there is a change insupplyand a shift of thesupply curve.
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Market Equilibrium
Price as a Regulator
Figure 3.7 illustrates theequilibrium price andequilibrium quantity in themarket for CD-Rs.
If the price of a disc is $2,the quantity suppliedexceeds the quantitydemanded and there is asurplus of discs.
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Market Equilibrium
If the price of a disc is $1,the quantity demandedexceeds the quantitysupplied and there is a
shortage of discs.
If the price of a disc is$1.50, the quantitydemanded equals the
quantity supplied andthere is neither a shortagenor a surplus of discs.
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Market Equilibrium
Price Adjustments
At prices above theequilibrium, a surplusforces the price down.
At prices below theequilibrium, a shortageforces the price up.
At the equilibrium price,buying plans selling plansagree and the pricedoesnt change.
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Market Equilibrium
Because the price rises if itis below equilibrium, falls ifit is above equilibrium, andremains constant if it is atthe equilibrium, the price ispulled toward theequilibrium and remains
there until some eventchanges the equilibrium.
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Predicting Changes in Price and Quantity
A Change in Demand
Figure 3.8 shows the effectof a change in demand.
An increase in demandshifts the demand curverightward and creates ashortage at the originalprice.
The price rises and thequantity suppliedincreases.
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Predicting Changes in Price and Quantity
A Change in Supply
Figure 3.9 shows theeffect of a change insupply.
An increase in supplyshifts the supply curverightward and creates asurplus at the originalprice.
The price falls and thequantity demandedincreases.
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Predicting Changes in Price and Quantity
A Change in Both
Demand and Supply
A change both demandand supply changes theequilibrium price and theequilibrium quantity but weneed to know the relativemagnitudes of the changes
to predict some of theconsequences.
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Predicting Changes in Price and Quantity
Figure 3.10 shows theeffects of a change in bothdemand and supply in thesame direction. Anincrease in both demandand supply increases theequilibrium quantity but
has an uncertain effect onthe equilibrium price.
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Predicting Changes in Price and Quantity
Figure 3.11 shows theeffects of a change in bothdemand and supply when
they change in oppositedirections. An increase insupply and a decrease indemand lowers theequilibrium price but has
an uncertain effect on theequilibrium quantity.
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THE END