Market and Demand
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Transcript of Market and Demand
Market A market is any arrangement that bring buyers
and sellers together. In a market economy people can trade what they
have (or have produced) for economic resources or goods they would like to have. Places, institutions, or mechanisms at or through which these trades take palace are called markets.
Money as a medium of exchange, standard of value, and store of vale facilitates trade.
Market (Supply and Demand) Supply and demand are the forces that make
market economies work. Modern microeconomics is about supply, demand,
and market equilibrium. The terms supply and demand refer to the
behavior of people . . . as they interact with one another in markets.
Buyers determine demand.
Sellers determine supply.
Input Markets and Output Markets
Output, or product, markets are the markets in which goods and services are exchanged.
Input markets are the markets in which resources—labor, capital, and land—used to produce products, are exchanged.
• Payments flow in the opposite direction as the physical flow of resources, goods, and services (counterclockwise).
Input MarketsInput markets include: The labor market, in which households supply
work for wages to firms that demand labor. The capital market, in which households supply
their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.
The land market, in which households supply land or other real property in exchange for rent.
DemandBehaviour of buyersRelationship between
◦ Quantity demanded of a good◦ Price◦ Holding other factors constant
Demand and its Determinants: A General Definition:
Demand is the quantity of a good or resource that buyers (or demanders) are willing and able to buy under a given set of conditions over a given period of time.
Conditions: price, income, taste, prices of related goods, expected prices, number of buyers, etc.
Quantity Demanded (Qd) Quantity demanded is the amount (number of
units) of a product that a household would buy in a given time period if it could buy all it wanted at the current market price.
For example, that 100,000 movie tickets are sold each month in a particular town at a price of $8 per ticket. That quantity -100,000-is the quantity of movie admissions demanded per month at a price of $8. If the price were $12, we would expect the quantity demanded to be less. If it were $4, we would expect the quantity demanded to be greater.
Law of Demand The law of demand states that there is an inverse
relationship between price and quantity demanded.
In other words – All Other things unchanged, as price rises, the quantity demanded decreases, and as price falls, the quantity demanded increases; the relationship between price and the quantity demanded is negative.
If the price of a good
then the Qd
holding other things constant!!!
Demand Curve The demand curve is a graph
illustrating how much of a given product a household would be willing to buy at different prices.
$3.002.502.001.501.000.50
21 3 4 5 6 7 8 9 10 1211
Price of Goods
Qd0
Price Quantity$0.00 120.50 101.00 81.50 62.00 42.50 23.00 0
• Individual demand• demand curve for 1 buyer
• Market demand**• curve for all buyers• add up individual Qd for each price
• A change in price, ceteris paribus, results in a change in quantity demanded; that is a movement along the curve not a change in demand.
• A change in demand (curve) results from changes in factors other than price. Such changes cause shifts of the demand curve.
Individual demand & Market demand
Changes in Demand versus Changes in Quantity Demanded
Changes in Demand
Increase in Demand◦ Increase in Qd at Every Price.◦ Demand Curve shifts to the
right.
Decrease in Demand◦ Decrease in Qd at Every Price.◦ Demand Curve shifts to left.
21 30
1.50
1.00
0.50
Price of Goods
Qd
D’
D
21 30
1.50
1.00
0.50
Prices
Qd
D’ D
Factors affecting demand Income
◦ For normal goods, An increase in income will increase demand examples: CDs,
Eating out, etc. Prices of related goods
◦ Related goods Substitutes (Example:- Snapple , Coke)
If price of Snapple rises, People switch to water Increase in demand for water.
If price of Snapple falls, People switch from water to Snapple Decrease in demand for water
• Complements:- Goods consumed with water e.g. Pretzels If price of pretzels rises
Eat fewer pretzels, so drink less water, Demand for water falls
The Impact of a Change in Income
• Higher income decreases the demand for an inferior good
• Higher income increases the demand for a normal good
The Impact of a Change in the Price of Related Goods
• Price of hamburger rises
• Demand for complement good (ketchup) shifts left
• Demand for substitute good (chicken) shifts right
• Quantity of hamburger demanded falls
Buyer expectations◦ Buyers can expect change in
Future income Future pricesAnd act to change demand today.
◦ Expect price of water to rise next month, Buy a case today, Increase demand today.
# of buyers (Size of Population, Demographics:-age, gender and Race) ◦ If there are more buyers
Increase market demand for water could be due to more people overall and more people
who like water. Preferences
◦ change in our likes/dislikes◦ change in technology
The End
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