Supply and Demand: Market Forces

Market Forces of Supply and Demand

• Market refers to a group of buyers and sellers for a specific good or service.
• Buyers determine the demand for a product.
• Sellers determine the supply of a product.

Competitive Markets

• Competitive markets have numerous buyers and sellers, and each has a negligible impact on the market price.
• The goods in a perfectly competitive market are exactly the same
• Because there are many buyers and sellers, no one can affect the market price; they are price takers
• Buyers can purchase all they desire, and sellers can sell all they want at this price.

Demand

• Quantity demanded is how much of a good buyers are willing and able to purchase.
• The law of demand states that, other things being equal, the quantity demanded of a good falls when the price of the good rises, and vice versa.

Demand Schedule and Demand Curve

• Demand schedule is a table illustrating the relationship between the price of a good and the quantity demanded.
• Demand curve is a graph that illustrates the relationship between the price of a good and the quantity demanded.

Example of Sofia's demand schedule

• At $0.00 Price, the demanded muffins are 16
• At $1.00 Price, the demanded muffins are 14
• At $2.00 Price, the demanded muffins are 12
• At $3.00 Price, the demanded muffins are 10
• At $4.00 Price, the demanded muffins are 8
• At $5.00 Price, the demanded muffins are 6
• At $6.00 Price, the demanded muffins are 4
• Sofia's preferences obey the Law of Demand

Market Demand

• Market demand is the sum of all individual demands for a good or service.
• The market demand curve is the sum of the individual demand curves horizontally.
• The total quantity demanded at any price is found by adding the individual quantities demanded on the horizontal axis.

Shifts in the Demand Curve

• The demand curve displays how price affects quantity demanded, assuming other factors are constant.
• "Other things" indicates non-price determinants of demand. These determine buyers' demand for a good, aside from the good's price.
• Changes shift the demand curve.

Factors Causing Demand Curve Shifts

• Number of buyers
• Income
• Prices of related goods
• Tastes
• Expectations

Number of Buyers

• An increase in buyers raises the quantity demanded at each price, shifting the demand curve to the right.
• A decrease in buyers decreases the quantity demanded at each price, shifting the demand curve to the left.

Income

• For a normal good, an increase in income leads to an increase in demand, shifting the demand curve to the right.
• For an inferior good, an increase in income leads to a decrease in demand, shifting the demand curve to the left.

Prices of Related Goods

• Two goods are substitutes if an increase in the price of one leads to an increase in the demand for the other. Example: pizza and hamburgers
• Two goods are complements if an increase in the price of one leads to a decrease in the demand for the other. Example: smartphones and apps

Tastes and Expectations

• Anything causing a shift in tastes toward a good increases demand and shifts the demand curve to the right.
• Example: Advertising convinces consumers that drinking orange juice everyday will help with lower cholesterol, leading to increase in demand for orange juice
• Expectations cause people to expect an increase in income, the current demand increases
• Expectations that people expect higher prices is that the current demand increases

Distinguishing Shifts vs. Movements Along the Curve

• Change in demand is a shift in the demand curve. It happens when a non-price determinant of demand changes (like income or number of buyers).
• Change in the quantity demanded is a movement along a fixed demand curve. It happens when the price changes.

Summary: Variables Influencing Buyers

• Price of the Good Itself: Represents a movement along the demand curve.
• Income: Shifts the demand curve.
• Prices of Related Goods: Shifts the demand curve.
• Tastes: Shifts the demand curve.
• Expectations: Shifts the demand curve.
• Number of Buyers: Shifts the demand curve.

Supply

• Quantity supplied is the amount of a good that sellers are willing and able to sell.
• The law of supply states that, other things being equal, the quantity supplied of a good rises when the price of the good rises, and vice versa.

Supply Schedule and Supply Curve

• Supply schedule is a table showing the relationship between the price of a good and the quantity supplied.
• Supply curve is a graph showing the relationship between the price of a good and the quantity supplied.

Example: Starbucks Supply Curve

• At the price of muffins of $0.00, Starbucks can supply 0 muffins
• At the price of muffins of $1.00, Starbucks can supply 3 muffins
• At the price of muffins of $2.00, Starbucks can supply 6 muffins
• At the price of muffins of $3.00, Starbucks can supply 9 muffins
• At the price of muffins of $4.00, Starbucks can supply 12 muffins
• At the price of muffins of $5.00, Starbucks can supply 15 muffins
• At the price of muffins of $6.00, Starbucks can supply 18 muffins

Market Supply

• Market supply is the sum of the supplies of all sellers for a good or service.
• The market supply curve is the sum of individual supply curves horizontally.
• To find the total quantity supplied at any price, add the individual quantities on the horizontal axis.

Shifts in the Supply Curve

• In the supply curve, shows how price affects quantity supplied
• These "other things" are non-price determinants of supply that determine producers' supply for a good, other than the good's price.
• Changes in non-price factors will shift the supply curve.

Factors Causing Supply Curve Shifts

• Input prices
• Technology
• Number of sellers
• Expectations about the future

Input Prices

• Consists of wages, ingredients, and prices of raw materials
• A fall in input prices makes production more profitable at each output price, reducing production costs.
• Supply is negatively related to prices of inputs. Firms supply a larger quantity at each price; the supply curve shifts to the right.

Technology

• Technology determines how much inputs are required to produce a unit of output.
• A cost-saving technological improvement has the same effect as a fall in input prices, decreasing production costs, and shifts the supply curve to the right.

Number of Sellers

• An increase in the number of sellers increases the quantity supplied at each price, shifting the supply curve to the right.
• A decrease in the number of sellers decreases the quantity supplied at each price, shifting the supply curve to the left.

Expectations about the Future

• Sellers may adjust supply when their expectations of future prices change when a good is not perishable
• Example: Events in the Middle East led to expectations of higher oil prices. Owners of Texas oil fields reduce supply now, save some inventory to sell later at the higher price. The supply curve shifts left.

Shift vs. Movement Along the Supply Curve

• Change in supply happens due to a shift in the supply curve and occurs when a non-price determinant of supply changes (like technology or costs).
• Change in the quantity supplied is a movement along a fixed supply curve and occurs when the price changes.

Summary: Variables Influencing Seller

• Price of the Good Itself: Represents a movement along the supply curve
• Input Prices: Shifts the supply curve
• Technology: Shifts the supply curve
• Expectations: Shifts the supply curve
• Number of Sellers: Shifts the supply curve

Supply and Demand Together: Equilibrium

• Equilibrium occurs where price has reached the level at which quantity supplied equals quantity demanded.
• Equilibrium price is the price where QS = QD.
• At markets not in equilibrium, a surplus occurs when quantity supplied exceeds quantity demanded.
• Facing a surplus, sellers try to increase sales by reducing or cutting the price, which causes QD to rise and QS to fall.
• Happens until the market reaches equilibrium price
• Shortage occurs when the quantity demanded is greater than the quantity supplied.
• Faced with shortages, the sellers raise the price.
• The price will continue to increase up to the point where equilibrium is reached.

The Law of Supply and Demand

• The price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance.
• Once the market reaches equilibrium, there is no further upward or downward pressure on the price.

Analyzing Changes in Equilibrium

• Decide whether the event shifts the supply curve, the demand curve, or both.
• Decide whether the curve(s) shifts to the right or to the left.
• Use the supply-and-demand diagram to compare the initial and the new equilibrium, and analyze the effects on equilibrium price and quantity.
• In market economies, prices are signals that guide decisions and allocate resources.
• The price ensures that supply and demand are in balance.
• The equilibrium price determines how much buyers consume and sellers produce.