Chapter 4 The Market Forces of Supply and Demand PDF

Chapter 4 The Market Forces of Supply and Demand Principles of Economics 2024 Spring Professor Soo Kyung Woo [email protected] Market Resources are allocated via markets A group of buyers & sellers of a particular good or service Buyers determine the demand for the product Sel...

Chapter 4 The Market Forces of Supply and Demand Principles of Economics 2024 Spring Professor Soo Kyung Woo [email protected] Market Resources are allocated via markets A group of buyers & sellers of a particular good or service Buyers determine the demand for the product Sellers determine the supply of the product 2 Demand 3 Quantity Demanded Amount of a good that buyers are willing/able to purchase Law of demand Other things equal, When the price of a good rises, the quantity demanded of the good falls When the price falls, the quantity demanded rises 4 Demand Relationship between the price & the quantity demanded Can be shown via a table or a graph 5 EXAMPLE: Sofia’s Demand Demand schedule on a table: Price Quantity of of muffins muffins demanded $0.00 16 1.00 14 2.00 12 3.00 10 4.00 8 5.00 6 6.00 4 An increase … decreases the in price… quantity demanded. 6 EXAMPLE: Sofia’s Demand Demand schedule on a table: Demand schedule on a graph: Price of Price Quantity Muffins of of muffins $6.00 $6 muffins demanded $5.00 $0.00 16 An increase $5 in price…$4.00 1.00 14 $4 2.00 12 $3.00$3 3.00 10 $2.00$2 4.00 8 5.00 6 $1.00$1 6.00 4 $0.00$0 5 10 15 00 5 10 15 of Quantity Muffins … decreases the quantity demanded.  Market Demand Sum of all individual demands for a good or service Market demand curve Sum the individual demand curves horizontally Relationship between the price & and total quantity demanded All other factors that affect how much buyers want are held constant 8 EXAMPLE: Market vs. Individual Demand Suppose Sofia and Diego are the only two buyers in the market for muffins Qd = quantity demanded Price Sofia’s Qd Diego’s Qd Market Qd $0.00 16 + 8 = 24 1.00 14 + 7 = 21 2.00 12 + 6 = 18 3.00 10 + 5 = 15 4.00 8 + 4 = 12 5.00 6 + 3 = 9 6.00 4 + 2 = 6 9 EXAMPLE: Market Demand Curve P P Market Qd $6.00 $0.00 24 $5.00 1.00 21 A movement 2.00 18 $4.00 along the An increase demand curve 3.00 15 $3.00 in price… 4.00 12 $2.00 5.00 9 $1.00 6.00 6 $0.00 Q 0 5 10 15 20 25 … decreases the quantity of muffins demanded. 10 Changes in Demand Δ𝑄𝑑 due to Δ𝑃 Relationship between 𝑃 & 𝑄 𝑑 while other things are constant A movement along the demand curve Δ𝑄 𝑑 due to “other things”? E.g. Income, Prices of related goods, Tastes The relationship itself changes Shift of a demand curve 11 Changes in Demand Demand Increase Demand Decrease At every price, At every price, the quantity demanded increases the quantity demanded decreases $6.00 Demand curve $6.00 Demand curve $5.00 shifts right $5.00 shifts left $4.00 $4.00 $3.00 $3.00 $2.00 $2.00 $1.00 $1.00 $0.00 $0.00 0 5 10 15 20 25 30 0 5 10 15 20 25 30 12 Variables that Can Shift the Demand Curve 1. Income 2. Prices of related goods 3. Expectations 4. Number of buyers 5. Tastes 13 1. Income Increase in "Normal good" demand Increase in income Decrease in "Inferior good" demand 14 2. Prices of Related Goods Increase in the A&B are Increase in demand for good B "Substitutes" the price of good A Decrease in the A&B are demand for good B "Complements" 15 3. Expectations about the Future Expected increase in Increase in income current demand Expected increase in Increase in prices current demand 16 Supply 17 Quantity Supplied Amount of a good sellers are willing and able to sell Law of supply Other things equal, When the price of a good rises, the quantity supplied of the good rises When the price falls, the quantity supplied falls 18 Supply Relationship between the price & the quantity supplied Again, can be shown via a table or a graph 19 EXAMPLE: Starbucks’ Supply Price Quantity P of of muffins $6.00 muffins supplied $0.00 0 $5.00 1.00 3 $4.00 2.00 6 $3.00 3.00 9 4.00 12 $2.00 5.00 15 $1.00 6.00 18 $0.00 Q 0 5 10 15 20 Market Supply Sum of the supplies of all sellers for a good or service Market supply curve Sum of individual supply curves horizontally Relationship between the price & and total quantity supplied All other factors that affect how much sellers supply are held constant 21 EXAMPLE: Market vs. Individual Supply Suppose Starbucks and Peet’s Coffee are the only two sellers in this market Qs = quantity supplied Qs Qs Price Starbucks Peet’s Market Qs $0.00 0 + 0 = 0 1.00 3 + 2 = 5 2.00 6 + 4 = 10 3.00 9 + 6 = 15 4.00 12 + 8 = 20 5.00 15 + 10 = 25 6.00 18 + 12 = 30 EXAMPLE: Market Supply Curve P QS P $6.00 (Market) $5.00 $0.00 0 An increase 1.00 5 $4.00 in price… A movement 2.00 10 along the $3.00 supply curve 3.00 15 $2.00 4.00 20 5.00 25 $1.00 6.00 30 $0.00 0 5 10 15 20 25 30 35 Q … increases the quantity of muffins supplied. 23 Changes in Supply Δ𝑄 𝑠 due to Δ𝑃 Relationship between 𝑃 & 𝑄 𝑠 while other things are constant A movement along the supply curve Δ𝑄 𝑠 due to “other things” E.g. Input costs, Technology, Number of sellers, Expectations The relationship itself changes Shift of a supply curve 24 Supply & Demand Together 25 Supply and Demand Together P D S $6.00 $5.00 $4.00 $3.00 Equilibrium $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 26 Equilibrium Situation in which market price has reached the level where Quantity supplied = Quantity demanded Supply and demand curves intersect Equilibrium price Balances quantity supplied and quantity demanded “Market-clearing price” Equilibrium quantity = Quantity supplied at the equilibrium price = Quantity demanded at the equilibrium price 27  Markets Not in Equilibrium (1) P D S Excess supply $6.00 Surplus Sellers try to increase $5.00 sales by cutting the price $4.00 Qd rises and Qs falls $3.00 Surplus decreases $2.00 Market equilibrium is $1.00 reached $0.00 Q 0 5 10 15 20 25 30 35 28  Markets Not in Equilibrium (2) P D S Excess demand $6.00 Sellers try to decrease $5.00 sales by raising the price $4.00 QD falls and QS rises $3.00 Shortage increases $2.00 Market equilibrium is $1.00 reached Shortage $0.00 Q 0 5 10 15 20 25 30 35 29 How Prices Allocate Resources Supply and demand together determine the prices of the economy’s many different goods and services “Two dollars” “—and seventy-five cents.” In market economies, prices adjust to balance supply and demand These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources “Markets are usually a good way to organize economic activity” 30 Analyzing Changes in Equilibrium STEP 1 Does the event shifts the supply curve, the demand curve, or both? STEP 2 Does the curve shifts to the right or left? STEP 3 Use the supply-and-demand diagram How does the equilibrium change? How do equilibrium price and quantity change? 31 Exercises Use the three-step method to analyze the effects of each event on the equilibrium price and quantity of orange juice. Event A: A fall in the price of apple juice. Event B: The price of oranges declines because of an abundant orange crop. Event C: Events A and B both occur simultaneously. 32 Event A. A fall in price of apple juice The market for orange juice STEP 1 P D curve S1 STEP 2 D curve shifts left P1 STEP 3 P and Q both fall P2 D2 D1 Q Q2 Q1 33 Event B. Fall in the price of oranges The market for orange juice STEP 1 P S curve S1 S2 STEP 2 S curve shifts right P1 STEP 3 P falls, Q rises P2 D1 Q Q1 Q2 34 Event C. Events A and B together The market for orange juice STEP 1 P Both S and D curves S1 S3 S2 STEP 2 D shifts left, P1 S shifts right (𝑺𝟐 OR 𝑺𝟑 ) STEP 3 P3 P falls, but Q is ambiguous P2 D2 D1 Q Q3Q1 Q2 35