Supply and Demand PDF

Chapter 2 Supply and Demand A market is a group of buyers and sellers of a particular good or service. Buyers - determine the demand Sellers - determine the supply Four types of Market 1. Perfrectly Competiti...

Chapter 2 Supply and Demand A market is a group of buyers and sellers of a particular good or service. Buyers - determine the demand Sellers - determine the supply Four types of Market 1. Perfrectly Competitive Market 2. Monopoly Markety 3. Oligopoly Market 4. Monopilsitic Competiion Market Perfectly Competitive Market The goods offered for sale are all exactly the same Buyers and sellers are so numerous so that no single buyer or seller has any influence over the market price They must accept the price the market determines, they are said to be price takers. At that market price, buyers can buy all they want, and sellers can sell all they want. Example - In the corn market,there are thousands of farmers who sell corn and millions of consumers. Because no single buyer or seller can influence the price of corn, each takes the market price as given. Monopoly Market Some markets have only one seller, and this seller sets the price. Such a seller is called a monopoly. They are pricemakers. Example, Your local cable television company, may be a monopoly. Residents of your town probably have only one company from which to buy cable service. Oligopoly Market Few sellers Not always aggressive competition For example, Airline industry. In each country, there are few major airlines in the market. They are not always on aggressive competitions, instead each tries to offer with better services, loyalty programs and in-flight facilities. Monopolistic Competition Market Many sellers Slightly differentiated products Each seller may set price for its own product Examples Hotels and hospitality: In the hospitality sector, hotels compete with one another by providing a range of facilities, room designs, and services. While all hotels provide the same basic service (a place to stay), they can differentiate themselves in order to attract different groups of customers and modify costs accordingly. Fast food industry - burgers from KFC, Mcdonald’s are slightly different although its the same product Hair salons - same services, but slightly diferent Demand Demand- The amount of a good that buyers are willing and able to purchase at various prices. Law of Demand - Other things being equal, the quantity demanded of a good falls when the price of the good rises. Note: A change in quantity demand is caused by change in price of the good and causes movement along the demand cauvre (not shift the curve) Variables that can shift the demand curve 1. Consumer Income 2. Price of related goods 3. Tastes 4. Expectations 5. Number of buyers Note: A change in demand is caused by any change that alters the quantity demanded at every price (shift the curve) 1.Consumer Income ❖ If the demand for a good falls when income falls, the good is called a normal good. Demand for a normal good is positively related to income ❖ If the demand for a good rises when income falls, the good is called an inferior good. Demand for a normal good is negatively related to income. 2. Price of Related goods ❖ Substitutes - Two goods are substitutes if an increase in the price of one causes an increase in demand for the other. (e.g. Cocacola Vs Pepsi) ❖ Complements - Two goods are complements if an increase in the price of one causes a fall in demand for the other. Complements are often pairs of goods that are used together. (computers and software) Supply The amount of a good that sellers are willing and able to sell at various prices. Law of supply- Other things being equal, the quantity supplied of a good rises when the price of the good rises. Note: A change in quantity supplied caused by a change in the price of that good. There will be movement along the supply curve. It does not shift the supply curve. Changes that may shift the supply curve 1. Input prices 2. Technology 3. Expectations 4. Number of sellers Equilibrium - a situation in which the market price has reached the level at which quantity supplied equals quantity demanded.  Surplus Shortage Law of Supply and Demand - The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.  Three steps for analyzing changes in equilibrium 1. Decide whether the event shifts the supply or demand curve (or perhaps both). 2. Decide in which direction the curve shifts. 3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity. Shifts in Supply only an increase in supply and no change in demand - the price will fall and the quantity will increase. a decrease in supply and no change in demand - the price will increase and the quantity will decrease. Shifts in Demand only an increase in demand and no change in supply - both quantity and price will go up. a decrease in demand and no change in supply - both quantity and price will go down. Shifts in Both an increase in demand and an increase in supply - quantity will increase, but price is ambiguous or uncertain. It depends on the size of the shift. a decrease in demand and a decrease in supply - quantity will decrease, but price is ambiguous or uncertain. It depends on the size of the shift. Increase in Demand and Decrease in Supply - price will increase, quantity will be ambiguous. Decrease in Demand and Increase in Supply - price will decrease, and the quantity will be ambiguous.  Utility Utility is a measure of satisfaction. The unit of utility is util. Total utility is the total utility a consumer gets from the consumption of all of the units of a good. Total Utility is the sum of marginal utilities. Marginal Utility (MU) is the utility a consumer gets from the last unit of a consumer good that he or she consumes. TU Vs MU When MU is positive >> TU increases When MU is negative >> TU decreases When MU=0 >> TU is at its maximum value. The law of diminishing marginal utility states that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility. Consumer Optimal Coice - Consumers choose the amount of goods that gives the highest total utility.