demand & supply zmarkets zdemand zsupply zprice determination zchanges in demand & supply
TRANSCRIPT
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Demand & Supply
MarketsDemandSupplyPrice determinationChanges in demand & supply
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Markets
“Markets are central institutions of a modern society. If you understand markets, you have a chance of understanding what is happening in your time. If you don’t, you don’t.” --Martin Mayer
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Markets
A market is a group of buyers and sellers of a particular good or service
Types of markets: perfect competition, monopoly, oligopoly, monopolistic competition
Perfect competition Identical goods Many buyers and sellers who are price
takers
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Markets
Monopoly One seller who is a price setter
Oligopoly Only a few sellers Can be any type of product
Monopolistic Competition Many sellers Slight product differentiation
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Demand
Quantity demanded (QD): the amount that people are willing & able to buy at a specific price
Change in quantity demanded(QD): a change in the amount that people are willing & able to buy due to a change in the price of the good
Demand(D): the amounts that people are willing & able to purchase at various prices, ceteris paribus
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Demand
We focus on the basic relationship between price of the good and QD
Nonprice determinants or ceteris paribus assumptions are: prices of related goods, income, expectations, number of buyers, & tastesRelated goods are either substitutes or
complements
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Demand
Demand shows that there is a negative relationship between price & QD (law of demand)
Diminishing marginal utility explains the negative relationship
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Demand
Graphics A single point on the demand curve
refers to QD The entire function refers to the
definition of demand
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Demand
A movement along the demand curve refers to change in QDMeans that people are willing & able to buy
a different quantity due to a change in the price of the good
A movement down the demand curve is an increase in QD
A movement up the demand curve is a decrease in QD
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Demand
The slope of the demand curve shows there is a negative relation between P & QD
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Demand
Change in demand (D) Caused by a change in a nonprice
determinant (ceteris paribus condition) Means that people are willing & able to
buy a different quantity regardless of price
Is represented by a shift of the demand function
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Demand
An increase in demand is a rightward (or upward) shift of the function
An increase in demand means people are willing & able to buy more at the same prices
An decrease in demand is a leftward (or downward) shift of the function
A decrease in demand means people are willing & able to buy less at the same prices
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Supply
Quantity supplied (QS): the amount that people are willing & able to sell at a specific price
Change in quantity supplied (QS): a change in the amount people are willing & able to sell due to a change in the price of the good
Supply (S): the amounts that people are willing & able to sell at various prices, ceteris paribus
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Supply
We focus on the basic relationship between price of the good and QS
Nonprice determinants or ceteris paribus assumptions are: input prices, technology, expectations, and number of sellers
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Supply
Supply shows that there is a positive relationship between price and QS (law of supply)
Increasing profits can explain positive slope of supply curve
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Supply
Graphics A single point on the supply curve refers
to QS The entire function refers to the
definition of supply
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Supply
A movement along the supply curve refers to a change in QS Means that people are willing & able to
sell a different quantity because of a change in the price of the good
A movement up the supply curve is an increase in QS
A movement down the supply curve is a decrease in QS
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Supply
The slope of the supply curve shows there is a positive relation between P & QS
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Supply
Change in supply (S) Caused by a change in a nonprice
determinant (ceteris paribus condition) Means that people are willing & able to
sell a different quantity regardless of price
Is represented by a shift of the supply function
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Supply
An increase in supply is a rightward (or downward) shift of the function
An increase in supply means that people are willing & able to supply more at the same prices
A decrease in supply is a leftward (or upward) shift of the function
A decrease in supply means that people are willing & able to sell less at the same prices
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Price Determination (Equilibrium)
Equilibrium is the point towards which the economy tends to move; once that point is reached, the economy tends to remain there unless some outside force pushes it away
In the context of the S/D model, we are concerned with two equilibrium values, price (Pe) and quantity (Qe)
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Price Determination
The equilibrium price is the one at which QD = QS
The equilibrium quantity is the one at which QD = QS
Graphically, equilibrium occurs at the point where the D & S functions intersect
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Price Determination
P > Pe An excess supply (surplus) will exist (QS
> QD) There will be a tendency for price to fall As price falls, QD will increase & QS will
decrease; the excess supply will be eliminated
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Price Determination
P < Pe An excess demand (shortage) will exist
(QD > QS) There will be a tendency for price to
increase As price rises, QD will decrease & QS
will increase; the excess demand will be eliminated
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Predicting Changes in Price & Quantity
Three steps must be undertaken to analyze a change in equilibrium Did the events change demand or
supply? Was there an increase or decrease in
the function? What happened to the equilibrium price
and quantity?
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Predicting Changes in Price & Quantity
Changes in demand An increase in D will increase both Pe & Qe A decrease in D will decrease both Pe & Qe
Changes in supply An increase in S will decrease Pe & increase
Qe A decrease in S will increase Pe & decrease
Qe
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Predicting Changes in Price & Quantity
If both D & S change, the change in only one equilibrium value can be predicted If both D & S increase, Qe will increase.
We cannot predict Pe. If both D & S decrease, Qe will
decrease. We cannot predict Pe.
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Predicting Changes in Price & Quantity
If D increases & S decreases, Pe will increase. We cannot predict Qe.
If D decreases & S increases, Pe will decrease. We cannot predict Qe.