chap2-110306024813Market structure-phpapp02

8/13/2019 chap2-110306024813Market structure-phpapp02

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Chapter 2

DEMAND,

SUPPLY &

MARKET

EQUILIBRIUM


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Chapter Outline

1.1 Introduction: Market andthe Circular Flow

1.2 Demand (DD)

1.3 Supply (SS)

1.4 Market Equilibrium

1.5 Change in Equilibrium(SS & DD)

1.6 SS/DD Analysis: Example


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1.1 INTRODUCTION

Demand &

supplyinteraction

Economics decision-making units

Market & the circulation flow


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Markets

A market is a group of buyers and sellersof a particular goods and services.

A market may be local, national orinternational in scope.

This chapter concern purely competitivemarket with a large number ofindependent buyers and sellers.


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1.2 DEMAND

Quantity consumers are bothwilling andableto buy at each possible price during a

given time period, other things constant.

can be defined as thepurchase ofproduct

How many packs of ai

yu bing will studentbuy at a price of RM2?

What if the price is

RM1.50?

Relationship between

price & quantity demanded


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Law of Demand

Says that quantity demanded varies inversely, or

negatively, to the price, other things constant.Negative relationship between price and quantity

demanded.

The higher the price, the smaller the quantitydemanded.

Figure: Price & Quantity

Demanded: The Law of

Demand


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Demand Schedule & DemandCurve

Thedemand scheduleis a tablethat shows therelationship between the price of the good andthe quantity demanded.

Thedemand curveis a graph of therelationship between the price of a good andthe quantity demanded.

Downward sloping & to the right because

law of demand.


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Mays Demand Schedule and

Demand CurvePrice of

Ice-Cream Cone

0

2.50

2.00

1.50

1.00

0.50

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

1. A decrease

in price...

2. ... increases quantity

of cones demanded.

Example


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Individual Demand & Market

demand

The individual demandis the relationship

between the quantity demanded by a singlebuyer and its prices

The market demandis the relationshipbetween the total quantity demanded by

all consumersin the market and its price.


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Price of Ice-Cream Cone



2.00 2.00 2.00

4 37

1.00 1.001.00

8 513

Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

Catherines Demand Nicholass Demand Market Demand+ =

When the price is $2.00,Catherine will demand 4ice-cream cones.

When the price is $2.00,Nicholas will demand 3ice-cream cones.

The market demand at$2.00 will be 7 ice-creamcones.

When the price is $1.00,Catherine will demand 8ice-cream cones.

When the price is $1.00,Nicholas will demand 5ice-cream cones.

The market demand at$1.00, will be 13 ice-cream cones.

ExampleThe market demand curve is the horizontal

sum of the individual demand curves!


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Changes in Quantity Demanded &Changes in Demand

Changes in quantity demandedresultin movement alongthe demand curvedue a change in pricewhile other

factors remain constant.(upward/downward movement)

Change in demandis the shiftof thedemand curve due a change in otherfactorswhile price remains constant.(leftward/ rightward shift)


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0

D

Price of Ice-CreamCones

Quantity of Ice-Cream Cones

A tax on sellers of ice-cream cones raises

the price of ice-creamcones and results in a

movement alongthedemand curve.

A

B

8

1.00

$2.00

4

Changes in Quantity Demanded


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Shifts in The DemandCurve

Price of

Ice-CreamCone

Quantity of

Ice-Cream Cones

Increasein demand

Decreasein demand

Demand curve,D3

Demandcurve,D1

Demandcurve,D2

0


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Changes in Consumer Income

Goods can be classified into twobroad categories:

Normal goods: the demandincreases when income increases

and decreases when incomedecreases

Inferior goods: the demand

decreases when income increasesand increases when incomedecreases


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Changes in Price of Related Good

(i) Substitute Goods- A product that can be used in place

of another product

- A change in the price of substitute

products affect the demand for theproduct in the same direction inwhich the price change.

- E.g: tea vs coffee; a bus ride vs anLRT ride

( Pcoffee Qdd coffee DDtea)


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Changes in Price of Related Good

(ii) Complementary Goods- A product that is used in conjunctionwith another product.

- The change in the price of a

complementary product affects thedemand for the product in theopposite direction to the changeprice.

- E.g: a disk and computer, pen andink.

( PpenQddpenDDink)


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Taste & Preference

Tastes and preferences of consumerschange significantly.

If a product become morefashionable, the demand for it willincrease and if the same productbecomes outdated, the demand for it

will fall.E.g: Changes in music, apparel or

recreation.


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Expectations

The higher the expected future priceofa product, the higher the currentdemandfor that product and vice versa.

E.g: When the government plans toincrease the price of sugar the following

week, the demand for sugar willimmediately increase.


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Population or Number of

Buyers

A larger population with a high rate of

growth creates greater demand forgoods and services.

E.g:An increase in the population ofUTAR would increase the demand for

houses, F & B, and other goods andservices.


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Taste / preference

Summary for Movement/Shift inDemand


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1.3 SUPPLY

Supplyindicates how much of a goodproducers are willing and able to offerfor sale per period at each possible price,other things constant

Law of supplystates that the quantitysupplied is usually directly related to itsprice, other things constant

The lower the price, the smaller the quantitysupplied

The higher the price, the greater the quantitysupplied


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Supply Schedule & Supply Curve

Thesupply scheduleis a tablethat showing how much of a product

firms will set at different prices.Thesupply curveis a graph

illustrating how much of a product afirm will set at different prices.

Upward slopping & to the right due to the lawof supply.


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Bens Supply Schedule and Supply

CurvePrice of

Ice-CreamCone

0

2.50

2.00

1.50

1.00

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

0.50

1. Anincrease

in price ...

2. ... increases quantity of cones supplied.


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Individual Supply & MarketSupply

Theindividual supplyis therelationship between price of good

and the quantity an individualproduceris willing and able to sellper period, other things constant.

Themarket supplyis the sum ofall that is supplied each period byall producersof a single product.


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Market Supply Curve


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Changes in Quantity Supplied& Changes in Supplied

Achanges in quantity suppliedresult in the movement along

the supply curve due a change inpricewhile other factors remainconstant.

Change in supplyis shiftof

supply curve resulting from achange in one of thedeterminantsof supply otherthan price of the goods.


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Price of Ice-Cream

Cone

Quantity of

Ice-Cream

Cones0

S

1.00

A

C$3.00

A rise in the priceof ice creamcones results in amovement alongthe supply curve.

Change in Quantity Supplied


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Changed in Supply

A shiftof the supply curve, either to theleft or right.

Determinants of supply other than the

price of the good

Cost of production

Technology

Prices of related goods

Expectation

Number of sellers


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Shifts in The SupplyCurve

Price of

Ice-CreamCone

Quantity of

Ice-Cream Cones

Increasein supply

Decreasein supply

Supplycurve, S1

Supplycurve, S3

0

Supplycurve, S2


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The Cost of Production Response to the factor of production (labor,

land, capita, energy, and so on). Supply of a goods are negatively related to

the price of the inputs used to make thegood.

Objective is to maximize profit.

Example:to produce ice-cream, sellers usevarious inputs such as cream, sugar, flavoring,

ice-cream machines. When price of one or more ofthese inputs rises, producing ice-cream is less

profitable & firm supply less ice-cream.


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TechnologyRepresents the economys knowledge about

how to combine resources efficiently. If a better technology is discovered,

production costs will fall. Thus, suppliers will

be more willing & able to supply the good ateach price.

Example: when new technology are introducedin the production of sushi, supply of sushi will

increase and shift the supply curve.


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Price of Related Goods Substitutes Goods

If there is an increase in the price of substitutegoods in production, supply of a good willdecrease.

Example:Pepsi and Coke

( PpepsiQSS pepsiSScoke)

Complementary Goods

An increase in the price of complementary goods

will increase the supply of a good & vice versa. Example:Pen and Ink

( PpenQSS penSSink )


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Expectations

Expectation of price in the futurecould either increase or decreasecurrent supply.

Example: when governmentannounced an increase in the price ofpetrol, current supply will decrease

because the supplier wants to sell after

the price hike to gain profit with new

price.


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Number of Sellers Market supply sums the amount supplied

at each price by all producers, marketsupply depends on the number producersin the market.

Example: if there are more than one economicrice shop at New Town, there will be more

economic rice supplied.

Shift of SS curve


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Summary for Movement/Shiftin Supply


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DD & SS Interaction

Output (Product) Market

1.4 MARKET EQUILIBRIUM

3 set of market condition / effect:

(a) The quantity

demanded equal

the quantity

supplied at the

current price. This

situation called

equilibrium

(b) The quantity

demanded exceeds

the quantitysupplied at the

current price. This

situation called

excess demand

or shortage

(c) The quantity

supplied exceeds

the quantity

demanded at the

current price. This

situation called

excess supply

or surplus


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Equilibrium

Price of

Ice-CreamCone

0 1 2 3 4 5 6 7 8 9 10 11 12

Quantity of Ice-Cream Cones

13

Equilibriumquantity

Equilibrium price Equilibrium

Supply

Demand

$2.00


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Market Equilibrium The condition that exists in a market when

the plans of buyers match those of sellers,so quantity demanded equals quantitysuppliedand the market clears. There is notendency for price to change.

DD = SS

Equilibrium price

The price that balances quantity

supplied and quantity demanded. Equilibrium quantity

The quantity supplied and the quantity

demanded at the equilibrium price.

E S l


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Excess Supply(Surplus)

Price of

Ice-Cream

Cone

0

Supply

Demand

Quantity

demanded

Quantity

supplied

Surplus

Quantity of

Ice-Cream

Cones

4

$2.50

10

2.00

7


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Excess Supply (Surplus)

When:

Price > Equilibrium Price, then

Qs > Qd

- There is excess supplyor asurplus.

- Suppliers will lower the pricetoincrease sales, thereby movingtoward equilibrium.


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Excess Demand (Shortage)

Price of

Ice-Cream

Cone

0 Quantity of

Ice-Cream

Cones

Supply

Demand

Quantity

suppliedQuantity

demanded

1.50

10

$2.00

74

Shortage


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Excess Demand (Shortage)

When:

Price < Equilibrium Price, then

Qd > Qs

- There is excess demandor a

shortage.

- Suppliers will raise the pricedueto too many buyers chasing too

few goods, thereby moving towardequilibrium.


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1.5 CHANGE IN EQUILIBRIUM

The market equilibrium will changewhen there is a shift in the demandor supply curve.

We will see what happens when:The demand curve shifts and supply

remains constant.

The supply curve shifts and demandremains constant.

Both the demand and supply curves

shift.


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Three Steps for Analyzing Changes

in Equilibrium1. Decide whether the eventsshifts

the supply or demandcurve (orboth)

2. Decide in whichdirectionthecurve shifts.

3. Use thesupply-and-demand

diagram to see how the shiftchanges theequilibrium priceand quantity.

Effect of Change in


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Effect of Change inDemand

Change in DD can arise from anumber of factors; change in income,tastes, etc.

Quantity

Price

SS

D0 D1

E0

E1

Suppose there is an increase

in the demand for Pilot

pens, the demand curve will

shift rightwards, to D1.

Equilibrium price will

increase, and equilibriumquantity will also increase.

Note: If there is a decrease in the demand, the

effect will be vice versa.

Effect of Change in


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Effect of Change inSupply

Change in SS can arise from a numberof factors; change in cost, technology,etc.

Quantity

Price S0 S1 Suppose there is an increase

in the supplyfor Pilotpens, the supply curve will

shift rightwards, to S1.

Equilibrium price will

decrease, and equilibriumquantity will increase.

Note: If there is a decrease in the supply, the

effect will be vice versa.

DD

E0

E1


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Effect of Changes in Both Demandand Supply

(a) Supply change > demand change (b) Supply change < demand change

As long as only one curve shifts, equilibriumprice and quantity will change.

If both curve shift, the outcome is obvious.

For example:


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1.6 ACTIVITY

?


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Supply and Demand Analysis

(a) Proton Berhad decreases the price of itscar model, Proton Persona from P0to P1.

Explain the law of demandand based on it,

explain what will happen to the quantitydemanded for Proton Persona car. Sketch a

graphto illustrate your explanation.


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(b)What will happen to the

Perodua Nautica(substitutes) when

the price of Proton Persona car

drop? Sketch a graphto illustrate

your explanation


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