Supply and Demand How Markets Work?. MARKETS AND COMPETITION The terms supply and demand refer to the behavior of people......as they interact with one.

Supply and Supply and Demand Demand How How Markets Markets Work?Work?

MARKETS AND COMPETITIONMARKETS AND COMPETITION

• The terms supply and demand The terms supply and demand refer to the behavior of refer to the behavior of people......as they interact with people......as they interact with one another in markets.one another in markets.• A market is a group of buyers A market is a group of buyers and sellers of a particular good and sellers of a particular good or service.or service.• Buyers determine demand...Buyers determine demand...• Sellers determine supply…Sellers determine supply…

Competitive MarketsCompetitive Markets

A Competitive Market is a market A Competitive Market is a market with many buyers and sellers so with many buyers and sellers so that each has a small impact on that each has a small impact on the market price.the market price.

Types of CompetitionTypes of Competition Perfectly Competitive:

Homogeneous Products Buyers and Sellers are Price Takers

Monopoly: One Seller, controls price

Oligopoly: Few Sellers, not aggressive

competition Monopolistic Competition:

Many Sellers, differentiated products

Perfectly CompetitivePerfectly Competitive

• perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogenous product

MonopolyMonopoly

• a specific person or enterprise is the only supplier of a particular commodity.

OligopolyOligopoly

• An oligopoly is a market form in which a market or industry is dominated by a small number of sellers.

• Because there are few sellers, each oligopolistic is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms

Monopolistic CompetitionMonopolistic Competition

• Monopolistic competition is imperfect competition where many competing producers sell products that are differentiated from another.

• In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms

• Monopolistic competition can naturally fall into a monopoly

SUPPLY AND DEMAND SUPPLY AND DEMAND TOGETHERTOGETHER

• Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

EquilibriumEquilibrium• Equilibrium Price

– The price that balances quantity supplied and quantity demanded.

– On a graph, it is the price at which the supply and demand curves intersect.

• Equilibrium Quantity– The quantity supplied and the quantity

demanded at the equilibrium price. – On a graph it is the quantity at which

the supply and demand curves intersect.

At $2.00, the quantity demanded is equal to the quantity supplied!

Demand Schedule

Supply Schedule

EquilibriumEquilibrium

Equilibrium price

Demand

Supply

$2.00

6 8 100

Equilibrium

Equilibrium quantity

Quantity of Ice-Cream Cones

Price of Ice-Cream

Cone

421 3 5 7 9 11

The Equilibrium of Supply and The Equilibrium of Supply and DemandDemand

EquilibriumEquilibrium• Surplus

– When price > equilibrium price, then quantity supplied > quantity demanded.

• There is excess supply or a surplus. • Suppliers will lower the price to increase

sales, thereby moving toward equilibrium.• Shortage

– When price < equilibrium price, then quantity demanded > the quantity supplied.

• There is excess demand or a shortage. • Suppliers will raise the price due to too

many buyers chasing too few goods, thereby moving toward equilibrium.

Demand

Supply

$2.00

6 8 100 Quantity of Ice-Cream

Cones

Price of Ice-

Cream Cone

421 3 5 7 9 11

$2.50

Surplus

Quantity Demanded

Quantity Supplied

Excess SupplyExcess Supply

Demand

Supply

$2.00

6 8 100 Quantity of Ice-Cream

Cone

Price of Ice-

Cream Cone

421 3 5 7 9 11

$1.50

Shortage

Quantity Supplied

Quantity Demande

d

Excess DemandExcess Demand

Assignment Assignment