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MARKET
A market is a group of buyers and sellers of a particular
good or service.
Example
Why do hotels in hill stations charge more in summers
than in winters?
Why do roses cost more on Valentines Day than rest
of the year?
Why do cricket players earn more than hockey
players?
Answer to these questions boil down to analysis of
demand and supply in economics.
DEMAND
Quantity demand indicates the quantity
consumers are both willing and able to buy at
each possible price during a given time period.
Law of Demand
The law of demand states that, other things equal,
the quantity demanded of a good falls when the
price of the good rises.
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Copyright 2004 South-Western
$2.00
1.00
D
0
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0
Quantity of
Ice-Cream Cones
Copyright2003 Southwestern/Thomson Learning
Consumer Income
Normal Good
Price of IceCream Cone
$3.00
An increase
in income...
2.50
Increase
in demand
2.00
1.50
1.00
0.50
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity of
Ice-Cream
Cones
Consumer Income
Inferior Good
Price of IceCream Cone
$3.00
2.50
An increase
in income...
2.00
Decrease
in demand
1.50
1.00
0.50
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream
Cones
SUPPLY
Supply indicates how much producers are
willing and able to sell per period at each
possible price.
Law of Supply
The law of supply states that, other things equal, the
quantity supplied of a good rises when the price of
the good rises.
1. An
increase
in price ...
2.50
2.00
1.50
1.00
0.50
1 2
9 10 11 12 Quantity of
Ice-Cream Cones
Input prices
Technology
Expectations
Number of sellers
S
C
$3.00
1.00
Quantity of
Ice-Cream
Cones
Copyright 2004 South-Western
Supply curve, S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
Quantity of
Ice-Cream Cones
Copyright2003 Southwestern/Thomson Learning
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.
Copyright 2004 South-Western
Supply Schedule
Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
Copyright2003 Southwestern/Thomson Learning
Supply
Surplus
$2.50
2.00
Demand
4
Quantity
demanded
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
Copyright2003 Southwestern/Thomson Learning
Equilibrium
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.
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.
Supply
$2.00
1.50
Shortage
Demand
4
Quantity
supplied
10
Quantity of
Quantity
Ice-Cream
demanded
Cones
Copyright2003 Southwestern/Thomson Learning
Supply
New equilibrium
$2.50
2.00
2. . . . resulting
in a higher
price . . .
Initial
equilibrium
D
D
0
7
3. . . . and a higher
quantity sold.
10
Quantity of
Ice-Cream Cones
Copyright2003 Southwestern/Thomson Learning
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
S1
New
equilibrium
$2.50
Initial equilibrium
2.00
2. . . . resulting
in a higher
price of ice
cream . . .
Demand
7
3. . . . and a lower
quantity sold.
Quantity of
Ice-Cream Cones
Copyright2003 Southwestern/Thomson Learning
e
r
a
E
E/
E//
t
e
Quantity of Labour
(a) Immigration Alone
Copyright2004 South-Western