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Learning Objectives
2.
3.
consider the nature of demand, changes in quantity demanded, changes in demand, and the factors that affect demand examine the nature of supply, changes in quantity supplied, changes in supply, and the factors that affect supply see how markets reach equilibrium the point at which demand and supply meet
Outline of Topics
T1 The Role of Demand T2 The Role of Supply T3 How Competitive Markets Operate
What Is Demand? Demand is a relationship between a products price and quantity demanded. Quantity demanded: the amount of a product consumers are willing to purchase at each price
Demand is shown using a schedule or curve. (See figure 2.1 on page 29) Demand curve: a graph that expresses possible combinations of prices and quantities demanded of a product
The law of demand states that price and quantity demanded are inversely related. Market demand : the sum of all consumers quantities demanded for a product at each price in a market. (See Figure 2.2 on page 31)
Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
4
D
1.00 0.50
You (D0)
Market (Dm)
1 2 3
2 3 4
3 5 7
Changes in demand: are shown by shifts in the demand curve are caused by changes in demand determinants Demand determinants: factors that can cause an increase or a decrease in a products demand The five main demand determinants (Would be discussed later) Number of buyers in a market Their average Income Prices of Other Products Consumer Preferences Consumer Expectations about future prices and incomes.
Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
7
D2
1.00 0.50
D0
D1
11
13
The number of buyers (an increase causes a rightward demand shift) Increase in Demand: an increase in the quantity demanded of a product at all prices Decrease in Demand: a decrease in the quantity demanded of a product at all prices Income For normal products, an increase causes a rightward demand shift. Normal products: products whose demand changes directly with income For inferior products, an increase causes a leftward demand shift.
Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
9
For complementary products, a rise in the other products price causes a leftward demand shift.
are shown by movements along demand curve are caused by price changes See Figure 2.4, page 33
11
Change in Demand
a b
D0
12
What Is Supply? Supply: is a relationship between a products price and quantity supplied is shown using a schedule or curve Quantity supplied:the amount of a product businesses are willing to supply at each price Supply curve: a graph that expresses possible combinations of prices an quantities supplied of a product ( see Figure 2.5, page 35) The law of supply states there is a direct relationship between price and quantity supplied.
Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
13
11
13
14
Changes in supply:
are shown by shifts in the supply curve are caused by changes in supply determinants Supply determinants: factors that can cause an increase or a decrease in a products supply The six main supply determinants (Would be discussed closely later)
The number of producers Resource prices The state of technology Changes in nature The price of related products Producer expectation
Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
15
S2
2.50 2.00 1.50 1.00 0.50
S0 S1
16
Increase in supply: an increase in the quantity supplied of a product at all prices Decrease in supply: a decrease in the quantity supplied of a product at all prices
Resource prices (an increase causes a leftward supply shift because of an increase of costs) State of technology (an improvement causes a rightward supply shift) Prices of related products (example: a declines in the price of tobacco, the supply for ginseng increases a rightward supply shift of ginseng)
Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
17
Changes in nature (an improvement causes a rightward shift for some products) See other examples on page 37 Producer expectations (an expectation of lower prices in the future causes an immediate rightward supply shift)
18
are shown by movements along the supply curve are caused by price changes See Figure 2.7, page 38
19
Change in Supply
S0 S1
80 60 40 20 1 2
80 60 40 20 1 2
20
Market Equilibrium: the stable point at which demand and supply curves intersect ( the quantity demanded = the quantity supplied) When a product is in surplus: Surplus: an excess of quantity supplied over quantity demand there is excess supply price is pushed down When a product is in shortage: Shortage: an excess of quantity demanded over quantity supplied there is excess demand price is pushed up
Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
21
Market Equilibrium
Figure 2.8, page 40
Market Demand and Supply Schedules for Strawberries
Surplus (+) or Shortage (-) (millions of kg)
Quantities
(millions of kg) D S
a e
5 7 9 11 13
13 11 9 7 5
+8 +4 0 -4 -8
15
22
Changes in Equilibrium
A rightward demand shift pushes up both equilibrium price and quantity. A leftward demand shift pushes down both equilibrium price and quantity. A rightward supply shift pushes equilibrium price down and equilibrium quantity up. A leftward supply shift pushes equilibrium price up and equilibrium quantity down.
23
shortage
D0 D1