Chapter 3.1 KTVM
Chapter 3.1 KTVM
Chapter 3.1 KTVM
Chapter 3
SUPPLY – DEMAND
THE MARKET FORCES OF SUPPLY AND DEMAND
Market
• Definition: (market)
Producer
àSUPPLY
ty
Quanti
(producer - supply) Price& d and
of goo Consumer
s
service DEMAND
(consumer - demand)
Market
• A market: a group of buyers and sellers of a
particular good or service.
• The buyers: determine the demand for the product
• The seller: determine the supply of the product
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Competition
• Most markets in the economy is highly competitive.
• Each buyer knows that there are several sellers from
which to choose.
• Each seller is aware that his product is similar to that
offered by other sellers.
• The price and quantity are not determined by any
single buyer or seller
• The price and quantity are determined by all buyers
and sellers as they interact in the marketplace
Competitive market
• A market in which there are so many buyers and so
many sellers that each has a negligible impact on the
market price.
• In this market, each seller has limited control over the
price because other sellers are offering similar
products.
• A seller has little reason to charge less than the going
price. If he charges more, buyers will make their
purchases elsewhere.
• No single buyer can influence the price of product
because each buyer purchases only a small amount
Competitive market
• To reach the highest form of competition = perfectly
competitive market, a market must have two
characteristics:
1. The goods offered for sale are all exactly the same.
2. The buyers and sellers are so numerous that no single
buyer or seller has any influence over the market.
• Buyers and sellers in perfectly competitive markets
must accept the price the market determines: they
are said to be price takers
• At the market price, buyers can buy all they want, and
sellers can sell all they want
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Competitive market
• In rice market
• There are thousands of farmers who sell rice and
millions of consumers who use rice and rice products.
• No single buyer or seller can influence the price of
rice, each takes the market price as given.
DEMAND
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Definition
• Demand
The quantity demanded: the amount of a good that buyers are
willing and able to purchase.
▫ Need
▫ Be able to purchase
▫ Willing-to-pay
• Law of demand:
• Other things being equal, when the price of a good rises, the
quantity demanded of the good falls – when the price falls, the
quantity demanded rises.
• Demand schedule:
• A table that shows the relationship between the price of a good
and the quantity demanded
• (Holding constant everything else that influences how much of the
good consumers want to pay
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Demand curve
• The price is on the vertical
axis
• The quantity is on the
horizontal axis
• The line relating price and
quantity demanded is
called the demand curve
• The demand curve slopes
downward: a lower price
means a greater quantity
demanded.
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Demand Function
QD = f(P) = a + b.P (b<0)
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1. Income
• A lower income = you have less to spend in total = you have
to spend less most goods.
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• A fall in the price of one good raise the demand for another
good = complements = an increase in the price of one leads
to a decrease in the demand for the other
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3. Tastes
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5. Number of buyers
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Summary
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Summing Up:
• Extension in demand is due to reduction in price.
• Increase in demand occurs due to changes in factors
other than price.
• Contraction in demand is the result of a rise in the price
commodity.
• A decrease in demand follows a change in factors other
than price.
• Changes in demand both increase and decrease are
represent shifts in the demand curve.
• Changes in the quantity demanded are represented by
move along the same demand curve.
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SUPPLY
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Definition
• Quantity supplied
The quantity supply: the amount of a good that sellers are
willing and able to sell.
• Law of supply:
Other things being equal, the quantity supplied of a good rises
when the price of the good rises.
• Supply schedule:
• A table that shows the relationship between the price of a good
and the quantity supplied.
• (Holding constant everything else that influences how much of the
good producers want to sell)
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• Supply Schedule
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P (S): QS = 0 + 3P Quantity
Price
Supplied
(PS)
(QS)
0.00 0
1.00 3
2.00 6
3.00 9
4.00 12
5.00 15
Q 6.00 18
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• Supply Function
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1. Input Prices
• When the price of one or more of inputs rises, producing is
less profitable, firms supply less.
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2. Technology
• The technology for turning inputs into products is another
determinant of supply.
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3. Expectations
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Summary
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Markets
P D
Not in Equilibrium:
S
Surplus
Surplus •Surplus (excess supply):
•quantity supplied is
greater than quantity
demanded
•Example: if P = $5,
• then QD = 9 lattes
• and QS = 25 lattes
Q •
•resulting in a surplus of
16 lattes
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•and QS to fall…
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•and QS to fall…
•Prices continue to fall
Q market reaches
until
equilibrium.
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•Example: if P = $1,
• then Q D = 21 lattes
• and Q S = 5 lattes
•
•resulting in a shortage of 16
Shortage
Q
lattes
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• causing QD to fall
• and QS to rise,
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• causing QD to fall
• and QS to rise,
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Equilibrium
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Equilibrium
P D S (Equilibrium) E
-Equilibrium Price PE: the
price that balances
quantity supplied and
quantity demanded (QS =
PE E QD)
-Equilibrium quantity QE:
the quantity supplied and
the quantity demanded
at the equilibrium price.
Q
QE
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Equilibrium
P D S
P QD QS
0 24 0
1 21 5
PE E 2 18 10
3 15 15
4 12 20
5 9 25
Q 6 6 30
QE
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D
Q
QD QE QS
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S
Market price is lower
than equilibrium price
(PM < PE)
PE E
PM
Shortage
D
Q
QS QE QD
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Summing up
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Elasticity
Consumers usually buy more of a good:
• Its price is …
• Incomes are …
• The prices of its substitutes …
• The prices of its complements are …
•…
• The size of the change?
• Elasticity: measure how much consumers respond to
changes in variables.
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%𝜟𝑸 𝜟𝑸 𝑰
ED,I = %𝜟𝑰
= 𝜟𝑰 𝑸
ED,I < 0: inferior goods
ED,I > 0: normal goods (>1: luxuries, <1: necessities)
ED,I = 0: goods without depend on income
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%𝜟𝑸𝒙 𝜟𝑸𝒙 𝑷𝒚
▫ ED,xy = %𝜟𝑷𝒚 = 𝜟𝑷𝒚 𝑸𝒙
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%𝜟𝑸 𝜟𝑸 𝑷
ES,P = =
%𝜟𝑷 𝜟𝑷 𝑸
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%𝜟𝑸 𝜟𝑸 𝑷
ES,P = %𝜟𝑷
= 𝜟𝑷 𝑸
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