Transcript How Markets Work

How Markets Work
Demand & Supply
Introduction
• Economics is about choices that people make to
face scarcity and how those choices are affected
by incentives.
• Prices act as incentives.
• The demand & supply model is the main tool of
Economics . It tells us how people respond to
prices and how prices are determined by
demand & supply.
• This model helps us to answer the economic
questions : What How , and for whom are goods
and services are produced?
Prices And Markets
• Prices of goods and services are determined by
demand and supply of these goods and services
in the markets.
• A market has two sides : buyers & sellers.
• Examples of goods and services:
• Some markets are physical places where buyers
& sellers meet.
• Some markets are groups of people around the
world who never meet , but connected through
Internet. Examples: E-commerce markets and
currency markets.
Money Prices & Relative Prices
• A Money Price of a good is the amount of
money must be paid in exchange of it.
• A Relative Price is the ratio of the price of one
good to another and it is an opportunity cost.
• Example :
• If the money price of coffee is 1 SR and the
money price of gum is 0.5 SR , then the relative
price of coffee to gum= 1 /0.5 = 2 : 1 and it is
the opportunity cost of a cup of coffee : To get
one cup of coffee ,you must give up two packs of
gum.
Demand
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If you demand something that means:
You want it.
You can afford it ,and
Plan to buy it.
Demand reflect a choice : What wants to be
satisfied and by what goods and services.
The Quantity Demanded
• The quantity demanded of goods &
services is the amount that consumer
plan to buy during a period of time at a
particular price.
• Many factors influence buying plans and
price is one of them.
The Law of Demand
• Other things remain the same , the
higher the price of a good , the smaller
the quantity demanded and the lower
the price of a good , the greater the
quantity demanded.
Substitution Effect and Income Effect
• To explain why a higher price reduce the
quantity demanded ?
• For two reasons:
• Substitution Effect: When the price of a good
rises . Other things remaining the same, its
relative price ( the opportunity cost) rises.
As the opportunity cost of a good rises , the
incentive to reduce its use and switch to a
substitute becomes stronger.
Income Effect
• When the price of a good rises , Other
things remaining the same , people face a
higher price and an unchanged income.
They cannot pay for all goods and services
that they used to buy. So when the price of
a good rises , Other things remaining the
same , they must decrease the quantities of
some goods and services specially the good
whose price has increased.
The Demand Curve
• It shows the inverse relationship between
the quantity demanded of a good and its
price , other things that affect demand being
the same.
Price
Quantity Demanded
A Demand Schedule
• It lists the quantity demanded at each price
other things that influence demand being the
same. Example:
Point
Price
Quantity
demanded
A
0.5
22
B
1
15
C
1.5
10
D
2
7
E
2.5
5
The Demand Curve
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2.5
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2
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1.5
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1
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0.5
2
4
6
8
10 12
14
16
18
20 22