Transcript econ11chap6demandsupplyandmarkets

Chapter 6
Demand, Supply, and
Markets
Economics 11
March 2012
What is a market?
 A market is any network that brings
buyers and sellers into contact with one
another so they can exchange goods and
services
 It is through markets that our economy
answers the three questions: what to
produce, how to produce, and for whom
to produce
Markets
 A market however, does not have to have a
physical setting
 business can be done by telephone, fax, internet or
written communication
 A market exists wherever the forces of supply
and demand meet to effect an exchange
 In any given market at any given time, the total
number of sellers constitute the supply and the
total number of buyers constitute the demand
Demand
demand - the quantities of a good or
service that buyers are willing and able to
buy at various prices in a particular
period of time
Demand
demand schedule – a list of prices and the number
you would buy at each price
demand curve – a graph showing the relationship
between price and quantity
 the vertical (y) axis always measures price, and the horizontal
(x) axis always measures quantity
 as price increases, quantity demanded decreases.
 as price decreases, quantity demanded increases.
 in other words, there is an inverse relationship between
quantity demanded and price.
Demand -
downward sloping demand
the law of downward sloping
demand – this law states that when the
price of a good is raised (and there are
no other changes), less of it will be
demanded. If the price of a good is
lowered (and there are no other changes)
then the quantity demanded will increase.
Demand –
demand and utility
the law of diminishing marginal
utility – this law states that each
additional unit of good consumed at any
given time yields less satisfaction than
the one previously consumed
Demand –
elasticity of demand
elasticity of demand – the responsiveness of
the quantity demanded to a change in price
 the demand for McDonalds’ hamburgers is elastic
 the price drops, more money is spent on
McDonalds’ burgers
 the price rises, less money is spent on McDonalds’
burgers
Demand –
elasticity of demand
factors determining elasticity of demand :
 lots of substitutes (items that have lots of substitutes are
usually elastic in demand demand is affected by price changes)
 small items tend to be unaffected by price changes so
they are likely to be inelastic (big items in a budget are likely
to be elastic)
 essential items (bread, electricity) tend to have inelastic
demand because consumers cannot readily avoid
using them
 luxury goods (like a holiday to a tropical destination) tend to
have elastic demand because consumers can easily stop
buying them if prices rise.
Demand –
shifts in demand
 shifts in demand occur when there is a change
in the quantity of a product demanded for
reasons other than price changes
 possible causes of a shift in demand:
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a change in market size
a change in income
an increase in the cost of substitutes
a change in preference
Supply
supply – the quantities of a good or
service that sellers are willing and able to
sell at various prices in a particular period
of time.
Supply
supply schedule – shows the price-quantity
relationship.
supply curve – a graph showing the relationship
between price and quantity
 Note that the supply curve slopes up and to the right –
showing that as prices rise, suppliers are willing and
able to supply more.
 There is a direct relationship between price and quantity
supplied.
Supply, Demand, and Equilibrium
 Assuming no other changes take place,
we know that as the price of a good (or
service) falls, more of that good will be
demanded and less of it supplied
 Conversely, as the price rises more of it
will be supplied and less of it demanded
Supply, Demand, and Equilibrium
 At some point, the quantity supplied and the
quantity demanded will be equal, here supply
and demand are in equilibrium.
 In markets, equilibrium is seldom reached.
 There are too many other factors that continuously influence
the supply and demand of goods and services.
 However when there is freedom of competition among and
between buyers and sellers, the forces of supply and demand
move toward equilibrium to resolve the problems of shortages
and surpluses.
Shifts in supply and demand
 If incomes generally increase, then it is
likely that people will be willing and able
to buy more, so the entire demand curve
shifts right.
 If incomes generally decrease, the entire
demand curve will shift to the left,
because there will be less demand
The role of the market in
our economic system
 Prices act as guides to owners of resources
and indicate where they can get the best deal
for their labour, land, or capital.
 Prices also provide the information and
incentive that consumers need to allocate their
scarce resources to meet their needs and
wants.
 Prices signal shortages and surpluses
Government Price Fixing
Ceiling prices
 A government may feel that the price for a
good or service is too high, and therefore it
fixes a maximum or ceiling price for it.
 The maximum or ceiling price is the highest
price that may be charged legally for a good or
service.
 For example: rent controls
Government Price Fixing
Floor prices
 If the government believes that a price of a
good or service is too low, it may impose a
floor price.
 A floor price is the minimum price below which
it is illegal to buy or sell a good or service.
 For example: minimum wage laws
 http://www.youtube.com/watch?v=1mo_D
8qRjTU
 http://www.youtube.com/watch?v=CouzZ
NjuyRM&feature=related
Law of downward-sloping
demand: when the price of a
good is raised (and there are
no other changes), less of it
will be demanded. If the
price of a good is lowered,
then the quantity demanded
will increase
Law of diminishing marginal
utility: each additional unit of
a good consumed at any
given time yields less
satisfaction than the one
previously consumed
Elasticity of demand: means the
responsiveness of the quantity
demanded to a change in
price.
If the price of Life brand deodorant goes up by 10%, those
who use it will most likely continue to buy it. Life Brand
deodorant costs around $2.00; a 10% increase will bring
the price up to $2.20. Since most people care about how
they smell and can afford the price, sales of Life brand
deodorant will probably stay the same. On the other
hand, if the price of a $25 000 car goes up by 10% the
price will become $27 500. This increase may be more
than some people can afford, therefore sales my be
affected. Generally small items are inelastic, while big
items are elastic.
In today’s world few of us would be either willing or able to
survive for very long without electricity. We need it for light,
heat, cooking, etc. On the other hand most of us could
survive without a week long holiday in the tropics. This
means that essential item tend to have inelastic demand,
while luxury goods tend to have elastic demand.
The elasticity of demand is affected by time. If the price of
gas goes up in the short term, then people have little choice
but to pay what it costs. The demand is inelastic. If, the
price of gas stays high, however, people will start to buy
more fuel-efficient cars, alternative fuel vehicles, hybrid
vehicles, etc.