Economics-1+1

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Published on July 26, 2008

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The Market Forces of Supply and Demand : The Market Forces of Supply and Demand Chapter 4 Markets : Markets A market is a group of buyers and sellers of a particular good or service. The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets. And Economics, especially Microeconomics is about how supply and demand interact in markets. Market Types or Structures : Market Types or Structures Competitive Markets Products are the same,price takers Monopoly Monopolistic Competition Oligopoly Demand Curve : Demand Curve $3.00 2.50 2.00 1.50 1.00 0.50 2 1 3 4 5 6 7 8 9 10 12 11 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Why does the Demand Curve Slope Downward? : Why does the Demand Curve Slope Downward? Law of Demand Inverse relationship between price and quantity. Law of Diminishing Marginal Utility. Utility is the extra satisfaction that one receives from consuming a product. Marginal means extra. Diminishing means decreasing. Market Demand : Market Demand Market demand refers to the sum of all individual demands for a particular good or service. Graphically, individual demand curves are summed horizontally to obtain the market demand curve. Ceteris Paribus : Ceteris Paribus Ceteris paribus is a Latin phrase that means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.” The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded! Two Simple Rules for Movements vs. Shifts : Two Simple Rules for Movements vs. Shifts Rule One When an independent variable changes and that variable does not appear on the graph, the curve on the graph will shift. Rule Two When an independent variable does appear on the graph, the curve on the graph will not shift, instead a movement along the existing curve will occur. Let’s apply these rules to the following cases of supply and demand! Change in Quantity Demanded versus Change in Demand : Change in Quantity Demanded versus Change in Demand Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product. Changes in Quantity Demanded : Changes in Quantity Demanded 0 D1 Price of Cigarettes per Pack Number of Cigarettes Smoked per Day A tax that raises the price of cigarettes results in a movement along the demand curve. A 20 2.00 Change in Quantity Demanded versus Change in Demand : Change in Quantity Demanded versus Change in Demand Change in Demand A shift in the demand curve, either to the left or right. Caused by a change in a determinant other than the price. Determinants of Demand : Determinants of Demand Market price Consumer income Prices of related goods Tastes Expectations What are some examples? Consumer IncomeNormal Good : Consumer IncomeNormal Good $3.00 2.50 2.00 1.50 1.00 0.50 2 1 3 4 5 6 7 8 9 10 12 11 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand An increase in income... D1 D2 Consumer IncomeInferior Good : Consumer IncomeInferior Good $3.00 2.50 2.00 1.50 1.00 0.50 2 1 3 4 5 6 7 8 9 10 12 11 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Decrease in demand An increase in income... D1 D2 Prices of Related GoodsSubstitutes & Complements : Prices of Related GoodsSubstitutes & Complements When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. When a fall in the price of one good increases the demand for another good, the two goods are called complements. Change in Quantity Demanded versus Change in Demand : Change in Quantity Demanded versus Change in Demand Supply Curve : Supply Curve $3.00 2.50 2.00 1.50 1.00 0.50 2 1 3 4 5 6 7 8 9 10 12 11 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Law of Supply : Law of Supply The law of supply states that there is a direct (positive) relationship between price and quantity supplied. Supply : Supply Quantity supplied is the amount of a good that sellers are willing and able to sell. Change in Quantity Supplied : Change in Quantity Supplied 1 5 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C A rise in the price of ice cream cones results in a movement along the supply curve. Market Supply : Market Supply Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve. Determinants of Supply : Determinants of Supply Market price Input prices Technology Expectations Number of producers What are some examples? Change in Supply : Change in Supply Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S1 Change in Quantity Supplied versus Change in Supply : Change in Quantity Supplied versus Change in Supply Equilibrium of Supply and Demand : Price of Ice-Cream Cone Quantity of Ice-Cream Cones Equilibrium of Supply and Demand 2 1 3 4 5 6 7 8 9 10 12 11 0 $3.00 2.50 2.00 1.50 1.00 0.50 Excess Supply : Price of Ice-Cream Cone Quantity of Ice-Cream Cones 2 1 3 4 5 6 7 8 9 10 12 11 0 $3.00 2.50 2.00 1.50 1.00 0.50 Supply Demand Surplus Excess Supply Excess Demand : Excess Demand Quantity of Ice-Cream Cones Price of Ice-Cream Cone $2.00 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Supply Demand $1.50 Shortage Three Steps To Analyzing Changes in Equilibrium : Three Steps To Analyzing Changes in Equilibrium Decide whether the event shifts the supply or demand curve (or both). Decide whether the curve(s) shift(s) to the left or to the right. Examine how the shift affects equilibrium price and quantity. How an Increase in Demand Affects the Equilibrium : How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 7 Quantity of Ice-Cream Cones Supply Initial equilibrium D1 1. Hot weather increases the demand for ice cream... Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How a Decrease in Supply Affects the Equilibrium : How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 2.00 0 1 2 3 4 7 8 9 11 12 Quantity of Ice-Cream Cones 13 Demand Initial equilibrium S1 10 1. An earthquake reduces the supply of ice cream... New equilibrium

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