Ch 4 Econ The Market Forces of Supply & Demand
quantity demanded
the amount of a good that BUYERS are willing and able to purchase
complements goods
two goods for which an increase in the price of one leads to a decrease in the demand for the other. eg. Gasoline prices go up, can cause less demand on cars.
substitute goods
two goods for which an increase in the price of one leads to an increase in the demand for the other eg. frozen yogurt prices go up, less people want to buy (less demand). But more people will buy ice-cream instead...higher demand for ice-cream.
What is a MARKET?
A group of buyers and sellers of a PARTICULAR good or service forms a market. Eg. ice-cream buyers and ice-cream seller...together they form a market. Car buyers and car sellers...form a market. Boba drinks buyers and sellers...form a market. Nail salon customers (buyers) and seller...form a market.
Supply Schedule
A table shows the Given prices and amount sellerʻs are willing to sell at.
Demand
Amount of good or service buyers are willing and able to purchases at given prices.
Law of Supply
As Price Increases - Quantity supplied Increases As Price Decreases - quantity supplied decreases. (When prices are getting higher, selling become more profitable, supply rises. When prices are decreases, cheaper, selling become less profitable, so the quantity supplied are less) At low price, some sellers might choose to SHUT DOWN. Their quantity supplied falls to ZERO;
Buyer
As a group, determine the demand for the product
Seller
As a group, determine the supply of the product.
Price Taker
Because buyers and sellers in "perfectly competitive" markets must accept the price and market determines. NO SINGLE BUYER OR SELLER CAN INFLUENCE THE PRICE. For example, in a wheat market, thousands of farmers who sell wheat and millions of buyers who buy wheat products. NO SINGLE BUYER OR SELLER can influence the price of wheat. Each takes the MARKET PRICE as given.
Demand curve: SHIFT OR MOVE ALONG THE CURVE
DEPENDS ON WHICH VARIALBE CHANGE: MOVE ALONG THE CURVE: Price of the good itself change. eg. There is an increase in cigarette tax. (so the price of cigarette change) SHIFT CURVE: Variables are: income, prices of related goods (substitute or complements), tastes, expectations, & number of buyers.
Forces that make MARKET ECONOMICS wrok.
Demand & Supply They determine the QUANTITY of each good produced and the price at which it is sold. If you want to know "how" any event or policy will affect the economy, u must think first about how it affect demand & supply.
Theory of Demand and Supply
How buyers & sellers behave and how they interact with one another. It shows how supply & demand determine prices in a market economy & how prices allocate the economyʻs scarce resources.
inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand. eg. bus rides. U have more income, u will ride on bus less, as u might buy a car.
normal good
a good for which, other things equal, an increase in income leads to an increase in demand. eg. u have more income, u might buy more clothes, more ice-cream, jewerly...
demand curve.
a graph of the relationship between the price of a good and the quantity demanded. PRICE always on Y AXIS. QUANTITY always X AXIS. Always NEGATIVE SLOPE - as price goes up, quantity demand is less. Price goes down, quantity demand is greater. (with assumption that other variables that influence buyers are constant)
supply curve
a graph of the relationship between the price of a good and the quantity supplied. The curve always a positive slope.
competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price. PRICE and QUANTITY sold are not determine by a Single buyer or seller. They are determined by ALL BUYERS & SELLERS as they interact in the market place.
demand schedule
a table that shows the relationship between price quantity demanded. Ceteris Paribus
Supply Determinants: 5 causes for supply curve shift
1. PRICE OF INPUTS Supply of a good is NEGATIVELY related to the price of the input used to make the good. (INPUT can be labors, machines, buildings, cream, sugar...to make ice-cream) When 1 or more of the inputs price rises, the product suppliers are making become less profitable. So they make less product (supply falls, curve shift to LEFT) eg. if the price of sugar rises, that make ice-cream less profitable. If the input prices rises too much, a firm will shout down - zero supply. 2. TECHNOLOGY - invention of new machinery can reduce amount of labor (reduce firmʻs cost) raised the supply. 3. SELLERʻS FUTURE EXPECTATION ABOUT PRICE - if a firm expect prices of the product will rise in the future. Firms will put away its current production into storage and supply less to the market today. 4. CHANGE IN THE # OF SELLERS - if some supplies going to retire or close business. The supply in the market fall. 5. GOVERNMENT - TAXES OR SUBSIDIES. When Govt impose a TAX on a certain business, SUPPLY DECREASE - (less profit as sellers pay more tax to govt) However, if Govt SUBSIDIES a business, govt giving $ to sellers (more profit) SUPPLY INCREASE.
2 ways to reduce the quantity of smoking demanded
1. To shift the demand curve to the left. (less demand) Policy makers required a mandatory warning on cigarette packages. 2. Increase the tax on the cigarette, so the prices go up. The demand ʻMOVEDʻ along the curve, less demand. Studies found 10% increase price, cause 12% drop in teenage smoking. Some studies found lower cigarette prices, greater use of marijuana...they appear to be "complement". NOT substitute as people think that, more people will smoke marijuana if cigarette price go up...the data proof this is wrong.
Market vs. individual supply
Market Supply: The SUM of the supplies of ALL SELLERS.
MARKET DEMAND vs. INDIVIDUAL DEMAND
Market demand = SUM of all individual demands for a PARTICULAR good or service. (Add all the individual quantities) We often deal with the market demand curve as it shows how the TOTAL QUANTITY DEMANDED FOR A GOOD changes as THE PRICE OF THE GOOD changes. (assume all others factors affect how much consumers wants to buy held constant)
Change in Supply (supply increases or decreases at every price)
Move ALONG THE THE LINE. If a particular good or serviceʻs Price rises, supply rises. Price falls, supply falls.
MARKET can be organized and unorganized
Organized: for example, market for agricultural commodities. Buyers and sellers meet at a specific time and place where auctioneer help set prices and arrange sales. Unorganized: Buying ice-cream in a local town. Buyer and seller donʻt need to meet at certain time and place. Buyers choose where and when to buy ice-charm for their cravings. Seller post a price for their products. Regardless unorganized, a group of Buyers and Sellers forms a market.
In Ch 4, we assume markets are "perfectly competitive".
Perfectly Competitive Market must have these 2 characteristics: 1) The goods offered for sale are all exactly the same. (eg. a wheat market selling the same wheat) 2) NUMEROUS BUYERS and SELLERS - that no single buyer or seller has any influence over the market price.
Law of Demand (Relationship between price & quantity demanded)
Price rises - Quantity demanded falls. Price falls - Quantity demanded rises Ceteris paribus (all other things are constant) eg. A scoop of an ice-cream cost $3, but if it rises to $20 a scoop (getting expensive), u would BUY LESS ice-cream. = demand fails If a scoop of ice-cream falls to $0.1 a scoop, (getting cheaper) you would BUY MORE = demand rises
Demand Determinants: (5 causes of the demand curve "shift")
THE EINTIRE CURVE shift up or down. 5 Causes: 1) Chage in INCOME: if you have less income (job loss), u spend less.. Demand curve shift Left. (demand falls) eg. u will buy less "normal goods" like clothings, ice-cream, go to theater. If more income, u buy more, curve shift right, (demand rises). When income falls = demand falls, goods are call ʻNORMAL GOOD". eg. ice-cream, clothing, jewelry, cars...mgoods are normal goods. When income falls = demand rises, goods are call "INFERIOR GOOD".eg. bus rides. U have less income, u will need to ride on public transportation 2) PRICES OF RELATED GOODS changes: If prices of substitutes goods or complement goods changes, the other related goods demand change. Example: If prices of frozen yogurt falls, people will buy more frozen yogurt (higher demand). BUT, u will buy less ice-cream, ice-cream demand falls, curve shift left. Those 2 goods are called "SUBSTITUTES". like ice-cream & frozen yogurt. However, if hot fudge price falls, u buy more hot fudge. Then ice-cream demand goes up as well. These 2 goods are called "COMPLEMENTS". Pairs of goods are used together. eg. gasoline and cars, computer & software. 3) TASTE or PREFERENCE. If studies say drinking tea increase risk of cancer, then the demand of tea drops. Or, if studies says drinking wine reduce the risk heart disease, then demand of wine increase. 4) BUYERʻS FUTURE Price EXPECTATIONS: eg. News said the car prices will go down next month, you wonʻt buy car at todayʻs price. Thus, less demand TODAY. or, there will be a 50% price rise for iPad next month, people will buy now (more demand now) 5) NUMBER OF BUYERS (POPULATION): The more buyers in the market, the demand curve shift right...more demand. For example, if survey said there are more pizza lovers, pizza demand will go up.
Supply
The amount of a good or service that sellers are willing and able to sell at given prices
Monopoly
Unlike perfectly competitive market. Monopoly only has 1 seller - seller set the price. eg. your local cable company. Or, the local telephone company.
Ceteris Paribus
When other variables remain constant. When drawing demand and supply curves, we assume all other variables stay constant.
