2. • Demand and supply are two words that
economists use most often.
• These are the forces that make market
economies work.
• They determine the quantity of each good
produced and the price at which it is sold.
2
3. Markets and Competition
• What is a Market?
– 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.
– Buyers determine demand for the product.
– Sellers determine supply of the product.
3
4. Markets and Competition
Cont…
• What is Competition?
– A business relation/rivalry in which two parties
compete to gain customers.
– Economists use the term competitive market to
describe a market in which there are many buyers
and sellers so that each has an impact on the
market price.
4
5. Markets and Competition
Cont…
• What is Competition? (Cont.)
– Economists believe that in order to be perfectly
competitive, markets must have the following
characteristics:
1. Products offered for sale are the same.
2. There are numerous buyers and sellers so that no
single buyer or seller has any influence over the
market price.
5
6. Markets and Competition
Cont…
• What is Competition? (Cont.)
– Not all goods and services are sold in perfectly
competitive markets.
– Some markets have only one seller, and this seller
sets the price.
– This situation refers to monopoly.
6
7. Demand
• Quantity demanded is the amount of the good that
buyers are willing and able to purchase.
• Many things determine the quantity demanded, but
one determinant plays a central role ---- the price of
the good.
• Quantity demanded falls as the price rises and rises
as the price falls, we say that these two are negatively
related.
7
8. Demand
Cont…
• This relationship is true in most cases, therefore,
economists term it as the law of demand.
• Law of Demand states that when the price of a good
rises, the quantity demanded falls and vice versa.
8
9. The Demand Curve: Relationship between Price
and Quantity Demanded
• Demand Schedule:
– It is a table that shows the relationship between
the price of the good and the quantity demanded.
9
11. The Demand Curve: Relationship between Price
and Quantity Demanded (Cont.)
• Demand Curve:
– It is a graph of the relationship between the price
of a good and the quantity demanded.
11
12. Demand Schedule and Demand Curve
Price of
Ice-Cream
$3.00
2.50
1. A decrease
in price ...
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12
2. ... increases quantity
of cones demanded.
12
Quantity of
Ice-Cream
13. The Demand Curve: Relationship between Price
and Quantity Demanded (Cont.)
• Market Demand:
– To analyze how markets work, we need to
determine the market demand.
– Market demand is the sum of all the individual
demands for a particular good or service.
13
14. Shifts in the Demand Curve
• Change in Demand:
– A shift in the demand curve, either to the left or
right.
– Caused by a change that alters the quantity
demanded (e.g. increase in tax).
14
15. Shifts in the Demand Curve
Price
Increase
in Demand
Decrease
in Demand
Demand curve, D3
0
Demand
curve, D1
15
Demand
curve, D2
Quantity
16. Shifts in the Demand Curve
• Factors that Cause Shifts in Demand Curve:
1. Consumer Income:
• As income increases the demand for a normal good will
increase.
• As income increases the demand for an inferior good
will decrease.
16
17. Shifts in the Demand Curve
Cont…
• Factors that Cause Shifts in Demand Curve (Cont.):
2. Prices of Related Goods:
• 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 (e.g. cars and fuel).
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18. Shifts in the Demand Curve
Cont…
• Factors that Cause Shifts in Demand Curve (Cont.):
3. Tastes.
4. Expectations:
• If the prices are expected to fall within a few days.
• Expect an increase in salary.
5. Number of Buyers:
• Increased number of buyers result in increased
demand.
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19. Supply
• Quantity supplied is the amount of a good that sellers
are willing and able to sell.
• Like demand, many things determine the quantity
supplied, but in this also price plays the central role.
• Quantity supplied rises as the price rises and falls as
the price falls, we say that these two are positively
related.
19
20. Supply
Cont…
• This relationship price and quantity supplied is
called the law of supply.
• Law of Supply states that when the price of a good
rises, the quantity supplied also rises and vice versa.
20
21. The Supply Curve: Relationship between Price
and Quantity Supplied
• Supply Schedule:
– It is a table that shows the relationship between
the price of the good and the quantity supplied.
21
23. The Supply Curve: Relationship between Price
and Quantity Supplied (Cont.)
• Supply Curve:
– It is the graph of the relationship between the
price of a good and the quantity supplied.
23
25. The Supply Curve: Relationship between Price
and Quantity Supplied (Cont.)
• Market Supply:
– Market supply refers to the sum of the supplies of
all sellers.
25
26. Shifts in the Supply Curve
• Change in Quantity Supplied:
– A shift in the supply curve, either to the left or
right.
– Caused by a change that alters the quantity
supplied.
26
27. Shifts in the Supply Curve
Price
Supply curve, S3
Supply
curve, S1
Decrease
in supply
Supply
curve, S2
Increase
in supply
Quantity
0
27
28. Shifts in the Supply Curve
• Factors that Cause Shifts in Supply Curve:
1. Input Prices:
• When the price of inputs rises, producing that good
becomes less profitable, thus, firms reduce supply.
2. Technology:
• Use of modern technology increases supply.
28
29. Shifts in the Supply Curve
Cont…
• Factors that Cause Shifts in Supply Curve (Cont.):
3. Number of Sellers:
• When the number of sellers increases, supply also
increases.
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30. Supply And Demand Together:
Equilibrium
• There is one point at which supply and demand
curves intersect.
• This point is called the market’s equilibrium.
• The price at this intersection is called the
equilibrium price.
• The quantity at this point is called the equilibrium
quantity.
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31. Supply And Demand Together:
Equilibrium (Cont.)
• At the equilibrium price, the quantity demanded
exactly balances the quantity supplied.
• Equilibrium price is also called market-clearing
price because at this price, everyone in the market is
satisfied:
– Buyers have bought all they wanted to buy.
– Sellers have sold all they wanted to sell.
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