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Demand Demand and and Supply Supply • Demand and Supply • Market Equilibrium 1
Demand Demand and and Supply Supply • Demand and Supply • Market Equilibrium 1
Demand Demand and and Supply Supply • Demand and Supply • Market Equilibrium 1

DemandDemand andand SupplySupply

Demand and Supply

Market Equilibrium

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Competitive Market

 

In neoclassical economics and microeconomics, perfect competition describes a market in which there are many small firms, all producing goods.

A market in which there enough small buyers and sellers of an identical product that no single buyer or seller is sufficiently large to affect the market prices.

 
 
 
 

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What is PricePrice MechanismMechanism?

 

Prices act as a signal to firms and consumers to adjust their economic behaviour.

For example, a rise in price encourages producers to switch into making that good but encourages consumers to use an alternative substitute product.”

encourages producers to switch into making that good but encourages consumers to use an alternative substitute
 
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Demand is …

“the amount of a good that a person is willing and able to buy at various prices over a given period of time.”

… “the amount of a good that a person is willing and able to buy at
… “the amount of a good that a person is willing and able to buy at

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The law of demand states that

“the quantity of a good demanded per period of time will fall as price rises and will rise as price falls, assume ceteris paribus.”

Quantity demanded is the amount of a good that a consumer is willing and able to buy at a given price over a given period of time.

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Ceteris Paribus

Some Economist's Jargon

"Ceteris paribus" is a Latin phrase often used by economists, literally meaning "other things equal" Used in the context of an economic model, it means all the variables that might affect the equilibrium in the model, are held constant unless we explicitly say otherwise.

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Ceteris Paribus

Some Economist's Jargon

If toll rates for North-South Expressway (PLUS) increases, then the number of road users are expected to decrease.

This is only true if we hold other things constant (or ceteris paribus) – the price of automobiles, consumers’ income, the users’ taste and preferences do not change.

ceteris paribus) – the price of automobiles, consumers’ income, the users’ taste and preferences do not
ceteris paribus) – the price of automobiles, consumers’ income, the users’ taste and preferences do not

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The The demand demand curve: curve:

The The demand demand for for potatoes potatoes (monthly) (monthly)

(1) (2) (3) (4) Price Tracey's Darren's Total market (pence per kg) demand demand demand
(1)
(2)
(3)
(4)
Price
Tracey's
Darren's
Total market
(pence per kg)
demand
demand
demand
(kg)
(kg)
(tonnes: 000s)
A
20
28
16
700
B
40
15
11
500
C
60
5
9
350
D
80
1
7
200
E
100
0
6
100
MarketMarket demanddemand forfor potatoespotatoes (monthly)(monthly) Point Price E Market demand 100 (pence per kg)
MarketMarket demanddemand forfor potatoespotatoes (monthly)(monthly)
Point
Price
E
Market demand
100
(pence per kg)
(tonnes 000s)
A
20
700
D
B
40
500
80
C
60
350
D
80
200
C
60
E
100
100
B
40
A
20
Demand
0
0
100
200
300
400
500
600
700
800
fig
Quantity (tonnes: 000s)
Price (pence per kg)

Change in demand

• Consumer preferences

• Consumers’ information

• Consumers’ incomes

– Normal goods vs. inferior goods

• Consumers’ incomes – Normal goods vs. inferior goods • Number of consumers in the market

• Number of consumers in the market

• Consumers’ expectations of future prices

• Prices of closely related goods

– Complementary vs. substitute goods

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Change in demand

• Over the last decades, consumers have shown a great deal of interest in buying “organically grown” fruits and vegetables.

This has caused an increase in demand for “organically grown” fruits and vegetables.

- Taylor and Weerapana, p.62-3

• A wet winter increases the demand for umbrellas. Rainy bank holiday weekends can have a significant effect on retailers’ revenues.

• If the price of football tickets goes up, you may decide to stop going to see the match every week and spend your money on Sky TV instead.

- Gillespie, p.36-7

you may decide to stop going to see the match every week and spend your money
you may decide to stop going to see the match every week and spend your money
you may decide to stop going to see the match every week and spend your money

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Normal goods vs. inferior goods

For examples, Instant noodles form the basis of many college students’ diets. However, after these students leave college and start working and earning a salary, many of them will switch over to eating microwavable meals or to eating out in restaurants. Which good is an inferior good and which is a normal good?

eating microwavable meals or to eating out in restaurants . Which good is an inferior good
eating microwavable meals or to eating out in restaurants . Which good is an inferior good
eating microwavable meals or to eating out in restaurants . Which good is an inferior good
eating microwavable meals or to eating out in restaurants . Which good is an inferior good
eating microwavable meals or to eating out in restaurants . Which good is an inferior good

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Complementary vs. substitute goods

CDs
CDs

Butter

Complementary vs. substitute goods CDs Butter CD player Coffee Tea S h o e s S

CD player

Complementary vs. substitute goods CDs Butter CD player Coffee Tea S h o e s S

Coffee

Tea

Shoes

Socks

What will happen to the demand of the good if the price of the related good change?

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Movement along vs. Shift in

a Demand curve

Movement along vs. Shift in a Demand curve 14
Movement along vs. Shift in a Demand curve 14

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Supply

“is defined as quantities of a good that producers are willing and able to supply at various prices over a given time.”

defined as quantities of a good that producers are willing and able to supply at various
defined as quantities of a good that producers are willing and able to supply at various
defined as quantities of a good that producers are willing and able to supply at various

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The Law of Supply states that …

“When the price of a good rises, the quantity supplied per period of time will usually also rise, and assume ceteris paribus.”

This applies to both individual producers’ supply and to the whole market supply.

Quantity supplied is the amount of a good that a producer is willing and able to supply for sale at a given price over a given period of time.

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MarketMarket supplysupply ofof potatoespotatoes (monthly)(monthly)

Supply 100 e d P Q 80 a 20 100 b 40 200 c c
Supply
100
e
d
P
Q
80
a
20
100
b
40
200
c
c
60
350
60
d
80
530
e
100
700
b
40
a
20
0
0
100
200
300
400
500
600
700
800
Price (pence per kg)

Quantity (tonnes: 000s)

Change in Supply

• Technology

• Weather Conditions

• The price of Inputs Used in Production

• The number of Firms in the Market

• Expectations of Future Prices

• Government Taxes, Subsidies and Regulations

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Change in Supply

Change in Supply • An unusually cold winter in 2006 destroyed over a billion dollars worth

• An unusually cold winter in 2006 destroyed over a billion dollars worth of citrus fruit in California. Hurricanes Katrina and Rita disrupted oil drilling and refining activities in Texas and Lousiana. Such events had caused an increase in the price of inputs.

• The Harbour Report, a study that examines the number of labour hours needed to produce an automobile, calculated that in 2005, General motors needed 34 hours per vehicle, while Toyota needed only 28 hours per vehicle. Suppose an improvement in technology enable General Motor to reduce the time it took to produce a car by 6 hours per vehicles. This improvement in technology would correspond to an increase in supply.

- Taylor and Weerapana, Economics, p.62-3

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Movement along vs. Shift in

a Supply curve

Movement along vs. Shift in a Supply curve 20
Movement along vs. Shift in a Supply curve 20

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Market Equilibrium & Incentives

Situation where the supply of an item is exactly equal to its demand. Since neither there is surplus nor shortage in the market, there is no innate tendency for the price of the item to change.

there is surplus nor shortage in the market, there is no innate tendency for the price
there is surplus nor shortage in the market, there is no innate tendency for the price

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Market Disequilibrium Shortages and Surplus Surplus (or Excess Supply) Shortages (or Excess Demand) 22

Market Disequilibrium

Shortages and Surplus

Market Disequilibrium Shortages and Surplus Surplus (or Excess Supply) Shortages (or Excess Demand) 22
Market Disequilibrium Shortages and Surplus Surplus (or Excess Supply) Shortages (or Excess Demand) 22

Surplus (or Excess Supply)

Market Disequilibrium Shortages and Surplus Surplus (or Excess Supply) Shortages (or Excess Demand) 22

Shortages (or Excess Demand)

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Changes in Demand/ Supply

Florida Tomato Growers May Lose $7 Million a Week, Group Say

by Elizabeth Campbell

“Tomato growers in Florida may lose $7 million a week in the next several months if crops create a surplus following a devastating cold snap in January … Freezing conditions in early January killed about 70 percent of the state’s winter crop, … The losses pushed up prices, damped demand and encouraged buyers to turn to alternative sources, including Mexico, … As warmer weather helps crop growth, a surplus may emerge and depress the market.” (Business Week, Mar 2010)

… As warmer weather helps crop growth, a surplus may emerge and depress the market.” (Business
… As warmer weather helps crop growth, a surplus may emerge and depress the market.” (Business

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Changes in Demand/ Supply

Changes in Demand/ Supply C o f f e e M a r k e t

Coffee Market

in Demand/ Supply C o f f e e M a r k e t Coffee

Coffee Market

What are the possible reasons that could explain the change?

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