phuong hm nguyen - the market forces of supply and demand

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Nguyn Hong M [email protected] The Market Forces of Supply and Demand

SummaryMarketDemandSupplyEquilibrium

1. Market

MarketA market(place) is a place where buyers and sellers meet and arrange sales. [Place-ness, i.e. how culture, social relation, and history have shaped the specific forms and meanings of economic activity that occur there -- economic anthropology; economic sociology]A market is an exchange mechanism that allows buyers to trade with sellers.A market is the collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products.

Note: Market # Industry. An industry is a collection of firms that sell the same or closely related products. In effect, an industry is the supply side of the market.4

Forms of MarketsMarkets take many forms:Some markets are highly organized, such as the markets for many agricultural commodities.More often, markets are less organized, such as the market for ice cream in a particular town

Market DefinitionMarket definition: Determination of the buyers, sellers, and range of products that should be included in a particular market.Extent of a market: boundaries of a market, both geographical and in terms of range of products produced and sold within it.Two reasons of its importance:Market definition can be important for public policy decisions. A company must understand who its actual and potential competitors are for the various products that it sells or might sell in the future; must also know the product boundaries and geographical boundaries of its market to set price, determine advertising budgets, and make capital investment decisions.

Market StructureMarket structure: the number of firms in the market, the ease with which firms can enter and leave the market, and the ability of firms to differentiate their products from those of their rivals.Market power: the ability to affect price, either by a seller or a buyer.Types of market structures:Competitive marketMonopolyMonopolistic competitionOligopoly

Competitive MarketCompetitive market (sometimes called perfectly competitive market): a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.Characteristics:There are many buyers and sellers in the marketThe goods offered by the various sellers are largely the sameFirms can freely enter or exit the marketWe use the term competition to refer to all markets in which no buyer or seller can significantly affect the market price.

MonopolyMonopoly: a firm that is the sole seller of a product without close substitutes (price maker).The fundamental cause of monopoly is barriers to entry which have 3 main sources:Monopoly resources: a key source required for production is owned by a single firm.Government regulation: the government gives a single firm the exclusive right to produce some good or service.The production process (natural monopoly): a single firm can produce output at a lower cost than can a larger number of firms.

Monopolistic CompetitionMonopolistic competition: a market structure in which many firms sell products that are similar but not identical.Characteristics:Many sellers: there are many firms competing for the same group of customers.Product differentiation: each firm produces a product that is at least slightly different from those of other firms. Thus, rather than being a price taker, each firm faces a downward-sloping demand curve.Free entry and exit: Firms can enter or exit the market without restriction.

Many industries fall somewhere between the polar cases of perfect competition and monopoly. Economists call this situation imperfect competition.2 types of imperfectly competitive market: (1) oligopoly; (2) monopolistic competition.10

OligopolyOligopoly: a market structure in which only a few sellers offer similar or identical products.Concentration ratio: the percentage of total output in the market supplied by the four largest firms.Ex.: In US economy, electric lamp bulbs (75%), breakfast cereal (80%), aircraft manufacturing (81%), cigarettes (98%), etc.

Source: Mankiw, N.G. Principles of Microeconomics, 7th edition. US: Cengage Learning, 2015.

2. Demand

Demand vs. Quantity DemandedDemand: the quantities of a good that buyers are willing and able to purchase at each possible price during a given period of time, holding constant the other factors that influence purchases (ceteris paribus).The quantity demanded is a specific amount of a good that buyers are willing and able to purchase at one price.

Demand ScheduleDemand schedule: a table that shows the relationship between the price of a good and the quantity demanded.

Price of Ice-Cream ConeQuantity of Cones Demanded$0,0012 cones0,50101,0081,5062,0042,5023,000

Demand CurveDemand curve: a graph of the relationship between the price of good and the quantity demanded

Because a lower price increases the quantity demanded, the demand curve slopes downward.

Market Demand vs. Individual Demand

Market demand: the sum of all the individual demands for a particular good or service.

One of the most important things to know about a graph of a demand curve is what is not shown. All relevant economic variables that are not explicitly shown on the demand curve graph income of customers, price of related goods, tastes, expectations, number of buyers, etc. are held constant.

Thus the demand curve shows how quantity varies with price but not how quantity varies with income of customers, price of related goods, tastes, expectations, number of buyers, or other variables.Determinants of Demand

Law of DemandLaw of demand: other things being equal (ceteris paribus), when the price of good rises, the quantity demanded of a good falls, and when the price falls, the quantity demanded rises.

P QD

P QD

Shift in the Demand Curvevs. Movement along the Demand Curve

Shifts in the Demand CurveIncome:Normal good: a good for which, other things being equal, an increase in income leads to an increase in demand.Inferior good: a good for which, other things being equal, an increase in income leads to a decrease in demand.Prices of related goods:Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the otherComplements: two goods for which an increase in the price of one leads to an decrease in the demand for the other

Shifts in the demand curveTastesExpectations: expectations about the future may affect the demand for a good or service today.Numbers of buyers: if there are more buyers, the quantity demanded in the market will be higher at every price, and market demand will increase.

Shifts in the Demand Curvevs. Movements along the Demand Curve

3. Supply

Supply vs. Quantity SuppliedSupply: the quantities of a good that sellers are willing and able to supply at each possible price during a given period of time, holding constant the other factors that influence purchases (ceteris paribus).The quantity supplied is a specific amount of a good that sellers are willing and able to supply at one price.

Supply refers to the position of the supply curve, whereas the quantity supplied refers to the amount suppliers wish to sell.25

Supply ScheduleSupply schedule: a table that shows the relationship between the price of a good and the quantity supplied.

Price ofIce-Cream ConeQuantity ofCones Supplied$0,000 cones0,5001,0011,5022,0032,5043,005

Supply CurveSupply curve: a graph of the relationship between the price of good and the quantity supplied.

Because a higher price increases the quantity supplied, the supply curve slopes upward.

Market Supply vs. Individual SupplyMarket supply is the sum of the supplies of all sellers.

Law of SupplyLaw of supply: Other things being equal, when the price of the good rises, the quantity supplied of the good also rises, when the price falls, the quantity supplied falls as well.

P QSP QS

Shifts in the Supply CurveAny change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left.

Shifts in the Supply CurveInput prices: the supply of a good is negatively related to the price of the inputs used to make the good.Technology: the advance in technology raised the supply by reducing firms costs.Expectations: expectations about the future may affect the supply for a good or service today.Numbers of sellers: If there are less suppliers, the supply in the market will fall.

Shifts in the Supply Curvevs. Movements along the Supply Curve

4. Equilibrium

EquilibriumEquilibrium: a situation in which the market price has reached the level at which quantity supplied equals quantity demanded.Equilibrium price (market-clearing price): the price that balances quantity supplied and quantity demanded.Equilibrium quantity: the quantity supplied and the quantity demanded at the equilibrium price.

PPE = $2,000QE = 7QD

S

Equilibrium

Equilibrium price

Equilibrium quantity

EEquilibrium

GV: Phm Vn Minh35Kinh t Vi M

EquilibriumAt equilibrium:QD = QS No surplus (excess supply)No shortage (excess demand)No upward or downward pressure on the price.

-> What happens when the market price is not equal to the equilibrium price?

PPEoQEQD

S

Surplus

QDQSP1

Market price > Equilibrium price QS > QD (excess supply) Sellers reduce their prices until QS = QDSurplus (excess supply)


38

PPEoQEQD

S

Shortage

QSQDP1

Market price < Equilibrium price QS < QD (excess demand) Sellers raise their prices until QS = QDShortage (excess demand)


Law of Supply and DemandLaw of supply and demand: the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

Changes in EquilibriumChanges in demand (shifts in the demand curve)Changes in supply (shifts in the supply curve)Changes in both demand and supply (shifts in both the demand and supply curves)

Analysis of Changes in EquilibriumDecide whether the event shifts the supply or demand curve (or perhaps both).Decide in which direction the curve shifts.Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity.

Change in Demand

PP1oQ1QD1

S

Initial equilibrium

Q2P2

D2New equilibrium

Changes in Equilibrium


Change in Supply

PP1oQ1QS1

D

Initial equilibrium

Q2P2

S2New equilibrium



Change in Demand and Supply

S2

Q2P2New equilibrium

D2

PP1oQS1

Initial equilibriumQ1

D1



45Change in Demand and Supply

S2

New equilibrium

Q2P2

D2

PP1oQ1QS1

Initial equilibrium

D1



ReferencesMankiw N.G. Principles of Microeconomics, 7th edition. US: Cengage Learning, 2015.Perloff J.M. Microeconomics, 6th edition. Boston: Addison-Wesley, 2012.Pindyck R.S. and Rubinfeld D.L. Microeconomics, 8th edition. US: Prentice Hall, 2013.Jain, T.R. and Sandhu A.S. Microeconomics. Delhi: Prince Print Process 2010.Leshkowich, Ann M. Essential Trade: Vietnamese Women in a Changing Marketplace. Honolulu: University of Hawaii Press, 2014.

phuong hm nguyen - the market forces of supply and demand

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