topic 2 part 1
TRANSCRIPT
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Topic 2
Demand and supply
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Learning Objectives
• Examine the nature of markets.
• Carefully develop the concepts of demand
and supply.• Discuss the separate factors that lead to
shifts in the demand and supply curves.
• Distinguish between a movement along
and a shift of demand and supply curves
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Markets Defined
• A market is any institutionalstructure, or mechanism, thatbrings together buyers andsellers of particular goods andservices.
• Markets exists in many forms:local, national, international,and face-to-face.
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• Large numbers of buyers and sellers
• Standardised product
• Market information feely available
• Easy entry and exit of sellers
• Individual sellers are price-takers
• Text page 42
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Perfectly competitivemarkets
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Demand
• The various amounts of a productthat consumers are willing and able
to purchase at various pricesduring some specific period, allother things remaining the same(ceteris paribus)
• Demonstrated by demand scheduleand demand curve.
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Law of Demand
• The inverse relationship between theprice and the quantity demanded of a
good or service during some period of time, ceteris paribus
Based on:
1. Common sense and simple observation
2. Income and substitution effects.
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Substitution Effect
• At a lower price, consumershave the incentive tosubstitute the cheaper goodfor similar goods that are nowrelatively more expensive.
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Income Effect
• With a fixed budget, at a lower price,consumers can buy more of a product
without giving up other goods.• This implies
– A decline in price increases the purchasingpower of money income.
– An increase in price decreases the purchasingpower of money income
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The Demand Curve
• Shows the inverse relationshipbetween price and quantitydemanded for a good orservice, ceteris paribus
• Derived from a demand
schedule showing the quantitydemanded at various prices.
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Demand schedule
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5 10
4 20
3 35
2 551 80
Price Quantity demanded
per unit per week
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Graphing Demand
d
d
0
5
4
3
2
1
10 20 30 40 50 60 70 80
Price( $
p
er
unit)
Quantity demanded (units per week)
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Individual and Market
Demand• Market demand is derived by
horizontally summingindividual demand curves.
• Market demand is derived byadding all the quantities
demanded in a demandschedule which correspond totheir prices.
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Market Demand Curve is theSum of Individual Demand
Curves
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Determinants of
Demand• Non-price determinants of demand
– tastes or preferences of consumers
– the number of consumers
– income of consumers
– prices of related goods
– expectations about future prices andincome.
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Changes in Demand
• Caused by changes in non –price determinants of demand.
• Represented as a shift of thedemand curve either to theright or left
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Movement along
a demand curve
P
Q 0
5
4
3
2
1
10 20 30 40 50 60 70 80
D1
Quantity demanded
D1
Price
(
$
pe
runit)
a
b
D2
D2
Increase in
Demand
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D1
D1P
Q 0
5
4
3
2
1
10 20 30 40 50 60 70 80
Quantity demanded
Price
($
perunit)
D3
D3
Decrease in
Demand
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Changes in Demand
• A shift in the location of the demand curveis called a change in demand.
• A shift in the demand curve to the right or
to the left occurs when each of thedeterminants of demand changes asfollows:– tastes or preferences– number of buyers
– income:▪ normal or superior goods—demand varies
directly with income▪ inferior goods—demand varies inversely with
income
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Changes in Demand
(cont.)• Prices of related goods
– Substitute goods: there is a directrelationship between the price of one good
and the demand for another.– Complementary goods: there is an
indirect relationship between the price of one good and the demand for another.
– Independent goods: a change in the priceof one good will have negligible impact on
the demand for the other.• Consumer Expectations.
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Changes in Quantity
Demand• A ‘change in demand’ is NOT the same
as a ‘change in the quantity demanded’.
• A change in the quantity demanded iscaused by changes in the price of thegood or service only.
• Represented as movement along ademand curve.
• Remember ‘ceteris paribus’ - Otherfactors determining demand are heldconstant.
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Quantity of X demanded (units per period)
Priceof
X
($perunit)
Change in Quantity Demanded
Change in Demand
↑ price of X causes movement up
demand curve
Summary of Determinants of Demand
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Law of Supply
• Shows the direct relationship between the priceand quantity supplied.
• Increased price causes increased quantitysupplied.
• Decreased price causes decreased quantitysupplied.
Based on:• common sense and observation
• price as revenue per unit and an incentive toproduce and sell a product
• rising costs and declining productive efficiency.
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An Individual Producer's Supply
of Product X
Price Quantity supplied
per unit ($) per week 5 60
4 50
3 35
2 20
1 5
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Change in Supply
• represented as a shift of thesupply curve
• caused by changes indeterminants of supply otherthan price.
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Increase in SupplyS
1
0
5
4
3
2
1
2 4 6 8 10 12 14 16
Price($per
unit
)
Quantity supplied (000/week)
S 1S 2
S 2
a
b
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Decrease in Supply
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S 1
0
5
4
3
2
1
2 4 6 8 10 12 14 16
Price($per
unit
)
Quantity supplied (000/week)
S 1
S 2
S 2
a
b
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Determinants of Supply
• resource prices
• technology
• prices of other goods
• expectations about future prices and economicactivity
• the number of sellers in the market.
A change in any of these determinants will shift thesupply curve to the left or right.
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Changes in QuantitySupplied
• Caused by changes in priceonly.
• Represented as a movementalong a supply curve.
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Summary: Determinants of Supply
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Quantity of X supplied (units per period)
Priceo
fX
($
perunit)
Change in Quantity supplied
Change in Supply
↑in price of X causes movement
up the supply curve
↓in price of X causes movement
down the supply curve
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• Market equilibrium
Next lecture
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