Group 1

Hoang Thu Trang Ha Hai Bang Tran Thanh Ha Bui Thi Thu Ha

Supply and Demand

A market is defined as a group of buyers and

sellers of a particular product or service.

A perfectly competitive markets has many buyers and sellers, so no single buyer or seller can

influence on the price

=> The model of demand and supply explains how

a perfect competitive marker operates

The demand curve

- Quantity

demanded: the amount of a product

that consumers are willing and able to buy

The Individual Demand curve

The individual demand curve is a graphical representation of the demand schedule

Demand schedule: A table of numbers that shows the relationship between the price of a product and quantity demanded, ceteris paribus ( everything else held fixed)

Other factors that can influence demand include:

Income Price of related products Tastes and preferences Expectations

Buyer Demand per Consumer

Price per liter $2.00 $1.75 $1.50 $1.25 $1.00 Quantity (liters) demanded per week 50 60 75 95 120

=> Remember that in a demand schedule, any change results from a change in price alone

Law of demand

There is a negative relationship between price and quantity demanded, ceteris paribus

The Law of Demand states that other things held constant, as the price of a good increases, the quantity demanded will fall.

The demand curve is negatively sloped

A movement along a single demand curve is called a change in quantity demanded, a change in the quantity a consumer is willing to buy when the price changes.

From Individual Demand to Market Demand

The market demand equals sum of the demands of all consumers The market demand is negative sloped, reflecting the law of demand
Derivation of the market demand curve from consumers' individual demand curves

The Supply curve

Quantity supplied: The amount of a product that firms are willing and able to sell

The Individual supply curve

Supply schedule: A table that show the relationship between the price of a product and quantity supplied, ceteris paribus

Individual supply curve: A curve showing the relationship between price and quantity supplied by single firm, ceteris paribus

Gas Supply per Consumer

Price per liter Quantity (liters) supplied per week 50 60 75 95 120 1.20 1.30 1.50 1.75 2.15

Law of supply
The individual supply curve is positively sloped, reflecting the law of supply:

There is a positive relationship between price and quantity supplied, ceteris paribus

Change in quantity supplied: A change in the quantity firms are willing and able to sell when the price changes, represented graphically by movement along the supply curve

Minimum supply price: The lowest price at which a product will be supplied

From Individual supply to market supply

Market supply curve: a curve showing the relationship between the market price and quantity supplied by all firms, ceteris paribus.

The market supply is the sum of the supplies of all firms

Why is the market supply curve positively sloped?

To explain the positive slope, consider the 2 responses by firm to an increase in price:

Individual firm

New firms

Individual firms: a higher price encourages a firm to increase its output by purchasing more materials and hiring more workers

New firms: the new firms may have higher production costs than original firms, but the higher output price makes it worthwhile to enter the market

Market Equilibrium

When the quantity of product demanded equals the quantity supplied at the prevailing market price

Excess supply at $12 price

$12 Supply

Price per pizza

d a

8 6 b c

Excess demand at $6 price

Demand

18 20

30

36

50

Excess Demand causes the Price to rise

Excess

demand (shortage) occurs when the

quantity demanded exceeds the quantity supplied. Firms will increase the price they charge for their limited supply of pizza, and consumers will pay the higher price for a fewer pizzas.

An increase in price eliminates excess demand by

changing both the quantity demanded and quantity

supplied.

Excess supply causes the Price to Drop

Excess

supply occurs when the quantity

supplied exceeds the quantity demanded.

This situation will cause the price to fall as firms cut

the price to sell more

An decrease in price eliminates excess demand

by changing both the quantity demanded and

quantity supplied

Market effect of changes in demand

A change in price causes in quantity demanded A change in demand caused by changes in a variable other than the price of the good shifts the entire demand curve.

Change in Quantity Demanded versus Change in Demand

Price per pizza Price per pizza
$8 6 a $8 a c

30 36 Thousands of pizza

30 Thousands of pizza
A Change in Demand

46

A Change in Quantity Demanded

Increases in Demand Shift the Demand Curve

Increase in income, with normal good Decrease in income, with inferior good Increase in price of substitute good Decrease in price of a complementary good Increase in population

Shift in consumer preferences

Expectations of higher future prices

How an increase in demand affects the equilibrium price and equilibrium quantity
$12 Supply c a b

Price per pizza

10

Excess demand at $8 price D1, Initial demand

D2, New demand

30

40

46

Decreases in Demand shift the Demand Curve

A decreases in demand: at each price consumers are willing to buy a smaller quantity.

For example: what types of changes in the pizza market will decrease the demand for pizza? ( Figure 4.9)

A decrease in demand decreases the Equilibrium Price

Excess supply at $8 price

$8

Price per pizza

b c 6

D1, Initial demand D0, New demand

14

20

30

Thousands of pizzas per month

Reason

There are many reason for the decrease in price : - Decrease in income. - Increase in income. - Decrease in the price of a substitute good. - Increase in the price of a complementary good.

Reason
-

Decrease in population. Shift in consumer tastes. Expectations of lower future prices.

Decreasing the Equilibrium price

Main reasons is the decrease in demand. For examples : a decrease in demand of pizza. Producer can sell 30000 pizzas, but consumer willing to buy only 14000 pizzas. So they decrease the price to shrink the excess supply.

Market effects if changes in supply

Supply changes have effects to the market. They are including:

1, The change in Quantity Supplied versus Change in Supply 2, The shift the Supply Curve when the supply increase or decrease. 3, Effects of increase and decrease in Supply to the equilibrium price. 4, Simultaneous changes in supply and demand

1, The change in Quantity Supplied versus Change in Supply

A

changes in

price cause a change in quantity supply.

Its

a movement

along a single supply curve.

When the supply change

A change in supply thats not because of the change in price will shift the entire supply curve.

The supply may increase or decrease. In each case it cause the supply curve changes:

+ increase: shift to the right and downward + Decrease: shift to the left and upward

2, How Supply Curve shift when the supply increase or decrease

There are some variable that cause the increase or decrease of the supply. They are wage; price if materials or capital; technology advance; expected future price and number of producers.

The increase or decrease of those elements will

cause the increase or decrease in supply. Then itll lead to the shift of supply curve.

- To the right and downward when supply

increase - To the left and upward when supply decrease

Types of changes increase in supply that shift the supply curve

The

increase of supply appear when: - Wage : Up - Price if materials or capital: Down - Number of producers: Up - Technology advance: Up - Expected future price: Down - Number of producers: Up Then the Supply curve get shift to the right and downward

Types of changes decrease in supply that shift the supply curve

Despite

of the increase in supply, the decrease appear when: - Wage : Down - Price if materials or capital: Up - Tax: Up - Expected future price: Up - Number of producers: Down The decrease in supply will shift the supply curve to the left and upward.

3, Effects of increase and decrease in Supply to the equilibrium price.

When the demand are remain, the change of supply will effect the equilibrium price of the product.

When the supply increase, its decrease the equilibrium price

And when the supply decrease, its increase the equilibrium price.

4, Simultaneous changes in supply and demand

When both supply or demand change, they will effect the equilibrium price.

The equilibrium price is increase or decrease, its depends on which change pull the price larger.

PREDICTING AND EXPLAINING MARKET CHANGE

Tool: using the model of demand and supply to show how equilibrium prices are determined and how changes in demand and supply affect equilibrium prices and quantities.

=> We can predict the effects of various events on price and quantity of the product or explain the reason for changes in price or quantity

Table 4.5 : Market effects of Change in Demand or How does the changes in demand orHow does the supply supply equilibrium price equilibrium quantity
change? Increase in demand Decrease in demand Increase in supply Decrease in supply change?

Predicting

When demand changes and the demand curve shifts, price and quantity change in the same direction.

When supply changes and the supply curve shifts, price and quantity change in opposite direction.

Explaining

When the equilibrium price and quantity changes,

but they do not know what cause these change, we will use table 4.5 to work backward.

If the equilibrium price and quantity change in same direction, it means that the reason is changing in demand.

On the contrast, the price and quantity change in opposite direction, the cause is a change in supply.

Summary

A market demand curve shows the relationship between the quantity demanded and price, ceteris paribus

A market supply curve shows the relationship between the supplied and price, ceteris paribus

Equilibrium in a market is shown by the intersection of the demand curve and supply curve. When a market reaches equilibrium, there is no pressure to change the price.

Summary

A change in demand changes price and quantity in the same direction: an increase in demand increases the equilibrium price and quantity, a decrease in demand

decreases the equilibrium price and quantity.

A change in supply changes price and quantity in opposite directions: an increase in supply decreases price and increases quantity; a decrease in supply increases price and decreases quantity