Economics for Business 23115

Transcription

1 Economics for Business 23115

2 MICROECONOMICS Week 1 Micro 1 Demand and Supply Principles of Economics, Chapter 4 (until page 80 included) The market forces of supply and demand Markets and competition A market a group of buyers and sellers of a particular good or service o Whenever there is a group of buyers and sellers interacting to trade a good/service = market o May occur in a physical place or virtual o May be highly organised (e.g. fish market auction in Sydney) or less organised (market for ice cream in Sydney A competitive market a market in which there are so many buyers and sellers that each has a negligible impact on the market place o The smaller the ability of each buyer/seller (due to the fact that there are so many) to affect the market place the more competitive the market is Perfectly competitive markets o This is the assumption made in economics for business which is based on two characteristics: Homogeneous: The goods being offered for sale are all exactly the same No influence: the buyers and sellers are so numerous that none can influence the market price o Because buyers and sellers accept the market price as given price takers Competitiveness of real-world markets o Some markets the assumptions of perfect competition apply well (e.g. agricultural markets) o However some markets no competition at all e.g. monopoly (price setter) o Most real world markets fall between the extremes of perfect competition and monopoly Demand Studying the behaviour of buyers demand Quantity demanded: the amount of a good that buyers are willing and able to purchase o Willing: a buyer wants to buy that amount (e.g. tastes, preferences) o Able: given the price of the good, a buyer has enough income Quantity demanded of a good depends on many factors including: o Price o Tastes o Income etc Price of the good central role Law of demand: o Other things being equal quantity demanded when $ (vice versa, quantity demanded when $ o ceteris parbius whereby all other factors OTHER THAN PRICE affects the quantity demanded Representation:

3 o Demand schedule: a table showing the relationship between the price of a good and the quantity demanded o Demand curve: a graph showing relationship between the price of a good and the quantity demanded Individual demand o The demand schedule shows how many ice creams catherine will buy at each at different prices as the $ quantity demanded (opposite) o The graph displays how all factors (other than price) that affect the demand of ice creams are held constant The demand curve shows a downward sloping displaying the law of demand Market demand o Due to there being many buyers within a competitive market we need to determine market demand o Market demand: the sum of all individual demands for a particular good or service Graphically, they are summed horizontally to obtain the market demand curve Movements along the demand curve (change in quantity demanded)

4 o This occurs when there is a change in price this is the change in quantity demanded Shifts in the demand curve (change in demand) o This occurs when one of the factors, other than price (which stays constant) changes causing a shift in the demand curve, either to the left or right o This is a change in demand (as opposed to a change in quantity demanded) o With a change in demand the quantity demanded changes at every price Factors affecting a shift in the demand curve (change in demand) Income: the relationship between income + demand depends on what type of good the product is: o Normal good: a good for which, other things being equal an in income à in demand shift to the right (a in income demand - a shift in the left) o Inferior good: (low quality good): a good for which, other things being equal an in income à in demand Prices of related goods: the relationship between prices of a related good + demand depends on what type of goods the products are o Substitutes: two goods for a which a in $ leads to a in demand for the other good (e.g. Samsung smart phones decreasing price decreased demand for apple iphones)

5 o Complements: two goods for which a in the price of one good leads to a in demand for the other good (e.g. sugar price demand for coffee) Tastes: o Like something buy more (Demand more) o Economists do not normally try to explain people s tastes whoever they do examine what happens when tastes change Expectations o E.g. about future income expected lower income buy more in the present increase in demand o E.g. about future price of good expected higher price of good buy more in the present increase in demand Number of buyers: o Because market demand derived from individual demands it positively depends on the number of buyers SUMMARY: DEMAND Movements along the demand curve: a change in quantity demanded (occurs with ONLY a change in price there is a movement along the same demand curve) Shifts in the demand curve: a change in demand (occurs with any other factor a completely new demand curve is created) Supply Supply the behaviour of producers/sellers Quantity supplied: the amount of a good that sellers are willing and able to sell o Willing: producer wants to sell that amount o Able: the amount is feasible given resources and technology Law of supply: other things being equal (ceteris paribus) the quantity supplied of a good when the price of a good and vice versa Representation: Two ways of representing the relationship between price and quantity supplied: o Supply schedule: table showing relationship between the price of a good and the quantity supplied o Supply curve: graph showing the relationship between the price of a good and the quantity supplied Individual Supply the supply schedule shows: o How many icecreams supplied each month at different prices o How the monthly quantity of icecreams changes as the price of icecream changes o It is assumed that all factors (other than price) that affect the supply of ice-creams are held constant

6 Supply curve: o The s curve is upward sloping reflecting the law of supply Market supply: the sum of all individual supplies for a particular good or service o Graphically, individual supply curves are summed horizontally to obtain the market supply curve o The market supply curve shows how the total quantity supplied of a good varies with the price of the good, holding all other factors constant Movements along the supply curve change in quantity supplied o A change in the price of the good generates the movement along the supply curve o This is a change in quantity supplied Shifts in the supply curve change in supply o A change in one or more of other factors (i.e. in a determinant other than price) generates a shift in the supply curve, either to the left or the right o Increase in supply: shifts the supply curve to the right o Decrease in supply: shifts the supply curve to the left o Now the quantity supplied has changed at every price Other factors, other than price, that effect supply Input prices: o The quantity supplied is negatively related to the price of inputs used to make the good o Therefore if the price of an input the supply Technology: o An improvement in production technology increases productivity o Therefore with the same inputs the producer can supply more

7 Expectations: if suppliers expect the price to rise they will be more likely to store some of the good and supply less to the market today as they can get higher profits when the price rises Number of sellers: because market supply is derived from individual supply it positively depends on the number of sellers (the more sellers the more supplied)