1 23115 ECONOMICS FOR BUSINESS Lecture 1: Market forces of supply and demand 1. INTRODUCTION THEORY OF SUPPLY AND DEMAND o Considers interactions between buyers and sellers in a competitive market. o In a competitive market shows how interactions determine the equilibrium price and quantity it is sold at. MARKETS AND COMPETITION o Market Group of buyers and sellers. o Competitive Market the number of buyers and sellers ensures that each has a negligible impact on the market price. o Assumption that markets are perfectly competitive, which needs two characteristics: Homogeneous goods. Buyers and sellers so numerous that none can influence market price. They are price takers as then accept the market price given. o In reality Markets fall in between extremes of perfect competition and monopoly Perfect competition (e.g. agricultural market) Monopoly No competition, seller (price setter) sets the price. 2. DEMAND o Buyers = determine demand o Sellers = determine supply o Competitive market = Many buyers and sellers, each with negligible impact on price. DEFINITION o Q of G Demanded = Amount that buyers are willing (tastes/preferences), and able (income) to buy. o Dependant on price (central role) and many other factors. LAW OF DEMAND o Ceteris Paribus, Q demanded of a good falls (rises), when the price of a good rises (falls). REPRESENTING DEMAND o Demand Schedule = Q of G/S demanded at different price points assuming ceteris paribus. o Demand curve = Representation of it graphically MARKET VS INDIVIDUAL DEMAND o Market demand = sum of all individual demand on the horizontal. CHANGES IN DEMAND o Movements along demand curve > changes in price o Shifts in Demand curve > changes in factors other than price FACTORS THAT CAUSE SHIFTS IN DEMAND CURVE o Income (relationship depends on type of good) Normal Good = Increase in income, ceteris paribus, leads in increase in demand. Inferior Good = Increase in income leads to decrease in demand. o Price of related goods Substitutes: Decrease in price for one good leads to decrease in demand for other good. Complements: A decrease in the price of one good leads to an increase in the demand for the other good.
2 o Tastes o Expectations Of future income Future price of good o Number of Buyers 3. SUPPLY WHAT IT IS: o Behaviour of producers/sellers, i.e. supply QUANTITY SUPPLIED o The amount of a good that sellers are willing and able to sell Able = Amount feasible given resources and technology. LAW OF SUPPLY o Ceteris paribus, the quantity supplied of a good rises when the price of the good rises, and vice versa. o The supply curve is upward sloping, reflecting that law. MARKET SUPPLY o The sum of all individual suppliers for a G/S. FACTORS THAT CAUSE A SHIFT IN THE SUPPLY CURVE o Input prices Negatively related to the price of inputs used to make the goods. o Technology Improvement in tech, increases productivity. o 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. o Number of Sellers Positively depends on number of sellers.
3 Tutorial 1: Supply and Demand Questions: 1. D 2. F 3. D 4. A 5. C 6. B 7. B 8. D 9. A 10. D 11. Additional Practice Questions 1. F 2. F 3. T 4. F F
4 Lecture 2: Equilibrium & Elasticity 1. EQUILIBRIUM DEFINITIONS: o Equilibrium Situation where supply and demand have been brought into balance. o Equilibrium Price - Price that balances quantity supplied and quantity demanded. Know as the market clearing price o Equilibrium Quantity Quantity supplied and demanded at equilibrium price. MARKET NOT IN EQUILIBRIUM SURPLUS o Market price is higher than equilibrium price (excess supply). Q Supplied smaller than quantity demanded. Suppliers supply lower price to increase sales, moving towards equilibrium. MARKETS NOT IN EQUILIBRIUM SHORTAGE o Market Price is higher than the equilibrium price, then there is a shortage (or excess demand) Quantity supplied is smaller than quantity demanded. Suppliers raise price due to too many buyer chasing too few goods, moving towards equilibrium. EQUILIBRIUM FACTS o In perfectly competitive markets, actions of buyers and sellers naturally move the price and hence the market towards equilibrium. o Law of Supply and Demand Claim that price of any good adjusts to bring the supply and demand for that good into balance. o Markets are not always in equilibrium, surpluses and shortages exist. o Once equilibrium reached, all buyers and sellers are satisfied and there is no upward or downward pressure on price. 2. CHANGES IN EQUILIBRIUM DETERMINATION OF OF EQUILIBRIUM o D & S determine a markets equilibrium. (Price and amount of good buyers purchase and sellers produce.) o Events that shifts D and/or S, the equilibrium changes. o Analysis of change in equilibrium is called comparative statics. Three steps involved: Whether event shifts the supply or demand curve (maybe both) Decide which direction curve shifts. Use supply-and-demand diagram to see how the shift changes the equilibrium.
5 CHANGES IN EQUILIBRIUM INCREASE IN DEMAND o Market for ice-cream summer gets hot, what is the effect on market? Hot weather will affect D. Will lead to an increase in the price as well as Q bought and sold. CHANGES IN EQUILIBRIUM DECREASE IN SUPPLY o Market for ice-cream Bushfire destroys ice-cream factories temperatures normal. Will affect S. Will shift S to the left. Decrease in E. CHANGES IN EQUILIBRIUM DECREASE IN SUPPLY o Changes in equilibrium All cases SUMMARY ROLE OF PRICES o Mechanism for allocating scarce resources (rationing function of prices). o Price co-ordinate the actions of large numbers of buyers and seller, each acting independently. How? o Buying and selling decisions determines market D and S this interaction sets the equilibrium price, i.e. how much is produced and bought. Who gets what is produced? o Buyers willing able to pay the equilibrium price, and sellers who are willing and able to produce and sell the good at the equilibrium price. o Known as the rationing function of prices, or prices as a mechanism for rationing resources. 2. ELASTICITY ELASTICITY OF DEMAND o Measures how much demand responds to changes in its determinants Price elasticity of demand. Income elasticity of demand.