Sherif Khalifa Sherif Khalifa () Market Forces 1 / 62
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Definition Supply and Demand refer to the behavior of buyers and sellers as they interact with one another in competitive markets. Supply and Demand are the forces that make market economies work. Supply and Demand determine the quantity of each item produced and the price at which it is sold. Supply and demand determine prices in a market economy and prices allocate the economy s scarce resources. Sherif Khalifa () Market Forces 7 / 62
Definition A market is a group of buyers and sellers of a particular good or service. The buyers as a group determine the demand for the product. The sellers as a group determine the supply of the product. Definition In a competitive market, the goods offered for sale are identical, and the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price. Because buyers and sellers must accept the price the market determines, they are said to be price takers. Sherif Khalifa () Market Forces 8 / 62
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Definition The quantity demanded of any good or service is the amount of the good that buyers are willing and able to purchase. Definition The law of demand is the claim that, other things equal, when the price of a good increases the quantity demanded of the good also decreases, and when the price decreases the quantity demanded increases. demanded demanded Sherif Khalifa () Market Forces 11 / 62
Definition The demand schedule is a table that shows the relationship between the price and the quantity demanded. 0 12 0.5 10 1.0 8 1.5 6 2.0 4 2.5 2 3.0 0 Definition The demand curve is a graph of the relationship between the price and the quantity demanded. Sherif Khalifa () Market Forces 12 / 62
3.0 2.5 2.0 1.5 1.0 0.5 0 2 4 6 8 10 12 Sherif Khalifa () Market Forces 13 / 62
3.0 2.5 2.0 1.5 1.0 0.5 0 2 4 6 8 10 12 Sherif Khalifa () Market Forces 14 / 62
3.0 2.5 2.0 1.5 1.0 0.5 0 2 4 6 8 10 12 Sherif Khalifa () Market Forces 15 / 62
3.0 2.5 2.0 1.5 1.0 0.5 0 2 4 6 8 10 12 Sherif Khalifa () Market Forces 16 / 62
3.0 2.5 2.0 1.5 1.0 0.5 0 2 4 6 8 10 12 Sherif Khalifa () Market Forces 17 / 62
3.0 2.5 Catherine s Demand Curve 2.0 1.5 1.0 0.5 0 2 4 6 8 10 12 Sherif Khalifa () Market Forces 18 / 62
Catherine Nicholas Market 0 12 7 19 0.5 10 6 16 1.0 8 5 13 1.5 6 4 10 2.0 4 3 7 2.5 2 2 4 3.0 0 1 1 Sherif Khalifa () Market Forces 19 / 62
3.0 Nicholas s Demand Curve 2.5 2.0 1.5 1.0 0.5 0 1 2 3 4 5 6 Sherif Khalifa () Market Forces 20 / 62
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3.0 2.5 Market Demand Curve 2.0 1.5 1.0 0.5 0 1 4 7 10 13 16 Sherif Khalifa () Market Forces 22 / 62
3.0 D 1 D 2 2.5 2.0 1.5 1.0 0.5 0 1 4 7 10 13 16 Sherif Khalifa () Market Forces 23 / 62
3.0 2.5 D 2 D 1 2.0 1.5 1.0 0.5 0 1 4 7 10 13 16 Sherif Khalifa () Market Forces 24 / 62
Definition A normal good is a good for which, other things equal, an increase in income leads to an increase in demand. Income Demanded Income Demanded Definition An inferior good is a good for which, other things equal, an increase in income leads to a decrease in demand. Income Demanded Income Demanded Sherif Khalifa () Market Forces 25 / 62
Definition Substitutes are two goods for which an increase in the price of one leads to an increase in the demand for the other. Substitutes are pairs of goods that are used in place of each other. of a Substitute Demanded of a Substitute Demanded Definition Complements are two goods for which an increase in the price of one leads to a decrease in the demand for the other. Complements are pairs of goods that are used together. of a Complement Demanded of a Complement Demanded Sherif Khalifa () Market Forces 26 / 62
Shift in tastes toward a good or a service affect the demand for that good or service. Expectations about future income or future prices affect the demand for a good or a service. If the number of buyers change, the quantity demanded in the market would change at every price. Sherif Khalifa () Market Forces 27 / 62
Definition The quantity supplied of any good or service is the amount that sellers are willing and able to sell. Definition The law of supply is the claim that, other things equal, when the price of a good increases the quantity supplied of the good also increases, and when the price decreases the quantity supplied decreases. supplied supplied Sherif Khalifa () Market Forces 28 / 62
Definition The supply schedule is a table that shows the relationship between the price of a good and the quantity supplied. 0 0 0.5 0 1.0 1 1.5 2 2.0 3 2.5 4 3.0 5 Definition The supply curve is a graph of the relationship between the price and the quantity supplied. Sherif Khalifa () Market Forces 29 / 62
3.0 2.5 2.0 1.5 1.0 0.5 0 1 2 3 4 5 6 Sherif Khalifa () Market Forces 30 / 62
3.0 2.5 2.0 1.5 1.0 0.5 0 1 2 3 4 5 6 Sherif Khalifa () Market Forces 31 / 62
3.0 2.5 2.0 1.5 1.0 0.5 0 1 2 3 4 5 6 Sherif Khalifa () Market Forces 32 / 62
3.0 2.5 2.0 1.5 1.0 0.5 0 1 2 3 4 5 6 Sherif Khalifa () Market Forces 33 / 62
3.0 2.5 2.0 1.5 1.0 0.5 0 1 2 3 4 5 6 Sherif Khalifa () Market Forces 34 / 62
3.0 Ben s Supply Curve 2.5 2.0 1.5 1.0 0.5 0 1 2 3 4 5 6 Sherif Khalifa () Market Forces 35 / 62
Ben Jerry Market 0 0 0 0 0.5 0 0 0 1.0 1 0 1 1.5 2 2 4 2.0 3 4 7 2.5 4 6 10 3.0 5 8 13 Sherif Khalifa () Market Forces 36 / 62
3.0 Jerry s Supply Curve 2.5 2.0 1.5 1.0 0.5 0 2 4 6 8 10 12 Sherif Khalifa () Market Forces 37 / 62
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3.0 Market Supply Curve 2.5 2.0 1.5 1.0 0.5 0 1 4 7 10 13 16 Sherif Khalifa () Market Forces 39 / 62
3.0 S 1 S 2 2.5 2.0 1.5 1.0 0.5 0 1 4 7 10 13 16 Sherif Khalifa () Market Forces 40 / 62
3.0 2.5 S 2 S 1 2.0 1.5 1.0 0.5 0 1 4 7 10 13 16 Sherif Khalifa () Market Forces 41 / 62
When the price of one or more of the inputs increases, producing is less profitable and firms supply less. By decreasing the firm s costs, the advance in technology increases the supply. If a firm expects the price of a good to increase in the future, it will put some of its current production into storage and supply less to the market today. As the number of sellers increases, the supply increases as well. Sherif Khalifa () Market Forces 42 / 62
Definition Equilibrium is a situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded. At the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell. Equilibrium price is the price that balances the quantity supplied and the quantity demanded. Equilibrum price is called the market clearing price. At the equilibrium price, buyers have bought all they want to buy and sellers have sold all they want to sell. Equilibrium quantity is the quantity supplied and the quantity demanded at the equilibrium price. Sherif Khalifa () Market Forces 43 / 62
Definition The law of supply and demand is the claim that the price of the good adjusts to bring the quantity supplied and the quantity demanded into balance. Demand Supply 0 19 0 0.5 16 0 1.0 13 1 1.5 10 4 2.0 7 7 2.5 4 10 3.0 1 13 Sherif Khalifa () Market Forces 44 / 62
Supply 2 Equilibrium Demand 7 Sherif Khalifa () Market Forces 45 / 62
Definition A surplus is a situation in which the quantity supplied is greater than the quantity demanded. When there is a surplus, producers decrease their prices. Sherif Khalifa () Market Forces 46 / 62
Supply 2.5 Surplus 2 Demand 4 7 10 Sherif Khalifa () Market Forces 47 / 62
Definition A shortage is a situation in which the quantity demanded is greater than the quantity supplied. When there is a shortage, producers increase their prices. Sherif Khalifa () Market Forces 48 / 62
Supply 2 1.5 Shortage Demand 4 7 10 Sherif Khalifa () Market Forces 49 / 62
Supply P 1 Equilibrium Demand Q 1 Sherif Khalifa () Market Forces 50 / 62
Problem Start from the initial equilibrium. Consider the effect of these two events on the equilibrium price and quantity: (1) Weather turns very hot. (2) Hurricane destroys sugar cane crops. Sherif Khalifa () Market Forces 51 / 62
S 1 P 2 P 1 D 2 Q 1 Q 2 D 1 Sherif Khalifa () Market Forces 52 / 62
S 2 S 1 P 2 P 1 D 1 Q 2 Q 1 Sherif Khalifa () Market Forces 53 / 62
S 2 S 1 P 2 P 1 D 2 D 1 Q 1 Q Sherif Khalifa () Market Forces 54 / 62
S 2 S 1 P 2 P 1 D 2 D 1 Q 1 Q 2 Sherif Khalifa () Market Forces 55 / 62
S 2 S 1 P 2 P 1 D 2 D 1 Q 2 Q 1 Sherif Khalifa () Market Forces 56 / 62
Government Buyers want a lower price, while sellers want a higher price. If the buyers are successful in their lobbying, the government imposes a legal maximum on the price. This maximum price is called price ceiling. If the sellers are successful in their lobbying, the government imposes a legal minimum on the price. This minimum price is called price flooring. Sherif Khalifa () Market Forces 57 / 62
Government Definition ceiling refers to the highest permissible price in the market. S 0 P e Shortage Ceiling D 0 Q e Sherif Khalifa () Market Forces 58 / 62
Government S 0 3 2 Shortage Ceiling 75 100 125 D 0 Sherif Khalifa () Market Forces 59 / 62
Government When the government imposes a binding price ceiling on a competitive market, a shortage of the good occurs Sellers must ration the scarce goods among the large number of potential buyers. Rationing is not desirable, as long lines are ineffi cient because they waste buyer s time. Sherif Khalifa () Market Forces 60 / 62
Government Definition floor refers to the minimum legal price that can be charged in a market. Surplus S 0 Floor P e Q Sherif Khalifa () Market e Forces 61 / 62 D 0
Government 7 Surplus S 0 Floor 5 D 0 Q e 50 150 Sherif Khalifa () Market Forces 62 / 62