Market Forces of Supply and Demand 09 18 2012 LEC TUESDAY SEPT 18 4 1 Market A group of buyers and sellers of a particular good or service Can be highly organized o Ex new york stock exchange Can be less organized o Ex market for ice cream The basic competitive model The basic competitive model builds on three assumptions o 1 Rational consumers o 2 Profit maximizing firms sellers o 3 Competitive markets many buyers and many sellers Each has a negligible impact on market price These assumptions determine how consumers behave how firms behave and how the market mediates their interaction Government is ignored in the basic model in order to isolate private decision making The model ignores government because we need to see how an economy without a government might function before we can understand the role of government A model with the highest most intense form of competition Push it to an extreme push it the farthest we can Assume there are many firms selling equivalent products to many consumers o note saying products are equivalent means the firms are selling items that the consumers consider to be interchangeable Perfect Competition case Assume there is a going price or market price Assume firms in aggregate can provide as much as consumers will buy and each firm can sell as much as it wants Assume that if a firm charged any more than the going price then it would lose all its sales In percent competition each firm is a price taker which simply means that because it cannot influence the market price it must The firm takes the market price as given because it cannot raise its price without losing all sales and at the market price it can sell as accept that price much as it wishes If a consumer offers less than the market price no one will sell to him Consumers are also price takers Firms in competitive markets all charge the same price Monopoly Market The only seller in the market Sets the price o Ex electrical companies in different counties FPL There are other types of markets between perfect competition and monopoly 4 2 Demand Describes how the quantity of goods and services bought can change with changes in a number of variables of income social Economists often treat price as the most important determinant of trends and population the level of demand An Individual s Demand o Price Quantity Demand o 5 00 0 o 3 00 1 o 2 00 2 o 1 00 6 o 50 15 figure 3 1 Demand Curve curve which shows the quantity demanded at each price Market demand curve Demand curve gives the quantity demanded at each price when everything else is held constant o Usually NOT ALWAYS slopes downward from left to right o Individual demand curves usually have a negative slope Why Because people to buy more of a good if it is less expensive When the price of a good increases the demand for the good usually decreases with everything else held constant Price is most important determinant in this case Shows the total quantity demanded at each price the total which is obtained by adding up the demands of the individual consumers Usually have a negative slope o How can a MDC be constructed from knowledge about o individual consumer s consumption habits For example at p 75 roger buys 9 candy bards and jane demands 11 total market demand is then equal to 20 at 1 50 roger buys 3 and Jane buys 1 total market demand is then equal to 4 o Suppose Q 24 3P v o when V 0 Q 24 3P When we draw the market demand curve with price on the vertical axis it follows that a change in anything that affects demand other than price will cause a shift in the demand curve This is different from a movement along the demand curve which reflects a change in the market price Shifts in Demand curves LECTURE 9 20 2012 BUYERS What might have caused this shift in the demand curve The shift could not have been caused by change in the price of candy bars that would have been shown as movement along the demand curve Sources of Shifts in Demand Curves A change in tastes A change in income Increase in income increases the demand for most goods shifts to the right o When an increase in income increases demand good is called a normal good a good for which other things equal an increase in income leads to an increase in demand o When an increase in income decreases demand the good is called a inferior good a good for which other things equal an increase in income leads to a decrease in demand A change in price of another good o substitutes two goods for which an increase in the price of one leads to an increase in the demand for the other Two goods are substitutes if the demand for one of the goods increases when the price of the other good increases ex ice cream and frozen yogurt Coffee and Tea when the price of coffee rises there is movement along the demand curve for coffee When the price of coffee rises the demanded amount of coffee decreases When the demanded amount of coffee decreases the demand for tea increases The increase in the demand for tea causes the demand curve for tea to shift to the right o complements two goods for which an increase in the price of one leads to a decrease in the demand for the other ex peanut butter and jelly when the price of peanut butter rises there is movement along the demand curve for peanut butter When the price of peanut butter rises the demanded amount of peanut butter decreases When the demanded amount of peanut butter decreases the demand for jelly decreases The decrease in the demand for jelly causes the demand curve for jelly to shift to the left Changes in the availability of credit Changes in expectations Changes in demographics o fewer teenagers as a fraction of the population may mean less demand for goods popular with teenagers Changes in information Shifts in a Demand Curve VS Movements Along a Demand Curve SELLERS maker Model of a perfectly competitive market has two types of decision o How the quantity of goods and services sold can change with changes in a number of variables like technology and the o Economists focus on price as the most important determinant o Buyers o Sellers Supply weather of the level of supply o ONE FIRM o 5 00 100 000 o 3 00 95 000 o 2 00 85 000 o 1 00 25 000 o 75 0 o Supply Curve Quantity supplied at each price when everything else is held constant A supply curve usually slops upward from left to right When the price of a good increases the supply for that good usually increases when everything else is held constant o Market Supply at each price A market supply curve shows
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