Demand and supply (KINH tế VI mô SLIDE)

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SUPPLY AND DEMAND I: HOW MARKETS WORK

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2

The Market Forces of

Supply and Demand

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• Modern microeconomics is about supply,

demand, and market equilibrium.

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• A market is a group of buyers and sellers of a particular good or service.

• The terms supply and demand refer to the

behavior of people as they interact with one another in markets

MARKETS AND COMPETITION

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MARKETS AND COMPETITION

• Buyers determine demand.

• Sellers determine supply

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I DEMAND

1/ Definition:

• Quantity demanded is the amount of a good that buyers are willing and able to purchase.

• Demand is the ability and the willingness to buy

a particular commodity at a given point of time, other things equal (ceteris parabus)

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2 Tools for demand demonstration

1 Demand Schedule

• The demand schedule is a table that shows the

relationship between the price of the good and the quantity demanded

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Catherine’s Demand Schedule

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The Demand Curve: The Relationship

between Price and Quantity Demanded

• Demand Curve

• The demand curve is a graph of the relationship between the price of a good and the quantity

demanded

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Figure 1 Catherine’s Demand Schedule and Demand Curve

Price of Ice-Cream Cone

0

2.50 2.00 1.50 1.00 0.50

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* Market Demand versus Individual Demand

• Market demand refers to the sum of all

individual demands for a particular good or

service.

• Graphically, individual demand curves are

summed horizontally to obtain the market

demand curve.

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The Demand function

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3 Movements along the Demand curve and Shifts in the Demand Curve

• Change in Quantity Demanded

• Movement along the demand curve

• Caused by a change in the price of the product

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Quantity of Ice-Cream Cones

A tax that raises the price of ice-cream cones results in a movement along the

demand curve

A B

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Shifts in the Demand Curve

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Figure 3 Shifts in the Demand Curve

Price of

Ice-Cream

Cone

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• Consumer Income

• As income increases the demand for a normal good

will increase

• As income increases the demand for an inferior

good will decrease

One good is defined as normal or inferior good

depending on individual consuming behavior

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4 Movements along the demand curve and Shifts in the Demand Curve

• Change in Quantity Demanded

• Movement along the demand curve

• Caused by a change in the price of the product

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Table 1 Variables That Influence Buyers

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• Prices of Related Goods

• When a fall in the price of one good reduces the demand for another good, the two goods are called

substitutes

• When a fall in the price of one good increases the demand for another good, the two goods are called

complements

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• Income of consumer (Real Income)

• Normal goods:

When income increases, the quantity demanded of

this good increase at all price (other things equal), the demand curve shifts to the right

And vice versa…

• Inferior goods:

When income increases, the quantity demanded of

this good decreases at all prices (other things equal), the demand curve shifts to the left

And vice versa…

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• Taste of consumers that depends on gender, age,

culture…can makes the demand of one goods expand

or collapse (other things equal)

• Expectation of change in price, income…in the future can affect the behavior of consumers at present:

When buyers expect price of one goods increases in the future, they may buy more at present, and vice

versa (other things equal)

• Number of buyers:

A rise in number of buyers will lead to a right shift in demand curve, and vice versa (other things equal)

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The Supply Curve: The Relationship between Price and Quantity Supplied

• Supply Schedule

• The supply schedule is a table that shows the

relationship between the price of the good and the quantity supplied

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Ben’s Supply Schedule

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The Supply Curve: The Relationship between Price and Quantity Supplied

• Supply Curve

• The supply curve is the graph of the relationship

between the price of a good and the quantity

supplied

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Figure 5 Ben’s Supply Schedule and Supply Curve

Price of Ice-Cream

Cone

0

2.50 2.00 1.50 1.00

Ice-Cream Cones

$3.00

12 0.50

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Market Supply versus Individual Supply

• Market supply refers to the sum of all

individual supplies for all sellers of a particular good or service.

• Graphically, individual supply curves are

summed horizontally to obtain the market

supply curve.

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Shifts in the Supply Curve

• Input prices

• Technology

• Expectations

• Number of sellers

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• Change in Quantity Supplied

• Movement along the supply curve

• Caused by a change in anything that alters the quantity supplied at each price

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1 5

Price of

Ice-Cream Cone

Change in Quantity Supplied

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• Change in Supply

• A shift in the supply curve, either to the left or right

• Caused by a change in a determinant other than

price

• Supply function: Qs = f (Px, Pi, T, G, E, N),

• Pi: price of input

• T: technologies

• G: government policies (tax, subsidy policies)

• E: sellers’ expectation

• N: number of sellers

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Figure 7 Shifts in the Supply Curve

Price of

Ice-Cream

Cone

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SUPPLY AND DEMAND

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At $2.00, the quantity demanded

is equal to the quantity supplied!

SUPPLY AND DEMAND

TOGETHER

Demand

Schedule

Supply Schedule

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Figure 8 The Equilibrium of Supply and Demand

Equilibrium price Equilibrium

Supply

Demand

$2.00

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Figure 9 Markets Not in Equilibrium

Quantity supplied

Surplus

4

$2.50

10 2.00

7

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• Surplus

• When price > equilibrium price, then quantity

supplied > quantity demanded

• There is excess supply or a surplus

• Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

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• There is excess demand or a shortage

• Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward

equilibrium.

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Figure 9 Markets Not in Equilibrium

Supply

Demand

(b) Excess Demand

Quantity supplied

Quantity demanded

1.50

10

$2.00

7 4

Shortage

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Equilibrium

• Law of supply and demand

• The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

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Three Steps to Analyzing Changes in

Equilibrium

• Decide whether the event shifts the supply or

demand curve (or both).

• Decide whether the curve(s) shift(s) to the left

or to the right.

• Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.

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Figure 10 How an Increase in Demand Affects the

D

3 and a higher quantity sold.

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Three Steps to Analyzing Changes in

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Figure 11 How a Decrease in Supply Affects the Equilibrium

3 and a lower quantity sold.

2.00

7

$2.50

4

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Table 4 What Happens to Price and Quantity When Supply

or Demand Shifts?

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Summary

• Economists use the model of supply and

demand to analyze competitive markets.

• In a competitive market, there are many buyers and sellers, each of whom has little or no

influence on the market price.

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• In addition to price, other determinants of how

much consumers want to buy include income, the prices of complements and substitutes, tastes,

expectations, and the number of buyers

• If one of these factors changes, the demand curve shifts

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Summary

• The supply curve shows how the quantity of a good supplied depends upon the price.

• According to the law of supply, as the price of a

good rises, the quantity supplied rises Therefore, the supply curve slopes upward

• In addition to price, other determinants of how

much producers want to sell include input prices, technology, expectations, and the number of sellers

• If one of these factors changes, the supply curve shifts

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• Market equilibrium is determined by the

intersection of the supply and demand curves.

• At the equilibrium price, the quantity demanded equals the quantity supplied.

• The behavior of buyers and sellers naturally

drives markets toward their equilibrium.

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Summary

• To analyze how any event influences a market,

we use the supply-and-demand diagram to

examine how the even affects the equilibrium price and quantity.

• In market economies, prices are the signals that guide economic decisions and thereby allocate resources.

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