CHAPTER+4

=The Market Forces of Supply and Demand =

What is a Market?
Market is a group of buyers and sellers of a particular good or sevice. The group of buyers determine the demand for the product, and the group of sellers determine the supply of the product. The term supply and demand refer to the behavior of people, as they interact with one another in markets. Markets usually are in many forms. They are often less organized. Most of the time, the demand for certain product and the supply for that product do not meet together at any one time.

What is Competition?
In a market for a product, buyers know there are several sellers to choose and each seller is aware that his/her product is very similar to products of other sellers. Economists often use the term competitive market. A competitive market is a market in which there are so many buyers and sellers that each has a negligible impact on the market price. In other words, because there are so many buyers and sellers in the market, if one buyer decides to not buy the product will not matter because it considered to be a very small portion. It would not effect the overall demand for the product.

In this chapter, we assume that the market is **perfectly competitive**.
When we say **perfectly competitive** we mean that: 1) Products are the same 2) Numerous buyers and sellers so that each has literally no influence over price 3) Buyers and sellers are price takers

We call buyers and sellers as 'price takers' because in a perfectly competitive market, both buyers and sellers must accept the price the market determines.

Not all markets are perfectly competitive. Some markets have one seller, and this seller controls the price. We call this market monopoly.

**The Demand Curve**: The Relationship between Price and Quantity Demanded
As the price of the good rises, you would buy less of the product. Think of a situation which you are buying a certain product. The product you usually bought was $25. However, after the input price increased, the price of the product increased as well. Would you buy it? Not likely. When other things are equal, the quantity demanded of a good falls when the price of the good rises. This is called the **Law of Demand.**
 * Quantity demanded** is the amount of a good that buyers are willing and able to purchase.

A **demand schedule** is basically just a table that illustrates the law of demand: the relationship between the price of a good and the quantity demanded.



The **demand curve** is a graph that shows the law of demand in a visual way. It illustrates a graph of the relationship between the price of a good and the quantity demanded.

Market Demand vs. Individual Demand

 * Market Demand** refers to the sum of all individual demands for a particular good or service. Basically, the market demand is the whole graph, and the individual demand curves are summed horizontally to obtain the market demand curve. Therefore, the i**ndividual demand** refers to the demand for a certain price.

media type="youtube" key="xnpAJaLni-k&hl=ko&fs=1" height="344" width="425"

Shifts in Demand Curve
A change in Quantity Demanded is the movement a long the demand curve, caused by a change in the price of product. Therefore, it is not a newly shifted demand curve but just a movement along the original demand curve.

Increase in demand shifts the curve to the **RIGHT** Decrease in demand shifts the curve to the **LEFT**

Factors that causes a shift in demand curve:
1) **Consumer Income** - As income increases the demand for a normal good will increase - As income increases the demand for an inferior good will decrease

After you have worked very hard at a company, you get your salary. The boss decides to raise your salary sine you have worked twice the amount of work of the other employees. Now you have become rich! Therefore, you would no longer need to ride the bus anymore, so you wouldn't buy bus tickets anymore. 2) **Price of related goods** - When a fall in the price of one food reduces the demand for another good = substitutes - When a fall in the price of one food increases the demand for another good = complements

When there is a price increase in hotdogs, buyers would buy more hamburgers instead. (substitutes) However, if there is a price increase in hotdogs, there would be a decrease in demand for ketchup since ketchup and hotdogs must go together (complements) 3) **Tastes** - Simply, if you like ice cream more than others, you buy more of it. 4) **Expectations** - Your expectation for the future may affect your demand for good today. If you know that you will get a higher income next month, you may choose to buy more of a good. 5) **Number of buyers** - Since market demand comes from individual demands, it depends on factors that affect individual demands. If John brings in Caroline and Hailey to the market, there would be a higher quantity demanded at every price.

The Supply Curve: The relationship between the price of a good and the quantity supplied.

 * Quantity Supplied** is the amount of good that sellers are willing and able to sell. When the price of the good is high, selling this product is profitable. On the other hand, when the price of the product is low, the business is less profitable. Therefore, less sellers would produce that good. The **Law of Supply** claims that when other things are equal, the quantity supplied of a good rises when the price of the good rises.


 * Supply schedule** basically is a table that shows the law of demand in written form: the relationship between the price of a good and the quantity supplied.



The **Supply curve** is a graph that illustrates the law of supply in a visual way. It shows how the quantity supplied increases as the price of good increases.

Market supply vs. Individual supply

 * Market supply** refers to the sum of all individual supplies for all sellers of a particular good or service. Market supply is the whole curve and the **individual supply** is the quantity supplied corresponding to a certain price. Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

media type="youtube" key="T3ZvnqjvzA0&hl=ko&fs=1" height="344" width="425" ^- How to draw a supply curve when the equation is given.

Shifts in the Supply Curve
A change in quantity supplied is the movement along the supply curve, caused by a change in anything that alters the quantity supplied at each price. Therefore, it does not create a newly shifted supply curve, but just a movement along the original graph.

Increase in supply shifts the curve to the **RIGHT** Decrease in supply shifts the curve to the **LEFT**

Factors that causes shift in supply curve:
1) **Input Prices** - Let's say we are in a company that produces ice cream. All of a sudden, the price of milk has increased exceedingly. We don't have enough money to produce the same amount of good when the price of input has increased greatly. Therefore, we must decrease the quantity supplied.

2) **Technology** - The invention of a machine that would speed up the production of ice cream will help increase the quantity supplied at a given price. Therefore, the supply curve will shift to the right.

3) **Expectations** - If the firm has this vision about the future that the price of ice cream would increase, then the firm will keep the production of ice cream now and sell it in the future when the price of ice cream increases.

4) **Number of Sellers** - Assume that there were two firms that supply ice cream. If one of the firm retires or decides to shut down its company, then there would be only one company producing ice cream. Then, obviously, there would be a decrease in supply of ice cream in the market.

Equilibrium

 * Equilibrium** refers to a situation in which the price has reached the level where quantity supplied equals the quantity demanded. In other words, equilibrium is when the quantity demanded and the quantity supplied are equal.


 * Equilibrium Price** is the price that balances quantity supplied and quantity demanded. As shown above, the equilibrium price the the point where the supply and demand curve intersects.
 * Equilibrium Quantity** is the point when the quantity supplied and quantity demanded are equal. This as well is the point when the supply and demand curve intersects.

media type="youtube" key="hzsffvO2efw&hl=ko&fs=1" height="344" width="425"

Surplus
When Price > equilibrium price Quantity Supplied > Quantity demanded

Shortage
When price < equilibrium price quantity demanded > quantity supplied



In most free markets, surpluses and shortages are only a temporary thing because prices eventually move back to the equilibrium point. This happening is called the law of supply and demand. It claims that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

Steps to analyzing changes in equilibrium
Decide whether the event shifts the supply or demand curve (or both)
 * Step one**

Decide whether the curve(s) shift(s) to the left or to the right
 * Step two**

Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity
 * Step three**



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
 * The demand curve sows how the quantity of a good depends upon the price
 * The supply curve shows how the quantity of a good suplied depends upon the price
 * 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
 * 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.

Problems and Applications 1. What would happen to the quantity demanded for ice cream when the input price of frozen yogurt increases?

2. What would happen to the demand curve of the inferior good when the buyers income gets higher?

Answers 1. Since ice cream and frozen yogurt are substitutes, when the input price for frozen yogurt increases, the demand for ice cream will increase a well. 2. The demand curve will shift to the left because as the buyer's income rises, buyers will not buy inferior goods.

Sources: http://www.econweb.com/MacroWelcome/sandd/SShift-New_Equilibrium.gif http://www.harpercollege.edu/mhealy/ecogif/s&d/dlinedec.gif http://www.freeworldacademy.com/newbizzadviser/pictseco/8.gif http://img.sparknotes.com/figures/0/039bab1e6f1ef2a65b5f4c8ddc66073a/eq.gif http://livingeconomics.org/images/glossary/surplus.gif http://livingeconomics.org/images/glossary/shortage.gif http://www.youtube.com/watch?v=T3ZvnqjvzA0 http://www.youtube.com/watch?v=hzsffvO2efw&feature=related http://www.youtube.com/swf/l.swf?swf=http%3A//s.ytimg.com/yt/swf/cps-vfl58601.swf&video_id=xnpAJaLni-k&rel=1&hqt=0&eurl=&iurl=http%3A//i1.ytimg.com/vi/xnpAJaLni-k/default.jpg&t=OEgsToPDskIy3ofA_J6QNL-wuvkj-fA9&use_get_video_info=1&load_modules=1&fs=1&hl=ko