Chapter+4+-+The+Market+Forces+of+Supply+and+Demand

**The Market Forces of Supply and Demand**

**What is a Market?** A market is a fancy name for a group of buyers and sellers of a certain good or a service.

Buyers of icecream + Sellers of icecream = MARKET (YEAH!) 

The buyers decide the demand for a good and the sellers decide the supply for a good. Markets can be either organized or disorganized.

Some characteristics or an **organized market** include  Some characteristics of a **disorganized** (or less organized) market include  It doesn’t really matter if a market is organized or disorganized, the buyers and the sellers are always closely connected with one another and this is what forms a MARKET (YEAH!) Picture Link: http://www.cartoonstock.com/lowres/bmm0122l.jpg
 * meet at a specific time
 * meet at a specific place
 * the price an sales can be assisted by an auctioneer
 * do not meet together at a specific time or place
 * no auctioneer
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">each seller posts the price of a good
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">each buyer decides how much of a good he/she wants to purchase

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: rgb(3, 191, 80);">**What is a competition?** You probably know that most markets are very competitive. For example, chocolates are sold by many different sellers. This allows the buyers to choose from many different sellers. Because the market for chocolates is HUGE, a single person has no power over the price and the quantity of chocolates. It’s the interaction between the buyers and sellers that determine the quantity and the price. A market like this is called a competitive market. A single buyer and a seller can’t change the price of a good such as chocolates.

In order for markets to reach the highest form of competition, they have to have these characteristics <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Now, you’re probably wondering, what is the opposite of a competitive market? If a market has only one seller, it’s called a **monopoly.** Since there is only one seller, he or she has the power to change the price and the quantity.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> the goods put up for sale have to be exactly the same
 * there has to be many buyers and sellers that they have no power to change the market price

Congratulations! You are now wired up with the fundamental theorem of markets! Let’s now observe what affects the demand and the supply of a good. You’re probably sick of reading now but no worries! There won’t be much reading from now on :) I promise :)

Picture Link: [|http://pro.corbis.com/images/42-17772875.jpg?size=572&uid={0DAAF4F9-06A0-4BAD-AD19-FE3019431B7B}]

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; color: rgb(4, 175, 49);"> <span style="color: rgb(5, 0, 0);">First, let’s study the behavior of buyers and how it affects the demand curve.

<span style="color: rgb(13, 26, 253);">**The Demand Curve: The Relationship between Price and Quantity Demanded** media type="custom" key="2119697"

As you can see, the chart on the left is Chaeri’s **demand schedule**. As the price of candy goes up, her quantity of candy demanded goes down. On the right is the demand curve which slopes downward because it is negatively related to the price.

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: rgb(202, 77, 7);">**Market Demand vs. Individual Demand**




 * Market demand** is all of the individual demands put together for a certain good. The drawing above is an individual demand because there is only one person (Chaeri). However in the second drawing, there is two people (Chaeri and Dayeon). If we put them together, we get MARKET DEMAND.

The Market Demand shows how total quantity demanded of a good changes as the price of that good changes.

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: rgb(253, 28, 179);">**Shifts in the Demand Curve**

There are some cases in which the demand curve shifts. It is not constant all the time. If something makes the quantity demanded to increase at every price, the demand curve shifts to the right. This is called an **increase in demand.**

On the otherhand, if something makes the quantity demanded decrease at every price, the demand curve shifts to the left. This is called a **decrease in demand.**

So you’re now probably wondering, “What makes the quantity demanded to increase or decrease at every price? How do we know?” Listen to the podcast to find out :)

media type="custom" key="2120073"

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; color: rgb(242, 44, 44);">
 * The Supply Curve: The Relationship between Price and Quantity Supplied**

<span style="color: rgb(0, 0, 0);">**Quantity Supplied:** The amount of good that sellers want to sell The Quantity Supplied is __positively related__ to the price. So, if the price of good goes up, the quantity supplied goes up as well. If the price of good goes down, the quantity supplied goes down. This is the **Law of Supply**.


 * The Supply Schedule** shows how the price of a good and the quantity supplied is related to one another.


 * The Supply Curve** moves up because greater price means greater quantity supplied (:



<span style="color: rgb(0, 0, 0);">This is a picture of Chaeri's supply schedule and supply curve. As you can see, as the price of chocolates increase, her quantity of chocolates supplied also increases by one.

<span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: rgb(255, 91, 0);"> <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="color: rgb(255, 91, 0);">

This is very similar to the market demand which adds up the demands of all the buyers except this time, you add up the supplies of all sellers.
 * Market Supply vs. Individual Supply**

**<span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The supply curve shifts to the right if something increases the quantity supplied at every given price. Such example can include a decrease of an input price. In this case, it's called **an increase in supply.** If something decreases the quantity supplied at every given price, the supply curve shifts to the left. This can be described as **a decrease in supply.**
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="color: rgb(255, 0, 169);">Shifts in the Supply Curve

Some variables that shifts the supply curve include: <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> For <span style="color: rgb(127, 0, 255);">**input prices**, if the price of an input decreases, it increases the quantity supplied because it's a lot cheaper for the suppliers to produce a good. This causes the supply curve to shift to the right. On the otherhand, if the input price goes up, the supply curve would move the left because it's not as profitable. To sum up, the supply of a good is -vely related to the price of inputs of that good.
 * Input Prices
 * Technology
 * Expectations
 * Number of Sellers

<span style="color: rgb(65, 232, 23);">**Technology** is also a big factor. Development and an increase in technology cuts the amount of labor needed to produce a good which increases the supply of that good.

<span style="color: rgb(226, 3, 3);">**Expectations** of suppliers is very similar to the expectations of buyers. If the suppliers feel that the price of a good will go up, then they might save some to supply for later. This makes the supply curve to shift to the left because it's a decrease in supply.

<span style="color: rgb(239, 138, 11);">**Number of sellers** also determines the shift of a supply curve. If there is less number of sellers for a good, this causes the supply curve to shift to the left because the supply of that good falls. If there are many sellers, then the supply curve would shift to the right. <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">

**
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; color: rgb(255, 0, 245);">Supply and Demand Together
 * Equilibrium price: price that both suppliers and demanders are satisfied with.
 * Equilibrium quantity: quantity at which both quantity supplied and quantity meets.

=
<span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">By looking at the cases of both surplus and shortage, we could conclude that the price of any good could push the market price downward or upward towards the equilibrium price. And this is called the **law of supply and demand**, which price adjusts to bring both quantity supplied and demanded into balance. ====== <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Now that we have learned what the equilibrium is, let's talk about the **three steps to analyzing changes in Equilibrium.** Listen to the podcast below:) media type="file" key="apecon1.m4a" http://www.economicshelp.org/images/micro/increase-demand.jpg http://www.nielsenindicator.com/javascript/Editor/assets/supply-demand.jpg

<span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Summary > >
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Models are used to observe competitive markets. Competitive markets have many buyers and sellers that a single person is unable to change the market price and quantity.
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The demand curve shows how the amount of good is determined by the price. As the price increases, the demand decreases. They are negatively related
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Some variables that affect the demand curve by shifting are income, the prices of related goods such as substitutes and complements, tastes, expectations and the number of buyers. Shifting to the right means increase in demand and shifting to the left means decrease in demand.
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The supply curve shows how the amount of good supplied is determined on the price. As the price of good rises, the quantity supplied rises also. They are positively related to one another
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Some variables that affect the supply curve by shifting are input prices, technology, expectations, and the number of sellers. Shifting to the right means increase in supply and shifting to the left means decrease in supply
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">When the supply and the demand curve intersect, it's called the equilibrium (the quantity demanded is the same as the quantity supplied)
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Both buyers and sellers naturally move towards their equilibrium.
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">If the price is above the equilibrium, it's called a surplus
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">If the price is under the equilibrium, it's called a shortage
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">three steps to analyzing changes in equilibrium are: 1. decide whether the event shifts the supply or demand curve 2. which direction does it shift to? 3. compare the new equilibrium to the old equilibrium.

<span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"><span style="color: rgb(233, 1, 123);">1. Consider the market for orange juice. For each of the events listed here, indicate whether demand or supply increases or decreases and why. <span style="color: rgb(0, 0, 0);">a) oranges get cheaper b) 50% discount for grape juice c) 30% sale for waffles
 * <span style="font-size: 110%; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; color: rgb(211, 18, 18);">Let's test your knowledge! **

2. <span style="color: rgb(165, 0, 255);">From the question above, look at a). What happens to the equilibrium price and equilibrium quantity when "oranges get cheaper"? How about b)?

a) the supply curve shifts to the right because the input prices become cheaper b) the demand curve shifts to the left because grape juice is a substitute for orange juice and if the price of one good decreases, then the demand for another good decreases. c) the demand curve shifts to the right because waffles and orange juice are complements and if the price of one good decreases, then the demand for another good increases.
 * Answers:**

2. The answer to the first question was that the supply curve shifts to the right. As it shifts, the equilibrium price will decrease and the equilibrium quantity will increase. For b), due to the shift in demand curve, both the equilibrium price and quantity for the grape juice will decrease.

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">