Chapter+4+The+Market+Forces+of+Supply+and+Deman

 ==Ch.4 The Market Forces of Supply and Demand == 


 From this chapter, you'll see the following two words appear ALL the time: Supply and Demand.  So please don't get sick of 'em. ;)

- Yena S. 

=**Table of Contents** = = = 1. Introduction 2. Key Topics and Lectures 3. Conclusion 4. Glossary 5. Summary 6. Mini Quiz 7. Answer Key 8. Citations

**__Introduction__**

Welcome to the world of "the Market Forces of Supply and Demand." Supply  and demand  are the two words economists use most often, which are the forces that make market economies work. They determine the QUANTITY of each good produced and the PRICE at which it is sold.

In this chapter, we will consider how buyers and sellers behave and how they interact with one another. Then we will determine how supply and demand show prices in a market economy and how prices, in turn, allocate the economy's scarce resources.

Are you ready to jump into the world of Microeconomics? ;)

**__What is a Market?__**

A <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">Market <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;"> is a group of buyers and sellers of a good or service. - Buyers determine the demand for the product. - Sellers determine the supply of the product. Even though markets can be either organized or disorganized, they are more often disorganized.

Some characteristics of an <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">organized market <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;"> include: 1. Meeting at a specific time 2. Meeting at a specific place 3. An auctioneer sets prices and arranges sales.

Some characteristics of a <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">disorganized market <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;"> include: 1. Do not meet together at a specific time or place. 2. No auctioneer is present. 3. Each seller posts the price of a good. 4. Each buyer decides how much of a good he wants to purchase.


 * __What is Competition?__**

A <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">Competitive Market <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;"> is a market where there are many buyers and sellers. Due to its large scale, each buyer and seller only has a negligible impact on the market price.

In this chapter, we assume that all markets are <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">perfectly competitive <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">. For a market to be perfectly competitive, it must have the following characteristics:

The goods offered for sale are all the same. Buyers and sellers are so many that no single buyer or seller can have influence over the market price.

Because everyone must accept the price the market determines, both buyers and sellers are said to be <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">Price Takers <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">. BUT not all goods and services are sold in perfectly competitive markets.

Then, what is the opposite of a competitive market? If a market has only one seller, it's called a <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">Monopoly <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">. Since there is only one seller, he or she has the power to change the price and the quantity. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">__**Market Demand vs. Individual Demand**__ <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif;">Market Demand <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> is all of the individual demands put together for a certain good. It shows how total quantity demanded of a good changes as the price of that good changes. ATTENTION: Before we cover the most important sections of this chapter, you might want to watch the following video, which gives an overview of the relationship between supply and demand.

media type="youtube" key="Z44kKMJm9NY" height="344" width="425"

__**Shifts in the Demand Curve**__



Demand curve 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 <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Increase in Demand <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">, which shifts the curve to the RIGHT.

On the other hand, if something makes the quantity demanded decrease at every price, the demand curve shifts to the left. This is called a <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Decrease in Demand <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">, which shifts the curve to the LEFT.

Now, let's look at some factors that cause shifts in a demand curve:

1) **Consumer Income** - As income <span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif;">increases, the demand for a <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif;">Normal good will increase . - As income increases, the demand for an <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif;">Inferior good will decrease.

__Example:__ 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 good reduces the demand for another good = Substitutes . - When a fall in the price of one good increases the demand for another good = Complements.

__Example:__ 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 Ski brings in Yena and Gabby to the market, there would be a higher quantity demanded at every price.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;">__**The Supply Curve: The Relationship between Price and Quantity Supplied**__ <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 129.6%;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;"> Quantity Supplied is the amount of good that sellers want to sell. It 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="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;"> __**Market Supply vs. Individual Supply**__ <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Market Supply <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;"> 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 <span style="color: #50dc4c; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">horizontally <span style="color: black; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">to obtain the market supply curve.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;">__**Shifts in the Supply Curve**__



<span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">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 <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Increase in Supply <span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">. If something decreases the quantity supplied at every given price, the supply curve shifts to the left. This can be described as a <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Decrease in Supply <span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;">. <span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;">Now, let's look at some factors that cause shifts in a supply curve: <span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">

<span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;">1) **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 other hand, 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 <span style="color: #50dc4c; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">negatively related <span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;"> to the price of inputs of that good.

2) **Technology** - Development and an increase in technology cuts the amount of labor needed to produce a good which increases the supply of that good.

3) **Expectations of Suppliers** - 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.

4) **Number of Sellers** - 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="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;">If you would like to review the shits in Demand and Supply curves, please watch the following video:

media type="youtube" key="xnpAJaLni-k" height="344" width="425"

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;"> __**Equilibrium**__ <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Equilibrium <span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;"> 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. <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;">

<span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Equilibrium Price <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;"> 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. <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Equilibrium Quantity <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;"> 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.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">When Price > Equilibrium Price, Quantity Supplied > Quantity Demanded. This is called a <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Surplus <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">__Surplus__ **

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">When Price < Equilibrium Price, Quantity Demanded > Quantity Supplied. This causes a <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Shortage <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">.
 * __<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Shortage __**

In most free markets, surpluses and shortages are only temporary because prices eventually move back to the equilibrium point. This awesome phenomena is called the <span style="color: #d20f97; font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">Law of Supply and Demand <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">. It claims that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

I'm guessing you have mastered the basic idea of supply and demand at this point, yeah? ;)

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;"> __**Three Steps to Analyzing Changes in Equilibrium**__

1. Decide whether the event shifts the supply or demand curve. 2. Decide in which direction the curve shifts. 3. Use the supply and demand diagram to see how the shit changes the equilibrium price and quantity.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 132%;">__**Conclusion**__

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">Whew. So far, we have analyzed supply and demand in a market. What did we learn again? Ah, yes. Supply and demand together determine the prices of the economy's many different goods and services; prices in turn are the signals that guide the allocation of resources. If you have thoroughly synthesized the material above, you will be able to swiftly move on to the next chapter. Please review the key terms and read the summary below to refresh your memory. And don't forget to tackle the Mini Quiz to test yourself! ;)

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 90%;">
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;"> ☺ **Market**: a group of buyers and sellers of a good or service ☺ **Competitive Market**: a market in which there are many buyers and many sellers that they don't impact the market price ☺ **Quantity Demanded**: the amount of a good that buyers are able to buy ☺ **Demand Curve**: a graph that shows the relationship between the price and quantity demanded of a good or service ☺ **Normal Good:** a good for which, other things equal, an increase in income leads to an increase in demand. ☺ **Inferior Good**: a good for which, other things equal, an increase in income leads to a decrease in demand. ☺ **Substitutes**: two goods for which an increase in the price of one good leads to an increase in the demand for the other. ☺ **Complements**: two goods for which an increase in the price of one good leads to a decrease in the demand for the other. ☺ **Law of Demand**: the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises. ☺ **Quantity Supplied**: the amount of a good that sellers are willing and able to sell. ☺ **Law of Supply**: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises. ☺ **Supply Schedule**: a table that shows the relationship between the price of a good and the quantity supplied. ☺ **Supply Curve**: a graph of the relationship between the price of a good and the quantity supplied. ☺ **Equilibrium**: a situation in which the price has reached the level where quantity supplied equals quantity demanded. ☺ **Equilibrium price**: the price that balances quantity supplied and quantity demanded. ☺ **Equilibrium quantity**: the quantity supplied and the quantity demanded at the equilibrium price. ☺ **Surplus**: a situation in which quantity supplied is greater than quantity demanded. ☺ **Shortage**: a situation in which quantity demanded is greater than quantity supplied. ☺ **Law of Supply and Demand:** the claim that the price of any good adjusts to bring the supply and demand for that good into balance.

__<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 130%;">**Summary** __ =<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 90%;"> = <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 117%;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 128.7%;"> ☺ 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. ☺ 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. ☺ 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. ☺ 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. ☺ 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. ☺ When the supply and the demand curve intersect, it's called the equilibrium (the quantity demanded is the same as the quantity supplied). ☺ Both buyers and sellers naturally move towards their equilibrium. ☺ If the price is above the equilibrium, it's called a surplus. ☺ If the price is under the equilibrium, it's called a shortage. ☺ 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-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 99%;">

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 117%;"> **__<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 117%;">Mini Quiz __** <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 117%;"> Now it's time to test your knowledge! ;)

1. Which of the following events will cause the demand curve for a normal good such as steak to shift to the left?

(A) A decrease in consumer incomes (B) An increase in consumer incomes (C) A decrease in the price of chicken a substitute for steak (D) The release of a new medical report saying that steak consumption improves health

2. For economists, people's tastes and demand are

(A) beyond the realm of economics. (B) negatively related. (C) not related. (D) positively related.

3. If, at the current price, there is a shortage of a good,

(A) sellers are producing more than buyers wish to buy. (B) the market must be in equilibrium. (C) the price is below the equilibrium price. (D) quantity demanded equals quantity supplied.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 128.7%;">**__Answer Key__** <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 117%;">

1. A 2. D 3. C

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 127%;">**__Citations__**

http://questgarden.com/15/11/6/060129180530/images/supply_%28291_x_360%29.jpg<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 90%;"> http://livingeconomics.org/images/glossary/surplus.gif [] http://www.youtube.com/watch?gl=KR&hl=ko&v=Z44kKMJm9NY&feature=related http://www.youtube.com/swf/l.swf?swf=http%3As.ytimg.com/yt/swf/cps-vfl58601.swf&video_id=xnpAJaLni-k&rel=1&hqt=0&eurl=&iurl=http%3Ai1.ytimg.com/vi/xnpAJaLni-k/default.jpg&t=OEgsToPDskIy3ofA_J6QNL-wuvkj-fA9&use_get_video_info=1&load_modules=1&fs=1&hl=ko