Lecture3

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Introduction to Microeconomics

The market forces of supply and demand

Introduction to Microeconomics

The market forces of supply and demand

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Summary

2

THE MARKET FORCES OF SUPPLY AND DEMAND

Part 1: Market and Competition

Part 2: Demand

Part 3: Supply

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Summary

Part 2: Demand

Part 3: Supply

Part 4: Demand and Supply together

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Markets and competition

4

Market?

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MARKETS AND COMPETITION

Definitions

:

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

2. A competitive market is a market in which there are many buyers and many sellers so that each has a negligible impact on the market price.

3. Perfectly competitive markets are defined by two primary characteristics: (1) the goods being offered for sale are all the same, and (2) the buyers and sellers are so numerous that no single buyer or seller can influence the market price.

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MARKETS AND COMPETITION

Definitions

:

5. A market in which there is only an unique seller, is not perfectly competitive. And such seller is called a monopoly.

6. The market with only few sellers which do not compete very aggressively is called oligopoly .

7. In the case of monopolistic competition, there are many sellers that offer (slightly) different products or services. Hence each seller has its monopoly status in setting retail price.

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MICROECONOMIC AGENTS

Firms

– Produce and sell goods and services

– Buy inputs (labor, capital & raw materials)

Consumers

– Buy goods and services

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Summary

8

Part 2: Demand

Part 3: Supply

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What determines the quantity and individual

demands?

10

Subsitute s

Completments Price

Income

Prices of related goods

Tastes

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WHAT DETERMINES THE QUANTITY AN INDIVIDUAL DEMANDS?

• The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.

• In economics, five main factors determine demands including:

1. Price

 The law of demand states that : Other things equal, when the price of a good rises, the quantity demanded of the good falls

2. Income

 Normal goods: the demand for a good falls when income falls

 Inferior goods: the demand for a good falls when income rises (bus)

3. Price of related goods

 Substitutes: When a fall in the price of one good reduces the demand for another good

 Complements: When a fall in the price of one good increases the demand for another good

4. Tastes

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THE DEMAND SCHEDULE AND THE DEMAND CURVE

12 Demand curve

Demand schedule

Question: Do you think of any case that the demand curve has upward slope? In such a case, the goods are called as the Giffen goods

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Demand

Ice Cream price (10000đ) Quantity (cây) 0,0 12 0,5 10 1,0 8 1,5 6 2,0 4 2,5 2 3,0 0 Quantity (cây) Price (10000đ) 3,0 2

•

4 6 8 10 12

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Giá kem (10000đ/cây) Mr.Thà nh (cây) Mr. Phát (cây) Tổng (cây)

0,0 12 7 19 0,5 10 6 16 1,0 8 5 13 1,5 6 4 10 2,0 4 3 7 2,5 2 2 4 3,0 0 1 1

14 + = Lượng kem(cây) Price (10000đ/cây) 3,0 2

•

4 6 8 10 12

2,5 2,0 1,5 1,0 0,5 0 Mr.Thành Price kem (10000đ/cây) Quantity(cây) 3,0 2

•

4 6 8 10 12

2,5 2,0 1,5 1,0 0,5 0 Mr. Phát 7 3 5 Quantity (cây) Giá kem (10000đ/cây)

3,0

2

•

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MARKET DEMAND VERSUS INDIVIDUAL DEMAND

• Market demand is the sum of all the individual demands for a

particular good or service.

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Shifts in the demand curve

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Quantity(cây) Price (10000đ)

0

Increase in demand

Decrease in demand D₁

D₂

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Price (1000đ/bao)

a. A shifts in the demand cure

b. A movement along the demand curve Quantity /day Price (1000đ/bao)

•

10 20 30 0

•

A policy to discourage smoking

shifts the demand curve D₁ D₂ A B 12

•

50 30

0 20 _Quantity/day

•

C

A

A tax that raises the price of cigarettes

results in a

movement along the demand curve

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SHIFTS IN THE DEMAND CURVE

• We know that demands depend on various factors. Particularly, a change in demand due to any factors rather than price can shift the demand curve to the right or the left.

• For example:

•_Any _change _that raises the quantity that buyers wish to purchase at a given price shifts the demand curve to the right.

•Any change that

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TWO WAYS TO REDUCE THE QUANTITY

OF SMOKING DEMANDED

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Summary

Part 2: Demand

Part 3: Supply

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SUPPLY

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What determines the quantity and

individual supplies?

Price

Input price

Technology

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Supply

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Price (10000đ/cây) Mr.Bình (cây) Mr. Minh (cây) Quantit y (cây)

0,0 0 0 0

0,5 0 0 0

1,0 1 0 1

1,5 2 2 4

2,0 3 4 7

2,5 4 6 10 3,0 5 8 13

+ = Quantity (cây) Price (10000đ) 3,0 2

•

4 5 3 1 2,5 2,0 1,5 1,0 0,5

0 _{Quantity (cây)}

Price (10000đ) 3,0 2

•

4 5 3 1 2,5 2,0 1,5 1,0 0,5 0 Supply of Mr.Bình Supply of Mr.Minh Quantity (cây) Price (10000đ) 3,0 2

•

4 5 3 1 2,5 2,0 1,5 1,0 0,5

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Quantity (cây) Price (10000đ)

0

SHIFTS IN THE SUPPLY CURVE

Supply curve S₁ Supply curve S₃

Supply curve S₂

Increase in supply

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SHIFTS IN THE SUPPLY CURVE

• Analogously to the analysis of demand curve, shifts in the supply curves can be due to a change in any factor rather than the price

affecting the supply curve.

•Any change that raises the quantity that sellers wish to produce at a given price shifts the supply curve to the right.

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30

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Summary

Part 2: Demand

Part 3: Supply

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Price (10000đ/cây)

Demand and Supply

Quantity

3,0

2

•

4 6 8 10 12

2,5 2,0 1,5 1,0 0,5 0 ₇ Surplus

•

Quantity of

demand Quantity of _supply

Quantity

3,0

2

•

4 6 8 10 12

2,5 2,0 1,5 1,0 0,5 0 ₇ Shortage

•

Price (10000đ/cây) Demand > Supply

Demand < Supply

Quantity of

Supply Quantity of _Demand

Price equilibrium

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EQUILIBRIUM

• Around the equilibrium, there is a surplus :

– A surplus a situation in which quantity supplied is greater than quantity demanded;

– in other words, Suppliers are unable to sell all they want at the going price and hence have to cut price towards the equilibrium.

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EQUILIBRIUM

• Or a shortage:

– a situation in which quantity demanded is greater than quantity supplied. – Demanders are unable to buy all they want at the going price; hence,

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Quantity (cây)

3,0

2

•

4 6 10 12

2,5 2,0 1,5 1,0 0,5 0 7

•

Price (10000đ/cây) New Equilibrium Initial equilibrium D₂ D₁ Hot weather

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EQUILIBRIUM

• The characteristics of the equilibrium:

– At the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell.

– The equilibrium price is sometimes called the market-clearing price because, at this price, everyone in the market has been satisfied: Buyers have bought all they want to buy, and sellers have sold all they want to sell.

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EQUILIBRIUM

• The

law of demand and supply

:

– the claim that the price of any good adjusts to bring the supply and demand for that good into balance:

 the activities of the many buyers and sellers automatically push the market price toward the equilibrium price.

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THREE STEPS TO ANALYZING CHANGES IN EQUILIBRIUM

• Concept:

– Comparative static is an analysis and comparison of two static

situations—an old and a new equilibrium

• Three analytical steps

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Step 1: Decide whether the event shifts the supply curve or demand curve (or perhaps both)

Step 1: Decide

whether the

event shifts the supply curve or demand curve

(or perhaps

both)

Step 3: Use the

supply-and-demand

diagram to see how the shift changes the equilibrium.

Step 3: Use the

supply-and-demand

diagram to see how the shift

changes the

equilibrium.

Step 2: Decide which direction the curve shifts

Step 2:

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A shift in demand curve

Shifts in Curves occur when any factor rather than price results in a change in supply and demand.

Movements along Curves show a

change in

quantity supplied

and demanded

due to a change in prices

Movements along Curves show a

change in

quantity supplied

and demanded

due to a change in prices

Other things equal…

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A shift in supply curve

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Any other factor might cause the similar effect on the supply curve ?

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A shift in both supply and demand

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45 thousands found in the first eight months

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