Chapter 3

• Market Demand

  The amount of a good that all buyers are willing to purchase within a given time period

  → Example: 1 person buys 2 breads, and 1 person buys 3 breads. The market demand is 5.
• Finding price and quantity using algebra

  Qd = 1800-30P

  What will the quantity demanded be if the price is: €5

  → Q = 1800-30*5 = 1650
• Finding price and quantity using algebra

  Qd = 1800-30P

  What will the quantity demanded be if the price is: €20

  → Q = 1800-30*20 = 1200
• Market Supply


  The sum of all the individual supplies for a particular good or service
• When the price changes, the quantity supplied changes. This is a movement along the supply curve.
• When a non-price determinant changes, supply changes. This is a shift of the supply curve.
• Decrease in supply → Supply curve shifts to the left
• Increase in supply → Supply curve shifts to the right
• Equilibrium refers to 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.
  • On a graph, it is the price at which the supply and demand curves intersect.
  • Equilibrium Quantity
  • The quantity supplied, and the quantity demanded at the equilibrium price.
  • On a graph, it is the quantity at which the supply and demand curves intersect.

  
• What happens when the market is NOT in equilibrium? (Qd=Qs)

  Supply may be higher than demand: excess supply. There is a surplus of the good on the market.

  Supply may be lower than demand: excess demand. There is a shortage of the good on the market.
• Excess Supply on a graph

  A) Surplus

  B) Quantity supplied

  C) Quantity demanded

  
• Excess Demand on a graph

  A) Shortage

  B) Quantity demanded

  C) Quantity supplied

  
• When the market is not in equilibrium, it will move towards the equilibrium:

  • When there is excess supply, sellers are not able to sell all their stock at current prices → they will cut prices
  • → The prices will fall until the market reaches equilibrium
• When there is excess demand, consumers are not able to buy all they want at current prices → sellers can raise prices without cutting sales.

  → the prices will rise until the market reaches equilibrium
• Find the equilibrium price and quantity:

  Qd = 32-2P

  Qs = 20+4P

  Qd = Qs

  32 – 2P = 20 + 4P

  12 = 6P

  P = 2

  Q = 32 – 2*2 = 28 or Q = 20 + 4*2 = 28
• Changes in equilibrium

  • When some events shift the supply or the demand curve, the market equilibrium changes.
• Three steps are used for analysing changes in equilibrium:

  1. Decide whether the event shifts the supply or the demand curve (or perhaps both)
  2. Decide in which direction the curve shifts
  3. Use the supply-and-demand graph to see how the shift changes the equilibrium (i.e. how the equilibrium quantity and price change)
• Hot weather increases the demand for ice cream, resulting in a higher price and a higher quantity sold. → The event shifts the demand curve

  A) New equilibrium

  B) Initial equilibrium

  
• What happens to price and quantity when supply or demand shifts?

  A) same

  B) up

  C) down

  D) down

  E) up

  F) ambigious

  G) up

  H) down

  I) ambigious

  J) down

  K) ambigious

  L) up

  M) ambigious

  N) down

  O) up

  
• How prices allocate resources

  • In any economic system, scarce resources have to be allocated among competing uses.
  • Supply and demand determine together the prices of an economy's many goods and services
• Example for allocating resources

  → beach front land

  it is scarce → many people want it, little available

  who will get this? Whoever is willing to pay the price

  price of beach front land adjusts until quantity of land demanded is equal to the quantity supplied
• Suppose both buyers and sellers of wheat expect the price of wheat to rise in the near future. What would we expect to happen to the equilibrium price and quantity in the market for wheat today?

  Price will increase; quantity if ambigous
• Suppose there is an increase in both the supply and demand for personal computers. In the market for personal computers, we would expect from the equilibrium price and quantity?

  The equilibrium quantity to rise and the change in the equilibrium price to be ambiguous.
• An inferior good is a good for which an increase in income causes a decrease in demand.
• When the demand for a good shifts to the right due to an increase in consumers' income: the equilibrium price and quantity increase.
• If the price of a good is above the equilibrium price at a certain point in time, there is a surplus and the price will fall.
• What is a market? Give some examples of markets.

  A market is a system where buyers and sellers interact to exchange goods, services, or resources. It's essentially a platform or mechanism that facilitates the transactional relationships between these two parties.

  Examples:

  • Stock market
  • Labour market
  • Real estate market
• Competitive Market

  • Definition: Many buyers and sellers, no single entity influences price.
  • Example: Agricultural market for wheat, corn, soybeans.
  • Characteristics: Low barriers to entry/exit, prices determined by supply and demand.
• Non-Competitive Market

  • Definition: Few sellers dominate, significant control over price.
  • Example: Microsoft's Windows operating system market.
  • Characteristics: High barriers to entry, limited competition, dominant firms influence prices.
• Individual Demand: Quantity of a good one consumer is willing to buy at different prices.
• Market Demand: Total quantity of a good all consumers in a market are willing to buy at different prices.
• Substitute Goods

  • Definition: Goods that can be used interchangeably to satisfy a need.
  • Example: Tea and coffee.
  • Behavior: If the price of one increases, demand for the other may rise.
• Complementary Goods

  • Definition: Goods typically consumed together or that enhance each other's value.
  • Example: Peanut butter and jelly.
  • Behavior: If the price of one increases, demand for the other may decrease.
• When there is a drought in Southern Europe, the price of fruit rises in supermarkets throughout Europe.

  A drought in Southern Europe will cause a negative shift of the supply curve for fruit. This will result in a higher price for fruit in the new market equilibrium
• When a report is published linking a product with an increased risk of cancer, the price of the product concerned tends to fall. A report publishing information that a product can be linked to an increased risk of cancer will cause a negative shift in the demand curve. This will result in a new market equilibrium in which the market price will be lowered.
• Calculate the equilibrium price and quantity in the market for chocolate bars:

  Qd = 1500-30P

  Qs = 1400+70P

  P = 1

  Qd = 1500-30*1 = 1470

  Qs = 1400+70*1 = 1470
• Equilibrium


  The price where the quantity supplied is equal to the quantity demanded.
• Price elasticity of demand


  (Percentage change in quantity demanded) / (percentage change in price)
• Percentage change

  = (final value - initial value) / initial value (x100)