Competitive markets demand and supply


 The term market means any kind of arrangement
where buyers and sellers of goods, services or
resources are linked together to carry out an
exchange.
Suresh Madhavan AKAH
Market


Markets
Product
market(goods
and services
bought and sold)
Factor
market(factors of
production
bought and sold)
Types of markets


 The competitive market is the market for a good
with large number of buyers and sellers, where the
single seller has very little or no market power.
Competitive markets


 Demand is concerned with the behaviour of buyers.
Demand


 The demand is the quantity of a good or service that
consumers are willing and able to buy at a given
price during a specific time period ceteris paribus.
Meaning of demand


 Willing ……want to buy.
 Able….Afford to buy.
Willingness and ability


 Demand schedule is a table listing the quantity
demanded at various prices
Demand Schedule

Price of chocolate bars $ Quantity of chocolate bars demanded
per week
5 2
4 4
3 6
2 8
1 10
Demand Schedule


 Price on vertical axis.
 Quantity on horizontal axis.
 It shows the relationship between price and quantity
demanded.
Drawing a demand
curve


 Market demand is the sum of all individual demands
for a good.
 The market demand is also the sum of consumer’s
marginal benefits.
Market demand


Drawing a market
demand


 The law of demand states that as the price of a good
increases, the quantity demanded of the good
decreases, ceteris paribus.
 As the price of a good decreases, the quantity
demanded of the good increases, ceteris paribus.
 It shows the negative relationship between the two
variables of price and quantity demanded.
The law of demand


Why the demand curve slopes downward?
Income effect
Substitution
effect
Law of
diminishing
marginal utility


 Real income= the actual buying power of a
consumer.
 As the price of a good decreases, the quantity
demanded increases because consumers now have
more real income to spend.
The income effect


 As the price of a good decreases, consumers switch
from other substitute goods to this good because of
its low price. Thus the quatity demanded increases.
The substitution effect


 As we consume additional units of something, the
satisfaction(utility) we derive for each additional
unit(marginal unit) diminishes.
The law of diminishing
marginal utility


 A consumer would only buy a second or third unit
of good when the price is lower.(reflects the
diminishing utility)
 At lower prices, more are demanded.
Why do they buy more
when the price falls?


 These are variables other than price that can
influence demand.
 Variables assumed to be unchanging(ceteris paribus)
 These factors lead to a shift in demand curve either
leftward or rightward.(also known as demand
shifters)
Non-price determinants
of demand


 Income(the effect is different for normal goods and
inferior goods)
 Preferences and tastes.
 Price of substitute goods.
 Price of complementary goods.
 Demographic changes.
 Future Expectations.
 Season.
Demand shifters


 Normal goods are any goods for which demand
increases when income increases, and falls when
income decreases but price remains constant.
 Demand has a direct relationship with income.
Normal goods


 An inferior good is a good that decreases in demand
when consumer income rises.
 Demand has an inverse relationship with income.
Inferior good


 A product or service that satisfies the need of a
consumer that another product or service fulfills.
Substitute good


 A good or service that is used in conjunction with
another good or service.
Complementary goods


 Whenever the price of a good changes, ceteris
paribus, it leads to a movement along the demand
curve.
 It is also known as an increase or decrease in
quantity demanded.
Movement along the
demand curve


 An change in a non-price determinant of demand
results in a shift in the entire demand curve.
 It is also known as change in demand.
Shift of the demand
curve


 The Veblen goods: Thorsten Veblen’s contribution.
 Some times the quantity demanded will rise as price
rise.
 This arise from conspicuous consumption.
 (Expenditure on or consumption of luxuries on a
lavish scale in an attempt to enhance one's prestige).
Exceptions to the law of
demand


The demand for a
Veblen good.
 As the price of a Veblen
good rises, people with
high incomes begin to
buy more of the product
because it has a “snob
value”.
(the value of owning somethi
ng that is very expensive or ra
re, for the
supposed status one gains by
owning it)


 Other than the veblen goods, find the examples for
other exceptions for the law of demand.
Explore and Explain


 Using diagrams, show the impact of changes on the
demand curve for product A
 The number of consumers in the market for a product
increases.
 Consumer income increases and product A is an inferior
good.
 Consumer income decrease and product A is a normal
good.
 A new report claims that use of product A has harmful
effects on health.
 The price of substitute good B falls.
 The price of complementary good B increases.
Test yourself


 Supply is the quantity of a good or service that
producers are willing and able to offer for
sale/supply at a given price during a specific time
period, ceteris paribus.
Supply


 The law of supply states that as price increases, more
of a good is offered for sale by firms. As price
decreases, less of a good is offered for sale.
The law of supply


Draw a supply curve


 Market supply is the sum of all individual firm’s
supplies for a good.
Market supply


 Higher price is an incentive for the producers to
produce more.
 Lower price means lower profitability.
 This leads to a positive relationship between price
and quantity supplied of a good/service.
Why slopes upward?


 A vertical supply curve means,
even as price increases, the
quantity supplied cannot
increase; it remains constant.
 This may be due to:
 Fixed quantity of the good
supplied because there is no
time to produce more of it. Ex;
Theatre tickets in a theatre.
 There is no possibility of ever
producing more of it. Ex;
Original painting and
sculptures of famous artists.
The vertical supply
curve


 Any change in price leads to change in quantity
supplied, shown as the movement along the supply
curve.
 Any change in non-price determinants of supply
leads to a change in supply, represented by a shift of
supply curve.
Movement along the
supply curve & shift of
the supply curve


Change in quantity
supplied and change in
supply


 Costs of factors of production.
 Technology.
 Price of related goods: competitive supply.
 Price of related goods: joint supply.
 Producer expectations.
 Taxes(indirect or taxes on profits).
 Subsidies.
 The number of firms.
 ‘Shock’s or unpredictable events.
The non-price determinants
of supply(Explore and Explain)


 Using diagrams, show the impact of each of the following on the
supply curve of product A.
 (a) The number of firms in the industry producing product A
decreases.
 (b) The price of oil, a key input in the production of product A,
increases.
 (c) Firms expect that the price of product A will fall in the future.
 (d) The government grants a subsidy on each unit of A produced.
 (e) The price of product B falls, and B is in competitive supply with
A.
 (f) The price of product B increases, and B is in joint supply with A.
 (g) A new technology is adopted by firms in the industry
producing A.
Test your understanding


Market Equilibrium
 Equilibrium: a state in
which opposing forces
or influences are
balanced.
 When the market is in
equilibrium, quantity
demanded equals
quantity supplied and
there is no tendency for
the price to change.


AT THE ORIGINAL PRICE LEVEL THERE IS…..
A NEW TECHNOLOGICAL
DEVELOPMENT LEADING TO
LOWER PRODUCTION COSTS?
EXCESS
DEMAND
A
EXCESS
SUPPLY
B


AT THE ORIGINAL PRICE LEVEL THERE IS…..
A RISE IN WAGE RATES IN CHINA
(WHERE MOST PRODUCTS ARE
MADE)?
EXCESS
DEMAND
A
EXCESS
SUPPLY
B


 If a quantity demanded of a good is a smaller than
quantity supplied, the difference between the two is
called a surplus (excess supply).
 If quantity demanded of a good is larger than
quantity supplied, the difference is shortage (excess
demand).
Surplus and Shortage(excess
supply and excess demand)


Market equilibrium


equilibrium
 where the supply and
demand curves meet
 equilibrium price:
P where QD = QS
 equilibrium quantity:
Q where QD = QS


0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
D
C
B
Aa
b
c
d
e
Supply
Demand
Price(penceperkg)
SHORTAGE
(300 000)
Shortage


0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
C
B
Aa
b
c
e
Supply
Demand
Price(penceperkg)
D dSURPLUS
(330 000)
Surplus


The Market
Price (£)
Quantity Bought and Sold (000s)
S
D
£5
600
D1
300
Surplus
£3
450
A shift in the demand
curve to the left will
reduce the demand to
300 from 600 at a
price of £5. Suppliers
do not have the
information or time to
adjust supply
immediately and still
offer 600 for sale at
£5. This results in a
market surplus (S >
D)
In an attempt to get rid
of surplus stock,
producers will accept
lower prices. Lower
prices in turn attract
some consumers to
buy. The process
continues until the
surplus disappears and
equilibrium is once
again reached.

The Market
Price (£)
Quantity Bought and Sold (000s)
S
D
£5
600
S1
100
Shortage
£8
350
A shift in the supply
curve to the left
would lead to less
products being
available for sale at
every price.
Suppliers would
only be able to offer
100 units for sale at
a price of £5 but
consumers still
desire to purchase
600. This creates a
market shortage. (S
< D)
The shortage in the
market would drive
up prices as some
consumers are
prepared to pay
more. The price will
continue to rise
until the shortage
has been competed
away and a new
equilibrium position
has been reached.


Change in demand and
new equilibrium


Change in supply and
new equilibrium


 Assuming a competitive market, use demand and supply
diagrams to show in each of the following cases how the
change in demand or supply for product A creates a
disequilibrium consisting of excess demand or excess supply,
and how the change in price eliminates the disequilibrium.
 (a) Consumer income increases (A is a normal good).
 (b) Consumer income falls (A is an inferior good).
 (c) There is an increase in labour costs.
 (d) The price of substitute good B falls.
 (e) The number of fi rms in the industry producing product A
increases.
 (f) A successful advertising campaign emphasises the health
benefi ts of product A.
Test your understanding


 Economics Course companion
 Economics for IB Diploma
 Economics Pearson Baccalaureate
 Ib economics blogspot.com
 Investopedia.com
 ibguides.com
References


Thank you

Competitive markets demand and supply

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