September 13th, 2016  

How will you define market?

Macro Notes  

CHAPTER 4  

Market Forces of Demand and Supply: basic work tool of economists  

Markets and Competition  

 --markets: group of buyers and sellers of a good or service  

 -this can be in an actual marketplace, online, etc...  

 --assume that these markets are in perfect competition  

 -goods are exactly the same from market to market  

 -many buyers and sellers: businesses competing for $, and the buyer competing  with others to buy that goof  

 --we cannot affect the market individually  

 --sellers are forced to sell at market price  

**we assume no government intervention**  

DEMAND

What is the difference between individual demand and market demand?

Quantity Demanded (QD)  

 --amount of goods buyers are willing/able to purchase at a particular price   --it is a particular point on the demand curve  

Law of Demand: when price (P) of a good rises, quantity demanded (QD) falls, other things  equal  We also discuss several other topics like What are the components of public relations?

 --while they do have incentive to buy/demand fewer, it is important to note that not  everyone will  

 --it is an inverse relationship b/w price and quantity demanded  

NOTE: (P) is graphed vertically on the y-axis and (QD) is graphed on the x-axis  

Individual Demand and Market Demand  If you want to learn more check out What are the two types of food evaluation?

 --market demand is the horizontal sum of quantities demanded by all buyers   --leads to the market demand curve  

What are the factors that increase demand?

Shifting Demand Curve  

 --shifts when some other variable changes: "other things" that affect the buyers' will ingness  

 if demand increases, the graph shifts RIGHT  

 if demand decreases, the graph shifts LEFT

Factors That Increase Demand:  

 1. the number of buyers increases

 -this is largely caused from population increase  

 -the larger the number of buyers, more demand and curve will shift right   2. income increases  

 -this is true for normal goods  

 -with inferior goods, if income increases then demand falls   3. price of substitute goods

 -ex) coke vs Pepsi: if coke prices increase, some people will buy more Pepsi   4. price of complements goes down  

 ex) tea and sugar: if the prices of tea goes down, people will buy more sugar  ***NOTE: Factors 3 and 4 make the market interrelated***  We also discuss several other topics like What is the importance of greenhouse gases?

 5. tastes change of the good

 -if more people demand the good the curve shifts RIGHT   -if buyers start preferring an alternate good, then the demand of a current good  will fall and the demand curve will shift LEFT  

 ex) lost desire for apples and decided to opt for mangoes instead; demand for man goes rises and demand for apples decreased  

 6. changes in expectations (about the future)

 ex) I like dark chocolate, but cocoa beans are scarce, so dark chocolate price will  increase: I buy more dark chocolate NOW  We also discuss several other topics like What is diffusion?

 -if buyers expect prices to rise, the current demand will shoot up  

SUPPLY  

quantity supplied: the amount that sellers are willing and able to sell when price (P) is high   --selling the good is profitable so firms are willing to sell more  

Law of Supply  

 --positive relationship: when price (P) rises, quantity supplied (QS) of the good raises,  given that everything else is held at a constant  

 --when price of good rises, everything else at a constant, the quantity of good supplied  will rise  

 --when sellers can get higher prices for goods, producing and selling become more  profitable  Don't forget about the age old question of What is human resource management?

 ex) rise in the price of laptops but not desktops will encourage comp. makers to  focus more on laptops, not computers  

 --price and quantity supplied are POSITIVELY RELATED  

 --this translates to an upward curve on a graph, in contrast to the demand curve   -each point on the curve shows the quantity that sellers would choose to sell at a  specific price  

 --shifts along the curve:

 -a change in price, we go ALONG the curve (a rise, we go right; a fall, we go  left)  

 --a shift in the supply curve  

 -when variables that we once held constant change (like to cost of transportation  of a good)  

 ex) if transportation of maple syrup drops, the seller is encouraged to supply  more bottles and the curve shifts RIGHT  

Individual Supply vs Market Supply  

 --market quantity supply is the horizontal sum of the individual supply of individual  companies/firms  

shifting supply curve  

 -when "other things" (variables) affect the sellers' willingness  Don't forget about the age old question of What is external validity?

Factors that Increase Supply  

 1. input prices fall

 -there are many other factors and sources of labor that create a product, and a  change in price in any of those sectors shifts the supply curve: in sectors of labor and energy to  create that good  

 -a rise in price of input shifts the curve to the left  

 -more profit and willing to supply more  

 2. technology improves

 -company can make more or the same amount at a lower cost   -technological advances increase the supply of a good  

 -not only is it more advanced, but it's cheaper and more new  ex) replacing sap buckets by tubes draining into a central container for boiling   3. the number of sellers increases

 -this is due to the entry of more firms  

 -if more people decide to get involved in a particular market, the supply of that  good would increase and curve shifts RIGHT  

 -if firms decide to leave the market, supply decreases and curve shifts LEFT  ex) maple syrup market: more vendors decide to sell maple syrup, and so more bottles will end  up being produced; increase in supply, this shifts the graph to the RIGHT   4. changes in expectations

 -if firms expect that the price (P) of a good will fall, they more today but not as  much in the future  

 -expectations of future prices of a good will affect the supply and therefore shift  the supply curve  

 -if expectation of a future price rising, the curve shifts LEFT   -if expectation of a future price falls, the curve shift RIGHT

If QS>QD  

 --surplus  

 --must lower the price (P) to achieve equilibrium b/c consumers are more likely to buy  that good  

If QS<QD  

 --shortage

 --raise prices; chokes off extra demand  

 -price continues to rise until equilibrium occurs  

When supply and demand curves are COMBINED, we have three outcomes   --equilibrium 

 -the quantity of goods that buyers are willing/able to buy EXACTLY balances the  quantity of goods that sellers are willing/able to sell  

 --surplus 

 -suppliers are unable to sell everything they produced at a certain price   -"excess supply"  

 -they then respond by lowering prices  

 --shortage 

 -buyers are unable to get all they want of a particular good or service at the go ing price  

 -"excess demand"  

Law of Supply and Demand: the price of any good with adjust itself to bring QS and QD for  that good into an equilibrium  

TERMS:  

change in quantity supplied: when the price of as good changes and we move ALONG the  supply curve  

change in supply: when something OTHER THAN PRICE changes, causes the ENTIRE supply  curve to shift  

alternate goods: other goods that firms in a market could produce instead of the good in ques tion  

alternate markets: when the firm sells the same good in a DIFFERENT market (ex.instead of  producing in the US, you decide to produce in Canada)  

technological advances (in production): when a firm can produce a given level of output in a  new and cheaper way than before

"The US Stock Market has predicted 7 of the last 5 recessions"  

The Market Forces of Supply and Demand  

 ex) The Market for Electric Cars 

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 --tastes change and people want more: demand shifts RIGHT  

 --the price rises because there is a shortage, it can wade off some of the Quantity De manded and increase is Quantity Supplied  

Ex 2) New Technology Reduces Cost of Producing Cars  

--cut the price and when it falls consumers will buy more of this product  ex 3) Tastes Change AND New Technology Reduces Production Costs  

--if demand increases, equilibrium point increases  

 --if demand shift is moderate and supply shift is dramatic, the equilibrium quantity  would rise, but the price is ambiguous  

The Mathematics of Supply and Demand  

Demand Function: Qd=100-2P  

NOTE: the minus implies an INVERSE relationship  

Supply Function: Qs=3P  

NOTE: the positive coefficient indicated an upward slope  

How do we get quantities? Insert price into either demand or supply function  Qs=3(20)=60  

Qd=100-2(20)  

Equilibrium  

 --QD=QS  

Total Expenditure (TE)  

 --price is multiplied by quantity  

 --in this case: (20)(60)=1200  

Different Ways of Reading Supply and Demand  

Putting it all together: