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MARKET EQUILIBRIUM

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Todd Cota

on 26 April 2015

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Transcript of MARKET EQUILIBRIUM

MARKET EQUILIBRIUM
THE POWER OF SUPPLY & DEMAND
MARKETPLACE
The Marketplace is a physical or non-physical location where buyers & sellers are linked together to engage in transactions for goods & services in exchange for money.

e.g. 1) product markets
2) resource (FOP)markets
3) financial markets
DEMAND
Demand:
The various quantities of a
Good or Service
that consumers are
Willing & Able
to purchase at different possible prices during a particular
time period
, ceteris paribus.
NON-PRICE DETERMINANTS OF DEMAND
1) Income
Normal Goods
Inferior Goods
2) Price of Other Products
Substitutes
Complements
Unrelated
3) Taste & Preferences
4) Size of Population
5) Change in Age Structure of Population
6) Change in Income Distribution
7) Government Policy Changes
8) Seasonal Change
9) Culture
DEMAND CURVE: MOVEMENTS & SHIFTS
Whenever the price of a good changes,
ceteris paribus
, it leads to a
movement along the demand curve
; causing an increase or decrease in quantity demanded.

Any change in a non-price determinants of demand results in a
shift in the entire demand curve
, causing a change in demand.
SUPPLY
Supply:
The various quantities of a good or service that firms are willing & able to produce and sell at different possible prices during a particular time period, ceteris paribus.
NON-PRICE DETERMINANTS OF SUPPLY
1) Costs of the Factors of Production
2) Price of other products, which the producer could produce instead of the existing product.
3) State of Technology
4) Expectations
5) Government Intervention
Taxes
Subsidies
6) Prices of Related Goods
Competitive supply (e.g. corn vs. wheat)
Joint supply (e.g. skim milk & butter)
7) Firm (producer) Expectations
8) Number of Firms in the Marketplace
9)Unpredictable Supply-Side-Shocks

Competitive Market:

Many buyers & sellers acting independently.
Effective Demand:
The ability to purchase a Good or Service.
Law of Demand:
There is a negative causal relationship between the price of a good or service & quantity demanded, over a particular time period, ceteris paribus. As the price of a good increases, quantity demand falls (vice versa).
in Demand for 2 reasons
1)
Income Effect
2)
Substitution Effect
TEAM CHALLENGE
Directions:
Get into Teams (3 members maximum)
Using diagrams, show the impact of each of the following on the demand curve.
Next to your graph, write down the best possible determinant of demand that you believe caused the change in demand for product "A".

1) The number of consumers in the market for Product A increases.

2) Consumer income increases and product A is an inferior good.

3) Consumer income decreases and product A is a normal good.

4) A news report claims that use of product A has harmful effects on health.

5) The price of substitute good B falls.

6) The firm producing good A decides to decrease the price of the good.

7) The price of complementary good B increases.
Law of Supply:
A law stating a positive causal relationship between the price of a good & quantity of the good supplied, over a particular time period, ceteris paribus: as the price of a good increases, the quantity of the good supplied also increases (& vice versa). If a producer can get higher prices, this may earn them higher profits & they may provide and incentive, thus increasing output.
Individual Supply to Market Supply:
Market supply is the sum of all individual firms' supplies for a good.
SUPPLY CURVE: Movements & Shifts
Any change in price produces a change in quantity supplied, shown as a movement on the supply curve.

Any change in a determinant of supply (other than price) produces a change in supply, represented by a shift of the whole supply curve.
TEAM CHALLENGE
Directions:
Get into Teams (3 members maximum)
Using diagrams, show the impact of each of the following scenarios.
Next to your graph, write down the best possible determinant of supply that you believe caused the change in supply.
1) The number of firms in the industry producing product A decreases.
2) The price of oil, a key input in the production of product A, increases.
3) Firms expect that the price of product A will fall in the future.
4) The government grants a subsidy on each unit of A produced.
5) The price of product B falls, and B is in competitive supply with A.
6) The price of product B increases, and B is in joint supply with A.
7) A new technology is adopted by firms in the industry producing product A.
S U P P L Y
D E M A N D
MARKET EQUILIBRIUM
Market Equilibrium:
A point of rest where the quantity demanded equals the quantity supplied, & there is no tendency for the price to change.
Market Disequilibrium:
Where excess demand (shortage) or excess supply (surplus), & the forces of Demand & Supply cause the price to change until the market reaches equilibrium at a market clearing price.
Supply & Demand Shifts
QUIZ TIME!
Use Supply & Demand diagrams to illustrate the following events.
Freezing weather destroys the avocados crop & the price of avocados rises.
The media reports on the negative consequences on health related to the high fat content found in cheese & the price of cheese falls.
A new technology of production for computers is developed & the price of computers falls.
Use D&S diagrams to show how the change in Demand or Supply for product "A" creates a disequilibrium, and how the change in price eliminates the disequilibrium.
Consumer income increases ("A" is a normal good).
Consumer income falls ("A" is an inferior good).
The price of substitute good "B" falls.
There is an increase in labor costs.
The number of firms in the industry producing product "A" increases.
REAL-WORLD EXAMPLES
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