MARKET – is an institution or mechanism that brings together buyers (“demanders”) and sellers (“suppliers”) of particular goods, services or resources.
DEMAND – is a schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.
- Law of Demand
All else equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls.
- The Demand Curve
The inverse relationship between price and quantity demanded for any product can be represented on a simple graph, we measure the quantity demanded on the horizontal axis and price on the vertical axis.
- Determinants of Demand
· Taste – A favorable change in consumer tastes for a product – a change that makes the product more desirable – means that more it will be demanded at each price
· Number of buyers – An increase in the number of buyers in a market increases demand.
· Income – How change in income affect demand is a complex matter.
Normal goods(“superior goods”) – products whose demand varies directly with money income.
Inferior goods – goods whose demand varies inversely with money income.
· Price of related goods – A change in the price of a related good may either increase or decrease the demand for a product, depending on whether a related good is a substitute or a complement.
Substitute good – is one that can be used in place of another good.
Complementary good – is one that is used together with another good.
Independent goods – vast majority of goods that are not related to one another.
- Change in Quantity Demanded
Change in Demand – is a shift of the demand curve to the right or to the left.
Change in Quantity Demanded – is a movement from one part to another on a fixed demand curve.
SUPPLY – is a schedule or curve showing the amounts of a product that producers are willing and able to make available for sales at each of a series of possible prices during a specific period.
- Law of Supply
As price rises, the quantity supplied rises, as price falls, the quantity supplied falls.
- Determinants of Supply
· Resource Prices – are used in the production process help determine the costs of production incurred by firms.
· Technology – Improvements in technology enable firms to produce units of output with fewer resources.
· Taxes and subsidies – An increase in sales or property taxes will increase production costs and reduce supply. In contrast, subsidies are “taxes in reverse”.
· Prices of Other Goods – Firms that produce a particular product, say, soccer balls, can sometimes use their plant and equipment to produce alternative goods, say basketballs and volleyballs.
· Price Expectations – Changes in expectations about the future price of a product may affect the producer’s current willingness to supply that product.
· Number of sellers – Other things equal, the larger the number of suppliers, the greater the market supply.
- Change in Quantity Supplied
Change in Supply – a change in the schedule and a shift to the curve.
Change in Quantity Supplied – is a movement from one point to another on a fixed supply curve.
SUPPLY AND DEMAND : MARKET EQUILIBRIUM
- Surplus – is the excess of quantity supplied over quantity demanded.
- Shortage – excess demand.
- Equilibrium price and quantity
- Rationing Function of Prices – the ability of the competitive faces of supply and demand to establish a price at which selling and buying decisions are consistent.
APPLICATION: GOVERNMENT – SET PRICES
- Price Ceilings and Shortages
It sets the maximum price a seller may charge for a product or a service.
- Price Floors – is a minimum price fixed by the government.
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