Basics


Demand

Demand is the desire to own anything and the ability to pay for it and willingness to pay; also defined elsewhere as a measure of preferences that is weighted by income.[1]

The Law of Demand

The law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases
The
greater the amount to be sold, the smaller the price at which it is offered must be in order for it to find purchasers.[2]

External Factors: advertising, brand names, supply, culture/pop-culture High Demand = High Prices.

What changes demand? And why?
  • if the price changes then quantity demand changes. If other factors are changed then the demand changes.ie. if prices go up less people would want to buy it or would be able to buy it.
  • If demand goes up, price normally goes up. If demand goes down, price normally goes down. As the price of a product goes up, the demand decreases. As the price of a product goes down, the demand increases.
So, there exists a definite relationship between the market price of a good and the quantity demanded of that good, other things held equal. This relationship between price and quantity bought is called the DEMAND CURVE (link):


law_of_demand.png
This is the law of demand curve. If the price was higher, the demand would lessen, because no one would be able to afford it.



CONSUMER STANDPOINT
  • The higher the price, the lower the demand
  • The lower the price, the higher the demand

Supply

The total amount of a good or service available for purchase; along with demand, one of the two key determinants of price.[3]

Difference in quantity supply and changes is supply:
  • Quantity supply is a specific quantity that sellers are willing and able to sell at a specific supply price. It is but ONE point on a supply curve.A change in quantity supplied is also known as a movement along the supply curve. A change in quantity supplied results ONLY from a rise or fall in the price of the item graphed.
  • A change in supply is known as a shift in the supply curve. This shift will be the result of changes in any of the non-price determinants of supply. These non-price determinants include technology, resource prices (costs of production), number of producers, price of other goods, expectations of profits, taxes and subsidies. Any one of the non-price determinants can cause a shift outward or to the right or a shift inward to the left in the supply curve.
SUPPLY CURVE (link):

supply.png
Buisiness Standpoint: -The higher the price = more production



Supply vs. Demand

  • Supply side economics: They (the government) give money to businesses for the economy to grow. They give tax breaks in order to hire more people, buy more products to sell or simply to just expand their business.(Conservatives) The businesses create things and sell them. Someone supplying.
  • Demand side economics: They give the consumers tax breaks so that they can buy spend more money on the businesses(liberal). and bonuses to spend on businesses. Through competition we choose which product is best for us. Ex. Walmart may have a cheaper toothpaste then Target so they choose the cheaper product at Walmart. Someone buying/demanding.

Summary:

From the eyes of the consumer supply and demand says that if the price grows, the demand shrinks and it goes both ways. From the business' point of view the more the price grows the more you make to get more money.

SS.D.2.4 The students understand and can identify the factors that result in changes in demand and changes in supply.
The students understand and can analyze supply and demand graphs.
The students understand and can recognize the difference between the law of supply and the law of demand.
  1. http://en.wikipedia.org/wiki/Demand_%28economics%29
  2. http://en.wikipedia.org/wiki/Law_of_demand
  3. http://www.investorwords.com/4822/supply.html


Competitive Markets


Markets in which there is competition between producers causing lower prices and better consumer satisfaction.


Generally, a perfectly competitive market exists when every participant is a "price taker," and no participant influences the price of the product it buys or sells. Specific characteristics may include:
  • Infinite Buyers/Infinite Sellers – Infinite consumers with the willingness and ability to buy the product at a certain price, Infinite producers with the willingness and ability to supply the product at a certain price.
  • Zero Entry/Exit Barriers – It is relatively easy to enter or exit as a business in a perfectly competitive market.
  • Perfect Information - Prices and quality of products are assumed to be known to all consumers and producers.[1][2]
  • Transactions are Costless - Buyers and sellers incur no costs in making an exchange [Perfect mobility].[2]
  • Firms Aim to Maximize Profits - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.
  • Homogeneous Products – The characteristics of any given market good or service do not vary across suppliers.
Some subset of these conditions is presented in most textbooks as defining perfect competition. More advanced textbooks[3] try to reconcile these conditions with the definition of perfect competition as equilibrium price taking; that is whether or not firms treat price as a parameter or a choice variable. It should be noted that a general rigorous proof that the above conditions indeed suffice to guarantee price taking is still lacking (Kreps 1990, p. 265).
In the short term, perfectly-competitive markets are not productively inefficient as output will not occur where marginal cost is equal to average cost, but allocatively efficient, as output will always occur where marginal cost is equal to marginal revenue, and therefore where marginal cost equals average revenue. In the long term, such markets are both allocatively and productively efficient.[4]
Under perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost. This implies that a factor's price equals the factor's marginal revenue product. This allows for derivation of the supply curve on which the neoclassical approach is based. (This is also the reason why "a monopoly does not have a supply curve.") The abandonment of price taking creates considerable difficulties to the demonstration of existence of a general equilibrium [5] except under other, very specific conditions such as that of monopolistic competition .

Summary:

Since there is competition between markets and businesses, this keeps the costs low for consumers. Every business competes to create a better product, but keep the cost low, to gain more profit.






Market Equilibrium


When the supply and demand are balanced. The input in the economy is equal to the output.

balance.jpg

When the price is above the equilibrium point there is a surplus of supply; where the price is below the equilibrium point there is a shortage in supply. Different supply curves and different demand curves have different points of economic equilibrium. In most simple microeconomic stories of supply and demand in a market a static equilibrium is observed in a market; however, economic equilibrium can exist in non-market relationships and can be dynamic. Equilibrium may also be multi-market orgeneral, as opposed to the partial equilibrium of a single market.
In economics, the term equilibrium is used to suggest a state of "balance" between supply forces and demand forces. For example, an increase in supply will disrupt the equilibrium, leading to lower prices. Eventually, a new equilibrium will be attained in most markets. Then, there will be no change in price or the amount of output bought and sold — until there is an exogenous shift in supply or demand (such as changes in technology or tastes). That is, there are no endogenous forces leading to the price or the quantity.
Not all economic equilibria are stable. For an equilibrium to be stable, a small deviation from equilibrium leads to economic forces that returns an economic sub-system toward the original equilibrium. For example, if a movement out of supply/demand equilibrium leads to an excess supply (glut) that induces price declines which return the market to a situation where the quantity demanded equals the quantity supplied. If supply and demand curves intersect more than once, then both stable and unstable equilibria are found.
Most economists e.g., (Samuelson 1947, Chapter 3, p. 52) caution against attaching a normative meaning (value judgement) to the equilibrium price. For example, food markets may be in equilibrium at the same time that people are starving (because they cannot afford to pay the high equilibrium price). Indeed, this occurred during theGreat Famine in Ireland in 1845–52, where food was exported though people were starving, due to the greater profits in selling to the English – the equilibrium price of the Irish-British market for potatoes was above the price that Irish farmers could afford, and thus (among other reasons) they starved.[2]

Summary:

Market Equilibrium occurs when both sides, demand and supply are in balance.


SS.D.2.4. The student understands the concept of equilibrium with respect to supply and demand, can define demand and supply,