The Market Forces of Supply and Demand

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.title[
# The Market Forces of Supply and Demand
]
.subtitle[
## Chapter 4
]
.author[
### Hussain Hadah
]
.date[
### University of Houston | 13 July 2022
]

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# Table of contents

1. [Introduction](#intro)

2. [Markets and Competition](#sec2)

3. [Demand](#demand)

4. [Supply](#supply)

5. [Supply and Demand Together](#supply_demand)

6. [Problems and Applications](#prob)

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# Introduction

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# Why does supply and demand matter?

- Shocks to supply and demand have big effects
- A cold snap in Florida increases the price of oranges
- Unrest in the Middle East increases the price of gas and the price of an F250 falls
- A bad harvest season in Mexico will increase the price of your avocado toast

<h3>
  <ul>
  <li>Supply and demand are two words that economists use often</li>
  <li>They are the forces that make market economies work</li>
  <li>They determine how much of each good is produced and at what price it ought to be sold</li>
  <ul>
</h3>

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# Markets and Competition

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# What is a <span style="color:red;"> _market_ </span>?

- A <span style="color:red;"> _market_ </span> is the collection of buyers and sellers of one specific good or service. 
- Buyers determine the demand for that product and sellers determine its supply.

- Markets can be highly organized or less organized.

### Farmers Market is an example of an organized market.
#### Buyers meet together to buy organic produce and sellers go to a farmers market to sell their goods.

### The market for taco food trucks is an example of an unorganized market
#### People that want to buy a taco from a food truck do not all meet together. Not all food trucks go to the same place to sell as well

---
# What is  <span style="color:red;">competition</span>?

- The market for food truck tacos is highly competitive
- There is a taco food truck on every corner (many sellers) from which you can choose from.
- They also sell similar product, taco
- No one food truck can set the price of a taco for the whole market
- No one hungry person can set the price of a taco for the whole market
- Prices and quantities sold are determined by the interactions between buyers and sellers

### A <span style="color:red;">competetive market</span> is a term used to describe a market with a big number of buyers and sellers. No one buyer or seller has a big impact on the market price.

#### In this chapter, we will assume that markets are <span style="color:red;">perfectly competitive</span>. For a market to be <span style="color:red;">perfectly competitive</span>, the following two conditions must be met:

##### 1. The goods offered for sale are identical
##### 2. There are so many buyers and sellers that no single buyer or seller has an influence over the market price

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# What is  <span style="color:red;">competition</span>? (cont.)

- Since in a perfectly competitive market, buyers and sellers cannot influence the price, they accept the market price as given. We call buyers and sellers, in this case, _price takers_

- Can you think of a perfectly competitive market?

- The market for avocado

- Not all goods and services are sold in a perfectly competitive market.

- Some markets only have one seller that sets the price. This is called a <span style="color:red;">monopoly</span>.

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# Demand

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# The Demand Curve
### The Relationship between Price and Quantity Demanded

- <span style="color:red;">Quantity demanded</span> is the amount of a good that buyers are willing and able to purchase.

- Many things can influence the quantity demanded of a good

- The good's price is the main influencer

- Quantity demanded and price have a negative relationship

- As the price of a good increases, people will buy less of it

- As the price of a good decreases, people will buy more of it

- The <span style="color:red;">law of demand</span>: All other things being equal, when the price of a good rise, the quantity demanded falls and _vice versa_

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# An example of a demand curve

- The figure shows Catherine's demand curve for ice-cream cones.

- The price of a good is on the y-axis and the quantity demanded is on the x-axis

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# Market vs. individual demand

- Catherine's demand curve only represents the demand of one person

- To analyze the _market demand_ for ice cream, we need to aggregate the demand for all individuals.

---
# Shifts in the demand curve

- Some events might occur that would shift the demand curve

- The pandemic hit the airline industry hard

- The demand for flights plummeted because of lockdowns, which shifted the demand curve for flights

- Shocks to the demand curve change the <span style="color:red;">_quantity demanded_</span>.

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<h1 style="font-size:32px">What can cause the demand curve to shift?</h1>

</br>

- Income
  1. <span style="color:red;">Normal good</span>: if the demand for a good increases/decreases when income increases/decreases, then the good is a normal good.
  2. <span style="color:red;">Inferior good</span>: If the demand for a good rises when income falls, the good is called an inferior good
- Prices of related goods
  1. Some goods are substitutes (Coke and Pepsi)
  2. Some goods are complements (Tennis balls and rackets)
- Tastes
- Expectations (Think of toilet papers before a storm)
- Number of buyers

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<h1 style="font-size:32px">What can cause the demand curve to shift? (cont.)</h1>

</br>

- A change in prices leads to a movement **ALONG** the demand curve (Changes in price only leads to changes to quantities demanded)

- A **SHOCK** to the demand curve changes the **_demand_**.
<img src="images/demand4.png" width="60%" height="60%" style="display: block; margin: auto;" />

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# Supply

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# The supply curve

- <span style="color:red;">Quantity supplied</span> is the amount of a good that sellers are willing and able to sell

- The quantity supplied and prices have a positive relationship

--
- When prices fall, quantity supplied falls

- When prices rise, quantity supplied rises

- The positive relationship is called the <span style="color:red;">law of supply</span>

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# Supply curve example

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# Market vs. individual supply

- Ben's supply curve is just the supply of one firm/person
- To analyze the market supply, we need to aggregate all suppliers

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# Shifts in the supply curve

- Many events could happen that would **shift** the **supply** curve

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<h1 style="font-size:32px">What might cause a shift in the supply curve?</h1>

</br>

1. Input Prices
2. Technology
3. Expectations
4. Number of Sellers

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# Supply and Demand Together

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# Equilibrium

- The intersection between supply and demand is called the market's <span style="color:red;">equilibrium</span>

- The price at the intersection is called the <span style="color:red;">equilibrium price</span>

- The quantity at the intersection is called the <span style="color:red;">equilibrium quantity</span>

- <span style="color:red;">Equilibrium price</span> is sometimes called the <span style="color:red;"> _market-clearing price_</span>

- At the <span style="color:red;"> _market-clearing price_</span>, everyone is satisfied

- People's actions in a market naturally approach the equilibrium

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<h1 style="font-size:32px">Graphical representation of the equilibrium</h1>

</br>

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<h1 style="font-size:32px">What happens if we are not at equilibrium?</h1>

</br>

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# The law of supply and demand

## In a free market, prices of goods adjust automatically to bring the quantity supplied and quantity demanded of a good to equilibrium

---
# Analyzing changes in equilibrium

## There are 3 steps to analyzing changes in equilibrium:

## 1. Decide whether the event shifts the supply or demand curve (or perhaps both)

## 2. Decide in which direction the curve shifts

## 3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity

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# Example 1: a shift in demand

## Suppose we had a summer that was overly hot. How does this hot summer affect the market for ice cream?

--
### 1. Hot weather changes people's taste's for ice cream (demand)

--
### 2. Hot weather makes people want to eat more ice cream. In which direction will the demand curve for ice cream shift?

--
### Demand curve will shift to the right

--
### 3. At the old price, firms will have more demand than supply. So they will raise the price to the new equilibrium prices

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# Example 1's graph

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# Shifts vs movements along curves

- Hot weather caused the demand curve to shift

- The shift in demand caused prices to rise and the quantity of ice cream to rise

- Supply curve was unchanged

- The change in weather caused the **demand** to shift

- Supply refers to the position of the demand curve

- Quantity supplied is the amount producers want to sell

---
# Example 2: Shift to supply

## Suppose a hurricane destroys sugarcane farms, which causes the price of sugar to increase. How does this even affect the market for ice cream?

--
#### 1. Sugar is an input for ice cream, so a change in the price of sugar will affect the supply curve. Higher sugar price increases the costs of production and decreases the amount of ice cream a firm will produce to sell at a given price. A change in the price of sugar has no effect on the demand curve.

--
#### 2. The supply will shift to the left as a result of the sugar price increase.

--
#### 3. There will be an excess demand for ice cream at the old price, which will cause shortages. Firms will increase the price of ice cream in reaction.

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# Example 2's graph

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<h1 style="font-size:32px">Example 3: shocks to supply and demand</h1>

</br>

## Say that the heatwave and the hurricane hit at the same time:

--
### 1. Both curves will shift.

--
### 2. The supply and demand will shift in the same direction they did in the examples before.

--
### 3. There are two possible outcomes.

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# Example 3's graph

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# Shifts in demand and supply: Summary
<img src="images/sup_dem6.png" width="90%" height="90%" style="display: block; margin: auto;" />

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<h1 style="font-size:32px">Supply and Demand Shocks: Oil Markets</h1>

</br>