Demand and Supply

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					Demand and Supply
Chapter 3
Competition
  Provides consumers with alternatives
  Competition by producers to satisfy
  consumer wants underlies markets
  which are characterized by demand and
  supply
Demand
 Relates the quantity   Quantity demanded
 of a good that            The quantity that
 consumers would            consumers would
 purchase at each of        purchase at a given
                            price
 various possible
 prices over some          Ceteris paribus
                              Holding all else
 period of time                constant
Demand
Price Quantity
$4    600
                 $6
$5    400
                 5           Demand
$6    350
$7    250
                      350   400
Law of Demand
 The quantity demanded of a good will
 move inversely to the price of the good
 As price increases, quantity demanded
 decreases
 As price decreases, quantity demanded
 increases.
 Inverse relationship leads to downward
 sloping demand curve
Movement along demand
curve
 Occur when price and only price
 changes
 Go from $6 to $4
 Called movement along the demand
 curve
 Quantity demanded changes
 Happens when ceteris paribus occurs
     When we hold other things constant
Other things constant
“Assumptions”
  Income             When any of these
  Price of related   change then
  goods              DEMAND CHANGES
  Tastes             We shift the curve
  Expected future    Create a new
  prices             relationship to
                     quantity demand at
                     each and every price
Increase in Demand

At each and every price
more of the good is
demanded.
                          $4                           D2

Price   Q1      Q2                              D1
$4      600     750
$5      400     500                  600        750

$6      350     450            A shift occurs in the
$7      300     400            Demand curve
Increase in Demand
  Increase in
  consumer income
  More money
  consumers have the
  more they are
  willing to pay for a
  good
  More units sold at
  each and every price
Increase in Demand
  Normal goods
     Demand for these
      goods varies directly
      with income
  Inferior Goods
     Demand for these
      goods varies
      inversely with
      income
Increase in Demand
                Change in taste
                If good becomes in
                style then
                consumers are
                willing to buy more
                of the good at any
                price
Increase in Demand
  Price of related
  goods
  Complements
     Two goods that must
      be consumed
      together
     Decrease in the price
      of one will increase
      demand for the other
Increase in Demand
                Substitutes
                   Two goods that must
                    be consumed
                    separately
                   Coke and Pepsi
                   Gasoline and diesel
                   Increase in price of
                    one will cause an
                    increase in the
                    demand of the other
Increases in Demand
  Demand will increase to the extent that
  population increases
  A change in consumer expectations
  about future prices will shift demand in
  the present
Decrease in Demand
At each and every price
Less of the good will be
demanded

                                                    D1
                           4
Price   Q1       Q2
$4      600      500                          D2
$5      400      300                    500        600
$6      350      250
                           Demand curve shifts
$7      300      200
Decrease in demand
  Change in income
     Income decreases
     Consumers have less
      money to spend and
      buy less at each and
      every price
     Depends on inferior
      or normal good
Decrease in demand
                Change in taste
                   Something becomes
                    out of style
                   Consumers will buy
                    less at each and
                    every price
Decrease in demand
  Complement
     As price of one good
      increases, demand
      for the other good
      decreases
Decrease in demand
                 Substitutes
                    As the price of one
                     substitute
                     decreases, the
                     demand for the
                     other will decrease
Supply
  Relates the quantity of a good that will
  be offered for sale at each of various
  possible prices, over some period of
  time, ceteris paribus
  Quantity supplied: the quantity of that
  will be offered for sale at a given price.
Law of Supply
                                                Supply
 There is a direct relationship
 between the price of a good
 and the quantity supplied

 Upward sloping curve due to
 Direct relationship              Price   Q1
                                  $5      100
 As price increases, quantity
 Supplied increases               $6      200
                                  $7      300
 As price decreases, quantity
 Supplied decreases
                                  $8      400
Movement along Supply Curve
  Caused by changes in price and only in
  the price of the good
  Move from one position on line to
  another
             4

             3


                     100   150
Changes in Supply
  Caused by a change in the other things
  constant
  At each and every price a new quantity
  is supplied
  Curve will shift
Increase in Supply
                                   S1
  At each and every                     S2
  price, more of the
  good is supplied     7
  Supply shifts to the
  right
   P     Q1     Q2
   $5 100 150                    400
                           300
   $6 200 300
   $7 300 400
   $8 400 500
Other things constant
  Resource prices
  Technology
  Number of sellers
  Price of jointly
  produced goods
  Producer
  expectations
  Production
  Restrictions
Increase in Supply
                 Resource prices
                 If the price of
                 resources such as
                 land, labor and
                 capital decreases,
                 supply increases
Increase in supply
  Changes in
  technology
  Makes production
  cheaper or easier
  Increases supply
Increase in supply
                     Increase in the
                     number of sellers
                     will increase supply
Increase in Supply
                 Producers
                 expectations of
                 future prices
                 If we expect prices
                 to decline in the
                 future, increase
                 production today
Increase in Supply
  Price of jointly
  produced goods
  If it rises then
  supply increases
  Price of beef rises,
  causing the supply
  of leather to
  increase
Decrease in Supply
  At each and every price less of the good
  is supplied                   S2
  Left shift                         S1

               6




                            200
                     150
Decrease in supply
  Decrease in number     Price of substitute
  of sellers             rises
  Increase in resource   Price of jointly
  prices                 produced product
  Strike or disaster     falls
                         Producers expect
                         future prices to rise
Decrease in Supply
  Production
  restrictions
     Natural disasters
     Strikes
Equilibrium
  When supply and demand meet in the
  marketplace, a market price is created
  There is only one price that clears the
  market, meaning that the quantity
  supplied equals the quantity demanded.
  A situation in which there is no
  tendency for either price or quantity to
  change
Equilibrium
 Where
 Quantity Demanded = Quantity Supplied
 One or only one equilibrium price

                                     S


         Pe

                                 D

                        Qe
Equilibrium Surplus
Situation
If market price is above
equilibrium
Then surplus occurs
Qd < Qs
What happens?
  Suppliers drop price to sell                  S
inventory                        Pa
                                 Pe
Surplus: Qs > Qd
Price drops until we reach
equilibrium
                                                D
                                      Qd   Qs
Equilibrium  Shortage
At Pb, a price below
Equilibrium, Qd > Qs                         S
We experience a shortage

Shortage : Qd > Qs           Pe
                             Pb
Consumers push the price                     D
until we reach equilibrium

Market always moves               Qs   Qe   Qd
Toward equilibrium
Changes in Market Equilibrium
  Caused by shifts in demand or supply
  Equilibrium price not longer holds true
  Market moves toward new equilibrium
  point
Change in Supply
Economy in Equilibrium                   S1
At P1 and Q1 (pt. A)
                                              S2
                               A
Resource prices drops
                       P1
Then supply shifts out
                          P2        B
At old price, surplus
occurs so market price
is dropped by suppliers

New Eq. is lower price              Q2
And larger quantity            Q1
Government Intervention
  When the market
  failure occurs,
  government enters
  the economy
  Price controls
  Subsidies
Price controls
                 Government
                 artificially creates
                 the market price
                 Market will fail to
                 reach equilibrium
                 Shortage or surplus
                 occurs
Price Floor
Government sets                               S
Price above equilibrium
Price.                    Pf              Price floor
Causes a surplus
                          Pe
Price cannot drop

No market equilibrium                         D
Surplus is permanent
                               Qd   Qe   Qs
Price floor – minimum
Legal price
Price Ceiling
Price ceiling – maximum
Legal price

If Pc is below Pe then     Pe
economy has a shortage
                                               Price
                          Pc
Price cannot rise and                          ceiling
Eliminate shortage
                                     Qe
Shortage is permanent           Qs        Qd
Subsidies
  Government pays
  corporations
     Not to produce
     To reduce production
      costs
Change in Demand
Economy in equilibrium
When demand shifts due
                                        S
To change in income

                        P2
At P1, we face a shortage
So market price increases
To P2                    P1
                                                 D2
New Eq. is higher price and                 D1
higher quantity
                              Q1   Q2

				
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posted:8/28/2012
language:English
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