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					Supply and Demand
The Market -- Basic Model

A1. Buyers are price takers.

A2. An increase in the price will reduce quantity
  demanded by consumers

A3. Sellers are price takers

A4. An increase in the price will increase quantity supplied
  by producers

A5. Buyers and sellers have perfect information
Market Equilibrium
Market Equilibrium


                                                 Q d
Qd  D(P) where as P increases Q decreas es, [          0].
                                 d
                                                  P
                                                Q s
Qs  S(P) where as P increases Q inc reases , [        0].
                               s
                                                 P
Market equilibrium is price and quantity such that
Qd  Qs
•Market Equilibrium

• If price above the equilibrium, quantity
  supplied will be greater than quantity
  demanded. Gains from trade are possible
  at lower price.
• If price is below the equilibrium, quantity
  supplied will be less than quantity
  demanded. Gains from trade are possible
  at a higher price.
Market Equilibrium
How Do P & Q Change?

• A Shift in Demand
  • A shift up to the right (an increase) will increase P & Q.
  • A shift down to the left (a decrease) will decrease P&Q

• A Shift in Supply
  • A shift out to the right (an increase) will decrease P and increase
    Q
  • A shift in to the left (a decrease) will increase P and decrease Q.
Increase in Demand
What Factors Shift Demand ?

• TASTES
• INCOME
  • Normal good
  • Inferior good
• PRICE OF SUBSTITUTE
• PRICE OF COMPLEMENT
• EXPECTATIONS
Increase in Supply
What Factors Shift Supply?

•   Input Prices
•   Technological Change
•   Acts of God/Weather
•   Change in Number of Suppliers
Movement Along vs. Shift

• A shift of the supply curve leads to an
  increase in quantity demanded. This is a
  movement along the demand curve
• A shift of the demand curve leads to an
  increase in quantity supplied. This is a
  movement along the supply curve.
Examples

• “Crude Oil, Petroleum Products Rise after
  Explosion at Large Shell Refinery.”
• “Digital Camera Prices Fall As More
  People Buy, Contradicting the Laws of
  Supply and Demand.”
• “Demand is increasing moderately, but
  with yields per acre rising, farmers have
  seen little change in prices.”
“Crude Oil, Petroleum Products Rise after Explosion at
Large Shell Refinery.”
“Digital Camera Prices Fall As More People Buy,
Contradicting the Laws of Supply and Demand.”
“Demand is increasing moderately, but with yields per
acre rising, farmers have seen little change in prices.”
Shifts in Both Supply and Demand

• An increase in both supply and demand will increase Q
  but effects on P are ambiguous.

• An increase in supply with a decrease in demand will
  reduce P, but effects on Q are ambiguous.

• A decrease in both supply and demand will decrease Q
  but effects on P are ambiguous.

• A decrease in supply with an increase in demand will
  increase P, effects on Q are ambiguous.
What’s Next?


   If price increases by 10%,
   will total revenue increase
   or decrease?

				
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posted:11/22/2012
language:English
pages:18