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Ch. 3 Demand _amp; Supply

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         Chapter 4
    The Market Forces of
    Supply and Demand
2
                  Objectives
1. Understand the concept of a competitive
   market.
2. Learn the factors that determine market demand.
3. Learn the factors that determine market supply.
4. Understand how and why demand and supply
   forces establish market prices and quantities.
5. Learn how prices and markets allocate society’s
   scarce resources.
3

Understanding Individual Markets:
DEMAND AND SUPPLY

    WHY DON'T WE ALL DRIVE
                   FERRARIS?
4
    MARKETS DEFINED
5
                Markets

A  market is a group of buyers and
 sellers of a particular good or service.
The terms supply and demand refer to
 the behavior of people . . . as they
 interact with one another in markets.
6
                Markets
       Buyers determine demand.




       Sellers determine supply.
7
     MARKETS DEFINED

COMPETITION

    .... FOR PRODUCTS & RESOURCES
8
     MARKETS DEFINED

COMPETITION

    .... FOR PRODUCTS & RESOURCES



PRICES
9
     MARKETS DEFINED

COMPETITION

    .... FOR PRODUCTS & RESOURCES



PRICES

    .... THE RATIONING FUNCTION
10
              Competition:
          Perfect and Otherwise
           Perfect Competition
 Isa market structure characterized by
 Many buyers and sellers
 Homogenius product
 No control over price
 Very easy enterance and exit from market
11
        Quantity Demanded
     The Quantity demanded is the
     amount of a good or service that
     buyers are willing and able to
     purchase.
12
      Law of Demand
 The claim that, other things
 being equal, the quantity
 demanded of a good or service
 falls when the price of the good
 rises.      -Ceteris Paribus
13
     DEMAND & SUPPLY
LAW OF DEMAND
14
     DEMAND & SUPPLY
LAW OF DEMAND

     FOR HIGHER PRICES
15
     DEMAND & SUPPLY
LAW OF DEMAND

     FOR HIGHER PRICES
     LESS QUANTITY IS DEMANDED
16    DEMAND...
   INVERSE PRICE AND
 QUANTITY RELATIONSHIP


 ILLUSTRATED....
          DEMAND...
P    Qd   P
$1   80
$2   55
$3   35
$4   20
$5   10
           o          Q
                          d
          DEMAND...
P    Qd   P
              5
$1   80
              4
$2   55
              3
$3   35
              2
$4   20
              1
$5   10
              o   10 20   35   55   80 Qd
          DEMAND...
P    Qd   P
              5
$1   80
              4
$2   55
              3
$3   35
              2
$4   20
              1
$5   10
              o 10 20   35   55   80 Qd
          DEMAND...
P    Qd   P
              5
$1   80
              4
$2   55
              3
$3   35
              2
$4   20
              1
$5   10
              o 10 20   35   55   80 Qd
          DEMAND...
P    Qd   P
              5
$1   80                  ETC.
              4
$2   55
              3
$3   35
              2
$4   20
              1
$5   10
              o 10 20   35   55   80 Qd
          DEMAND...
P    Qd   P
              5
$1   80
              4
$2   55
              3
$3   35
              2
$4   20
              1
$5   10
              o 10 20   35   55   80 Qd
          DEMAND...
P    Qd   P
              5
$1   80
              4
$2   55
              3
$3   35
              2
$4   20
              1
$5   10
              o 10 20   35   55   80 Qd
          DEMAND...
P    Qd   P
              5
$1   80
              4
$2   55
              3
$3   35
              2
$4   20
              1
                                    D
$5   10
              o 10 20   35   55   80 Qd
25
      Movement Along Versus a
      Shift of the Demand Curve
   If the price of a good changes but
    everything else remains the same,
    there is a movement along the
    demand curve.
   If the price of a good remains constant
    but some other influence on buyers’ plans
    changes, there is a shift of the demand
    curve.
26
A Change in Quantity Demanded
  Versus a Change in Demand

   A movement along the demand curve shows
    a change in the quantity demanded.
27
A Change in Quantity Demanded
  Versus a Change in Demand

   A movement along the demand curve shows
    a change in the quantity demanded.
   A shift of the demand curve shows a
    change in demand.
28
29
          Market Demand

Market  demand refers to the sum of all
 individual demands for a particular
 good or service.
Graphically, individual demand curves
 are summed horizontally to obtain the
 market demand curve.
30
DETERMINANTS OF DEMAND
      NON - PRICE
31
DETERMINANTS OF DEMAND
      NON - PRICE
 TASTES
32
DETERMINANTS OF DEMAND
      NON - PRICE
 TASTES
 NUMBER OF BUYERS
33
DETERMINANTS OF DEMAND
      NON - PRICE
 TASTES
 NUMBER OF BUYERS
 INCOME
     Normal or Inferior Goods
34
DETERMINANTS OF DEMAND
      NON - PRICE
 TASTES
 NUMBER OF BUYERS
 INCOME
     Normal or Inferior Goods


 PRICE OF RELATED GOODS
      Substitutes or Complements
35
DETERMINANTS OF DEMAND
      NON - PRICE
 TASTES
 NUMBER OF BUYERS
 INCOME
     Normal or Inferior Goods
 PRICE OF RELATED GOODS
     Substitutes or Complements
 EXPECTATIONS
36
      Quantity Supplied

 The Quantity supplied is the
 amount of a good or service
 that sellers are willing and
 able to sell.
37
         Law of Supply
 Law of supply is the claim
 that, other things being equal,
 the quantity supplied of a
 good or service rises when the
 price of the good or service
 rises.         -Ceteris Paribus
38   DEMAND & SUPPLY
LAW OF SUPPLY
39     DEMAND & SUPPLY
LAW OF SUPPLY

     FOR HIGHER PRICES
40     DEMAND & SUPPLY
LAW OF SUPPLY

     FOR HIGHER PRICES

     GREATER QUANTITY IS SUPPLIED
41     DEMAND & SUPPLY
LAW OF SUPPLY

     FOR HIGHER PRICES

     GREATER QUANTITY IS SUPPLIED


     SUPPLY IS ALWAYS BASED
       UPON A FIRM'S COSTS
42
           Market Supply

Market  supply refers to the sum of all
 individual supplies for all sellers of a
 particular good or service.
Graphically, individual supply curves
 are summed horizontally to obtain the
 market supply curve.
43    SUPPLY...
   DIRECT PRICE AND
 QUANTITY RELATIONSHIP


 ILLUSTRATED....
          SUPPLY...
P    Qs   P
$1    5
$2   20
$3   35
$4   50           L
$5   60
              o       Q
                       s
          SUPPLY...
P    Qs   P
              5
$1    5       4
$2   20
              3
$3   35
              2
$4   50
              1
$5   60
              o 10 20   35   55   80 Qs
          SUPPLY...
P    Qs   P
              5
$1    5       4
$2   20
              3
$3   35
              2
$4   50
              1
$5   60
              o 10 20   35   55   80 Qs
          SUPPLY...
P    Qs   P
              5
$1    5       4
$2   20
              3
$3   35
              2
$4   50
              1
$5   60
              o 10 20   35   55   80 Qs
          SUPPLY...
P    Qs   P
              5
$1    5       4
$2   20
              3
$3   35
$4   50
              2
                             ETC.
              1
$5   60
              o 10 20   35   55   80 Qs
          SUPPLY...
P    Qs   P
              5
$1    5       4
$2   20
              3
$3   35
              2
$4   50
              1
$5   60
              o 10 20   35   55   80 Qs
          SUPPLY...
P    Qs   P                       S
              5
$1    5       4
$2   20
              3
$3   35
              2
$4   50
              1
$5   60
              o 10 20   35   55   80 Qs
51 DETERMINANTS OF SUPPLY
        NON - PRICE
  RESOURCE PRICES
52 DETERMINANTS OF SUPPLY
        NON - PRICE
  RESOURCE PRICES
  TECHNOLOGY
53 DETERMINANTS OF SUPPLY
        NON - PRICE
  RESOURCE PRICES
  TECHNOLOGY

  TAXES & SUBSIDIES
54 DETERMINANTS OF SUPPLY
        NON - PRICE
  RESOURCE PRICES
  TECHNOLOGY

  TAXES & SUBSIDIES

  PRICES OF RELATED GOODS
55 DETERMINANTS OF SUPPLY
        NON - PRICE
  RESOURCE PRICES
  TECHNOLOGY

  TAXES & SUBSIDIES

  PRICES OF RELATED GOODS

  EXPECTATIONS
56 DETERMINANTS OF SUPPLY
        NON - PRICE
  RESOURCE PRICES
  TECHNOLOGY

  TAXES & SUBSIDIES

  PRICES OF RELATED GOODS

  EXPECTATIONS

  NUMBER OF SELLERS
          SUPPLY...
                  Changes in price
P    Qs   P        bring about a     S
              5      change in
$1    5       4
                      quantity
                     supplied
$2   20
              3
$3   35
              2
$4   50
              1
$5   60
              o 10 20      35   55   80 Qs
             DEMAND & SUPPLY
    PUTTING THE TWO TOGETHER
P   Q    s   Qd    P                     S
$1 5          80   5
$ 2 20        55   4

$ 3 35        35   3

$ 4 50        20   2

$ 5 60        10   1                     DQ
                   o   10 20   35   55       80
59
         Equilibrium

Equilibrium is a situation in
which supply and demand have
been broght into balance.

      Equilibrium Price
      Equilibrium Quantity
             DEMAND & SUPPLY
    PUTTING THE TWO TOGETHER
                       MARKET CLEARING
P   Q    s   Qd    P     EQUILIBRIUM S
$1 5          80   5
$ 2 20        55   4

$ 3 35        35   3

$ 4 50        20   2

$ 5 60        10   1                     DQ
                   o   10 20   35   55   80
61          DEMAND & SUPPLY
       SHIFTS VS. MOVEMENTS
          ALONG THE CURVE
     P $6
                               S
       5
                                         S'
       4
       3                                  SHIFTS
                                           MOVE
       2                                    ONE
       1                                D CURVE
                                        Q
        o    10 20   35   55       80
62          DEMAND & SUPPLY
       SHIFTS VS. MOVEMENTS
         ALONG THE CURVE
     P $6
                               S
       5
                                            S'
       4
       3                           MOVEMENT
                                     ALONG
       2                            A CURVE
       1                                D
                                        Q
        o    10 20   35   55       80
63       DEMAND & SUPPLY
    THE MARKET SYSTEM IS OUR RATIONING
DEVICE AND THE EQUILIBRIUM POINT IS OPTIMAL

       P$6                     S
          5
          4
          3
          2
          1                         D
          o 10 20                       Q
                     35   55       80
64       DEMAND & SUPPLY
    THE MARKET SYSTEM IS OUR RATIONING
DEVICE AND THE EQUILIBRIUM POINT IS OPTIMAL

       P$6                     S
          5                    Note:
          4                    Rationing
          3                    function
                               of prices.
          2
          1                         D
          o 10 20                       Q
                     35   55       80
65 Supply and Demand Together
Equilibrium Price
 Theprice that balances supply and demand.
 On a graph, it is the price at which the supply
 and demand curves intersect.
Equilibrium Quantity
 The quantity that balances supply and
 demand. On a graph it is the quantity at
 which the supply and demand curves
 intersect.
       DEMAND & SUPPLY
INTERFERENCE WITH MARKET
 PRICE LEADS TO PROBLEMS             PRICE
P $6                                 FLOOR
             SURPLUS
  5
                           S



                 }
  4
  3              }
  2
           SHORTAGE                  PRICE
  1                            D    CEILING
   o     10 20   35   55       80
67
       Three Steps To Analyzing
        Changes in Equilibrium

 Decide   whether the event shifts the supply
  or demand curve (or both).
 Decide whether the curve(s) shift(s) to the
  left or to the right.
 Examine how the shift affects equilibrium
  price and quantity.
68      DEMAND & SUPPLY
     PUTTING THE TWO TOGETHER



         How about
     changes in demand?
        DEMAND & SUPPLY
        INCREASE IN DEMAND
P   Q s Q d Qd’ P
                 $6                S
$ 1 5 80 95 5
$ 2 20 55 75 4
$ 3 35 35 60     3                     D’
                 2
$ 4 50 20 50
                 1                      D
$ 5 60 10 40     o 10 20 35   55       80
                                            Q
        DEMAND & SUPPLY
        DECREASE IN DEMAND
P   Q s Q d Qd’ P
                 $6                S
$ 1 5 80 35 5
$ 2 20 55 20 4
                 3
$ 3 35 35 15
                 2
$ 4 50 20 10
                 1             D’       D
$ 5 60 10 5      o 10 20 35   55       80
                                            Q
71      DEMAND & SUPPLY
     PUTTING THE TWO TOGETHER



        How about a
      change in supply?
       DEMAND & SUPPLY
       INCREASE IN SUPPLY
P   Q s Q’ Qd P
         s     $6                 S    S’
$ 1 5 35 80 5
$ 2 20 55 55 4
                3
$ 3 35 75 35
                2
$ 4 50 85 20
                1                      D
$ 5 60 95 10    o 10 20 35   55       80
                                           Q
       DEMAND & SUPPLY
       DECREASE IN SUPPLY
P   Q s Q’ Qd P          S’
         s     $6                  S
$1 5     2 80 5
$ 2 20 10 55 4
                3
$ 3 35 15 35
                2
$ 4 50 20 20
                1                       D
$ 5 60 25 10    o 10 20 35    55       80
                                            Q
74      DEMAND & SUPPLY
     PUTTING THE TWO TOGETHER



 How about a change
   in demand and
 a change in supply?
         DEMAND & SUPPLY
         DECREASE IN SUPPLY
         INCREASE IN DEMAND
P   Qs   Q’      P
          Qd Qd’6
          s              S’        S
$1 5    2 80 955
$ 2 20 10 55 704
                3
$ 3 35 15 35 50                         D
               2
$ 4 50 20 20 35                         ’
                 1                      D
$ 5 60 25 10   25o 10 20 35   55       80
                                            Q
         76                  Demand
                               Increase  Decrease
                    No Change in Demand in Demand

         No                     Price           Price
         Change
Supply




                                Quantity        Quantity

         Increase    Price       Price     ?   Price
            in
          Supply     Quantity    Quantity      Quantity    ?

         Decrease    Price      Price           Price     ?
            in
          Supply
                     Quantity   Quantity   ?    Quantity
77What are   the factors which will
    determine whether demand or
    supply shift will be dominant?
   Relative magnitude of shift
    –   Larger shift             larger effect
   Shape of opposite curve
    –   Relatively flat curve
         »   Large effect on Q - Small effect on P
    –   Relatively steep curve
         »   Large effect on P - Small effect on Q
78
     ANY QUESTIONS?

				
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