chapter 17 demand, supply, and equilibrium copyright 2002 by the mcgraw-hill companies, inc. all...
TRANSCRIPT
Chapter 17
Demand, Supply, and Equilibrium
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 17-1
Chapter Objectives
• Individual and market demand
• Changes in demand
• Individual and market supply
• Changes in supply
• Graphing supply and demand curves
• Finding equilibrium price and quantity
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 17-2
Demand Defined
• Demand is the schedule of quantities of a good or service that people will purchase at different prices– The law of demand: when the price of a good
is lowered, more of it is demanded; When it is raised, less is demanded
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Individual and Market Demand
• The law of demand holds for both individuals and markets
• Individual demand is the schedule of quantities that a person would purchase at different prices
• Market demand is the schedule of quantities that everyone in the market would buy at different prices
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Table 1 Hypothetical Individual Demand and Market Demand Schedules
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Quantity demanded by Venus
Price QD
$30 0
25 2
20 3
15 3
10 4
5 5
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Table 1 Hypothetical Individual Demand and Market Demand Schedules
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Quantity demanded by Martina
Price QD
$30 1
25 1
20 2
15 3
10 5
5 6
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Table 1 Hypothetical Individual Demand and Market Demand Schedules
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Quantity demanded by Serena
Price QD
$30 2
25 3
20 5
15 6
10 7
5 7
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Table 1 Hypothetical Individual Demand and Market Demand Schedules
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Quantity demanded by Lindsay
Price QD
$30 1
25 3
20 4
15 6
10 7
5 8
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0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Price Venus Martina Serena Lindsay Total $30 0 1 2 1 4
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0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Price Venus Martina Serena Lindsay Total $30 0 1 2 1 4 $25 2 1 3 3 9
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 17-11
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Price Venus Martina Serena Lindsay Total $30 0 1 2 1 4 $25 2 1 3 3 9 $20 3 2 5 4 14
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0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Price Venus Martina Serena Lindsay Total $30 0 1 2 1 4 $25 2 1 3 3 9 $20 3 2 5 4 14 $15 3 3 6 6 18
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0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Price Venus Martina Serena Lindsay Total $30 0 1 2 1 4 $25 2 1 3 3 9 $20 3 2 5 4 14 $15 3 3 6 6 18 $10 4 5 7 7 23
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0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Price Venus Martina Serena Lindsay Total $30 0 1 2 1 4 $25 2 1 3 3 9 $20 3 2 5 4 14 $15 3 3 6 6 18 $10 4 5 7 7 23 $ 5 5 6 7 8 26
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 17-15
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
6
12
18
24
30
Quantity
P
r
i
c
e
Price Venus Martina Serena Lindsay Total $30 0 1 2 1 4 $25 2 1 3 3 9 $20 3 2 5 4 14 $15 3 3 6 6 18 $10 4 5 7 7 23 $ 5 5 6 7 8 26
Market Demand
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What Is the Market?
• The market is where people buy and sell
– Local markets• Gasoline, groceries
– Regional• Automobiles
– National or international• Computers
Changes in Demand
Price QD(1) QD(2) $30 4 5 $25 9 11 $20 14 18 $15 18 28 $10 23 38 $ 5 26 50
A change in demand would be a change in the schedule
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D1 D2
Quantity
30
25
20
15
10
5
0 10 20 30 40 50
An Increase in Demand
Price QD(1) QD(2) $30 4 5 $25 9 11 $20 14 18 $15 18 28 $10 23 38 $ 5 26 50
An increase in demand is an increase in the quantity people are willing to purchase at all prices
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The demand curve shifts to the right
D1 D2
Quantity
30
25
20
15
10
5
0 10 20 30 40 50
An Increase in Demand
Price QD(1) QD(2) $30 4 5 $25 9 11 $20 14 18 $15 18 28 $10 23 38 $ 5 26 50
A decrease in demand means people are willing to purchase less at all prices
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The demand curve shifts to the left
D1 D2
Quantity
30
25
20
15
10
5
0 10 20 30 40 50
Changes in Demand
D2
D1
A
B
C
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Move from point A to point B A change in quantity demanded
A and B are on the same line, therefore, they are on the same schedule. If they are on the same schedule, there can be no change in demand
Changes in Demand
D2
D1
A
B
C
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Move from point A to point B A change in quantity demanded
Movement from A to B is simply a change in quantity demanded in response to a change in price
Changes in Demand
E
G
I
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Move from point F to point G An increase in demand
There is an increase in demand because people are willing to buy more at all prices on G’s curve which is to the right of F’s curve
H
F
Changes in Demand
E
G
I
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Move from point G to point H A decrease in demand
There is a decrease in demand because people are willing to buy less at all prices on H’s curve which is to the left of G’s curve
H
F
Changes in Demand
E
G
I
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Move from point H to point I A change in quantity in demanded
As long as we remain on the same curve, there is no change in demand
H
F
Changes in Demand
L
GJ
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Move from point J to point K A change in quantity in demanded
As long as we remain on the same curve, there is no change in demand
N
KM
Changes in Demand
L
GJ
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Move from point K to point L An increase in demand
From K to L is an increase in demand because L’s demand curve is entirely to the right of K’s curve
N
KM
Changes in Demand
L
GJ
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Move from point L to point M A decrease in demand
From L to M is a decrease in demand because M’s demand curve is entirely to the left of L’s curve
N
KM
Changes in Demand
L
GJ
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Move from point M to point N A change in demand
We don’t know on which of an infinite number of possible demand curves N is situated, therefore, the most we can say is that there is a change in demand
N
KM
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What Causes Changes in Demand?
• Changes in income
• Changes in the price of related goods and services
• Changes in taste and preferences
• Changes in price expectations
• Changes in population
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Changes in Income
• The demand for NORMAL goods varies directly with income– When income goes up people buy more
therefore demand goes up
• The demand for INFERIOR goods varies inversely with income– When income goes up people buy less,
therefore demand goes down
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Changes in the Price of Related Goods and Services
• Goods and services are related in two ways– They can be used as a substitute for the
other• Hot dogs and hamburgers; Tuna and
salmon
– They can complement the other• Videos & VCRs; Gasoline & cars, tires
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Prices of Substitute Goods
• Directly related– If the price of hamburgers goes up
– The price of hot dogs would also go up• As the price of hamburgers goes up people
will buy less hamburgers and more hot dogs. This increases the demand for hot dogs . . . thus increasing the price of hot dogs
Pric
e
Quantity
D1
S
D2
Price of hamburger goes up . . . People buy less hamburger and more hotdogs. This increases the demand for hot dogs which drives the price of hot dogs up
Hot Dogs
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Prices of Complementary Goods
• Inversely related– Prices of weenies go up . . . the price of
hot dog buns goes down• The price of weenies goes up . . . people
buy less weenies. If people buy less weenies, they will also buy less hot dog buns
• This decreases the demand for hot dog buns and lowers the price of hotdog buns
Pric
e
Quantity
D1
S1
The price of weenies goes up . . . People buy less weenies. If people buy less weenies, they will also buy less hot dog buns. If people buy less hot dog buns, this decreases the demand for buns and lowers the price
D2
Hot Dog Buns
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Changes in Taste and Preferences
• Taste and preferences tend to change over time– Smaller cars and less fattening foods– Preferring designer clothing and brand
name sneakers– Fewer people are smoking (has been helped
by a campaign to reduce smoking)
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Changes in Price Expectations
• If people expect the price of something to rise, they rush out to stock up before it does– This increases the demand
• If people expect the price of something to fall, they will hold off buying it – This decreases the demand
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Changes in Population
• As the nation’s population increases, the demand for particular goods and services increase– General growth increases the demand for food,
housing, autos, etc.
• The changing age distribution affects demand– Next three decades there will be a higher demand
for retirement homes, nursing homes, wheel chairs, bifocal glasses, etc.
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Supply Defined
• Supply is a schedule of quantities of a good or service that people are willing to sell at various prices– As prices rise, people are willing to sell more– Thus, there is a positive or direct
relationship between price and quantity• Price rises . . . quantity supplied rises
• Prices declines . . . quantity supplied declines
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Individual and Market Supply
Hypothetical supply of American Cars, 2001 (in thousands)
Daimler Japanese Price GM Ford Chrysler Owned Firms Total
$20,000 5311 2356 1245 535 9,447
18,000 4617 1984 991 384 7,976
16,000 4002 1584 762 270 6,618
14,000 3623 1216 601 208 5,648
12,000 3190 996 491 181 4,858
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Hypothetical Supply of American Cars, 2001
Output (in millions)
20,000
18,000
16,000
14,000
12,000
4 5 6 7 8 9
Market supply
Changes in Supply
E
FG
H
I
Move from E to F
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A change in quantity supplied
Changes in Supply
E
FG
H
I
Move from F to G
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An increase in supply
Changes in Supply
E
FG
H
I
Move from G to H
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A change in supply
Changes in Supply
E
FG
H
I
Move from H to I
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A change in quantity supplied
Changes in Supply
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J
M
N
K
L
Move from J to K An increase in supply
Changes in Supply
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J
M
N
K
L
Move from K to L A change in quantity supplied
Changes in Supply
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J
M
N
K
L
Move from L to M A decrease in supply
Changes in Supply
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J
M
N
K
L
Move from M to N A change in supply
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What Causes Changes in Supply?• The main reason for a change in supply is
changes in the cost of production– cost of raw materials, labor, capital,
insurance, interest, rent, wages, etc.
– when these cost go up . . . supply decreases
– this causes the price to increase
S1
S2
D
P1
Q1
P2
Q2
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What Causes Changes in Supply• Technological advance
– A technological improvement will increase supply
– Companies are able to produce more at reduced cost cost with an improvement in quality
– A supply increase will cause the price to decline
S1
S2
D
P1
Q1
P2
Q2
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What Causes Changes in Supply• Prices of other goods
– Changes in the prices of other goods can shift the supply curve for a product
• If the price of corn rises, a farmer may cut back on the production of wheat
• If the price of hair transplants declines, some dermatologist may do more facelifts
S1
S2
D
P1
Q1
P2
Q2
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What Causes Changes in Supply• Change in the Number of Suppliers
– When new firms enter an industry, supply rises
– When firms leave an industry, Supply falls
S1
S2
D
P1
Q1
P2
Q2
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What Causes Changes in Supply– Changes in taxes
• The basic effect of taxes is to reduce supply
• The effect of taxes on supply will be covered later in the next chapter
S1
S2
D
P1
Q1
P2
Q2
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What Causes Changes in Supply– Expectation of price increases
• Suppliers will hold current production off the market in anticipation of the higher prices
• The effect is that of reducing supply
S1
S2
D
P1
Q1
P2
Q2
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What Causes Changes in Supply– Expectation of price decreases
• Suppliers will try to sell all they have before the price drops
• The effect is that of increasing supply
S1
S2
D
P1
Q1
P2
Q2
Graphing the Demand and Supply Curves
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Quantity
10
9
8
7
6D
2 4 6 8 10 12 14
Hypothetical Demand Schedule Price Quantity Demanded(QD) $10 1 $ 9 2 $ 8 4 $ 7 7 $ 6 12
Graphing the Demand and Supply Curves
17-58Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Quantity
10
9
8
7
6
S
2 4 6 8 10 12 14
Hypothetical Supply Schedule Price Quantity Supplied (QS) $10 14 $ 9 12 $ 8 9 $ 7 5 $ 6 1
Graphing the Demand and Supply Curves
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Quantity
10
9
8
7
6D
S
2 4 6 8 10 12 14
Hypothetical Demand and Supply Schedules Price QD QS $10 1 14 $ 9 2 12 $ 8 4 9 $ 7 7 5 $ 6 12 1
The equilibrium point is where the demand and supply curves cross
Graphing the Demand and Supply Curves
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Quantity
10
9
8
7
6D
S
2 4 6 8 10 12 14
Hypothetical Demand and Supply Schedules Price QD QS $10 1 14 $ 9 2 12 $ 8 4 9 $ 7 7 5 $ 6 12 1
Equilibrium quantity is 6
Equilibrium price is about $7.20
Graphing the Demand and Supply Curves
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Quantity
10
9
8
7
6D
S
2 4 6 8 10 12 14
Above equilibrium price there are surpluses
Price
Price always tends toward equilibrium. If price is above equilibrium, sellers will lower prices until the price declines to the equilibrium price
Price
Price
Graphing the Demand and Supply Curves
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Quantity
10
9
8
7
6D
S
2 4 6 8 10 12 14
Below equilibrium price there are shortages
PricePrice always tends toward equilibrium. If price is below equilibrium, buyers will bid prices up until the price rises to the equilibrium price
PricePrice
Finding Equilibrium Price and Quantity
17-63Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
If we draw our graphs accurately, we can usually find equilibrium price and quantity in a couple of seconds, especially if we’ve used graph paper. But sometime we need to do further analysis to find really accurate equilibrium prices and quantities
Price Quantity Demanded Quantity Supplied $15 2 19 $14 4 17 $13 7 12 $12 12 6 $11 20 3
Hypothetical Demand and Supply Schedule
How much is the equilibrium price?
Finding Equilibrium Price and Quantity
17-64Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Quantity Demanded Quantity Supplied $15 2 19 $14 4 17 $13 7 12 $12 12 6 $11 20 3
Hypothetical Demand and Supply Schedule
How much is the equilibrium price?
First we add a “Units apart” column
Finding Equilibrium Price and Quantity
17-65Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Quantity Demanded Units Apart Quantity Supplied $15 2 17 19 $14 4 13 17 $13 7 5 12 $12 12 6 6 $11 20 17 3
Hypothetical Demand and Supply Schedule
How much is the equilibrium price?
First we add a “Units apart” column
Equilibrium price is closer to $13 than to $12
Finding Equilibrium Price and Quantity
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Price Quantity Demanded Units Apart Quantity Supplied $15 2 17 19 $14 4 13 17 $13 7 5 12 $12 12 6 6 $11 20 17 3
Hypothetical Demand and Supply Schedule
How much is the equilibrium price?
First we add a “Units apart” column
Equilibrium price is a little closer to $13 than to $12
Therefore, equilibrium price has to be something greater than $12.50 and less than $13
17-67Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Quantity Demanded Units Apart Quantity Supplied $15 2 17 19 $14 4 13 17 $13 7 5 12 $12 12 6 6 $11 20 17 3
Hypothetical Demand and Supply Schedule
How much is the equilibrium quantity?
Equilibrium quantity demanded is closer to 7 than 12. The midpoint between 12 and 7 is 9.5. Therefore, we know the equilibrium quantity demanded must be something less than 9.5
Equilibrium quantity supplied is closer to 12 than 6. The midpoint between 12 and 6 is 9. Therefore, we know the equilibrium quantity supplied is something more than 9.0
The equilibrium quantity has to be between 9.0 and 9.5. Anything between 9.1 and 9.4 would be acceptable. I would split the difference and say 9.2 or 9.3
17-68Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Quantity
15
14
13
12
11
S
D
4 8 12 16 20
Graph of the Previous Demand and Supply Schedule
Remember, equilibrium price has to be something greater than $12.50 and less than $13
$12.60 plus or minus .05 is about the best you can do
17-69Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Quantity
15
14
13
12
11
S
D
4 8 12 16 20
Graph of the Previous Demand and Supply Schedule
$12.60 plus or minus .05 is about the best you can do
Remember, the equilibrium quantity has to be between 9.0 and 9.5. Anything between 9.1 and 9.4 would be acceptable. I would split the difference and say 9.2 or 9.3 In this instance, this technique proved useful.
Is This Type of Analysis Necessary?
• It isn’t when you’ve got an equilibrium price or quantity that is clearly closer to one figure than to another– You will be able to spot this when you draw your
graph
• But when the demand and supply curves cross about halfway between two figures, then you will need to go back to the original schedule to figure out more precisely where the equilibrium point lies
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