chapter 3: demand and supply. demand vs. quantity demanded demand is the amount of a product that...
TRANSCRIPT
Chapter 3:
Demand and Supply
Demand vs. Quantity Demanded
• Demand is the amount of a product that people are willing to purchase at each possible price during a given period of time.
• The quantity demanded is the amount of a product that people are willing and able to purchase at one, specific price.
• Prices are the tools by which the market
coordinates individual desires. Eg 100 PCs for $10??
3.1 The Law of Demand
• Law of demand – there is an inverse relationship between price and quantity demanded.– Quantity demanded rises as price falls, other
things constant.– Quantity demanded falls as prices rise, other
things constant. Eg. Drop PC price
The Law of Demand
• What accounts for the law of demand?
– People tend to substitute for goods whose price has gone up eg. butter and margarine
– Relative price: the price of one product in terms of another product
eg. If hot fudge sundaes are $2 while CDs are $14, then a CD costs 7 sundaes
The Law of Demand
• What accounts for the law of demand?
– Money price: the actual amount paid for product
The Demand Table
• The demand table assumes all the following:– As price rises, quantity demanded declines.– Quantity demanded has a specific time
dimension to it. – All the products involved are identical in
shape, size, quality, etc.
The Demand Table
• The demand table assumes all the following:– The schedule assumes that everything else is
held constant.
From a Demand Table to a Demand Curve
• You plot each point in the demand table on a graph and connect the points to derive the demand curve.
The Demand Curve
• The demand curve is the graphic representation of the law of demand.
• The demand curve slopes downward and to the right.
• As the price goes up, the quantity demanded goes down.
D
Pri
ce (
per
uni
t)
0
Quantity demanded (per unit of time)
PA
QA
A
A Sample Individual Demand Curve
Price
per
DVD
s (in
dol
lars
)
A Demand Curve
Quantity of DVDs demanded (per week)1 2 3 4 5 6 7 8 9 10 11 12
13
$6.00
5.00
4.00
3.00
2.00
1.00 .50
0
3.50E
D
C
BFA
From a Demand Table to a Demand Curve
Price per cassette
ABCDE
A Demand Table
DVD rentals demanded per
week
$0.50 1.002.003.004.00
98642
Demand for DVDs
G
Other Things Constant
• Other things constant places a limitation on the application of the law of demand.– All other factors that affect quantity demanded
are assumed to remain constant, whether they actually remain constant or not. ie. Ceteris Paribas
Individual versus Market Demand Curves
• A market demand curve is the (horizontal) sum of all individual demand curves.– This is determined by adding the individual
demand curves of all the demanders. Eg everyone’s demand for chocolate bars
Individual and Market Demand Curves
• Market: all of the arrangements between buyers and sellers to exchange a product for money, goods etc.
From Individual Demandsto a Market Demand Curve
(1)Price per cassette
$.0.501.001.502.002.503.003.504.00
(2)Alice’s
demand
(3)Bruce’s demand
(2)Cathy’s demand
(3)Market demand
98765432
65432100
11000000
16141197532
ABCDEFGH Cathy Bruce Alice
D
A
C
EF
G
Quantity of cassettes demanded per week2
$4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0Pr
ice p
er c
asse
tte (i
n do
llars
)
4 6 8 10 12 14 16
B
Market demand
• Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant.
• Graphically, it refers to the entire demand curve.
3.2 Shifts in Demand
• A shift in demand is the graphical representation of the effect of anything other than price on demand.
Shifts in Demand
D0
D1
Shift in DemandP
rice
(pe
r u
nit)
Quantity demanded (per unit of time)100
$2
$1
200
B A
Change in demand(a shift of the curve)
250
Determinants of Demand
TastesTastes
IncomeInferior and Normal Goods
IncomeInferior and Normal Goods
Number of buyers Number of buyers
ExpectationsExpectationsPrices of related goodsSubstitutes and Compliments
Prices of related goodsSubstitutes and Compliments
Income
• An increase in income will increase demand for normal goods. Eg. cars
• An increase in income will decrease demand for inferior goods. Eg. beans
Price of Other Goods
• When the price of a substitute good falls, demand falls for the good whose price has not changed.
• When the price of a complement good falls, demand rises for the good whose price has not changed.
Tastes
• A change in taste will change demand with no change in price.
Expectations
• If you expect your income to rise, you may consume more now.
• If you expect prices to fall in the future, you may put off purchases today.
Taxes and Subsidies
• Taxes levied on consumers increase the cost of goods to consumers, thereby reducing demand.
• Subsidies have an opposite effect.
• Quantity demanded refers to a specific amount that will be demand per unit of time at a specific price.
• Graphically, it refers to a specific point on the demand curve.
Changes in Demand versus Movements Along a
Demand Curve
• A movement along a demand curve is the graphical representation of the effect of a change in price on the quantity demanded.
Changes in Demand versus Movements Along a
Demand Curve
Change in Quantity Demanded
D1
Change in quantity demanded(a movement along the curve)
B
0
Pri
ce (
per
uni
t)
Quantity demanded (per unit of time)100
$2
$1
200
A
Changes in Demandand Quantity Demanded
• Change in Quantity Demanded - movement along the same demand curve in response to a price change.
• Change in Demand - shift in entire demand curve in response to a change in a determinant of demand (a ceteris paribus variable)
3.3 The Law of Supply
• There is a direct relationship between price and quantity supplied.– Quantity supplied rises as price rises, other
things constant.– Quantity supplied falls as price falls, other
things constant.
– Supply: amount of a product the firm is willing to sell at various prices
120525
Law of Supply• Law of Supply
– As the price of a product rises, producers will be willing to supply more.
– The height of the supply curve at any quantity shows the minimum price necessary to induce producers to supply that next unit to market.
The Law of Supply
• The law of supply is accounted for by two factors:
– When prices rise, firms substitute production of one good for another.
– Assuming firms’ costs are constant, a higher price means higher profits.
The Supply Curve
• The supply curve is the graphic representation of the law of supply.
• The supply curve slopes upward to the right.
• The slope tells us that the quantity supplied varies directly – in the same direction – with the price.
S
A
Quantity supplied (per unit of time)
0
Pric
e (p
er u
nit)
PA
QA
A Sample Supply Curve
Individual and Market Supply Curves
• The market supply curve is derived by horizontally adding the individual supply curves of each supplier.
From Individual Supplies to a Market Supply
Quantities Supplied
ABCDEFGHI
(1)Price
(per DVD)
(2) Ann's Supply
(5)MarketSupply
(4)Charlie'sSupply
$0.000.501.001.502.002.503.003.504.00
012345678
001234555
000000022
013579
111415
(3)Barry's Supply
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
From Individual Supplies to a Market Supply
Pric
e pe
r D
VD
Charlie Barry Ann
Quantity of DVDs supplied (per week)
$4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0
I
H
G
F
E
D
C
BA
Market Supply
CA
3.4 Shifts in Supply
• Supply refers to a schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant.
• If the amount supplied is affected by anything other than a change in price, there will be a shift in supply.
Shifts in Supply
• Shift in supply – the graphic representation of the effect of a change in a factor other than price on supply.
Shifts in Supply
Shift in Supply
Pric
e (p
er u
nit)
Quantity supplied (per unit of time)
S0
Shift in Supply(a shift of the curve)
S1
$15A B
1,250 1,500
Shift Factors of Supply
• Other factors besides price affect how much will be supplied:– Prices of inputs used in the production of a
good.– Technology.– Suppliers’ expectations.– Taxes and subsidies.
Factors that Shift Supply
Prices of RelatedGoods and Services
Number Of
Producers
ExpectationsOf
Producers
TechnologyAnd
Productivity
ResourcePrices
Supply
Price of Inputs (Resource Prices)
• When costs go up, profits go down, so that the incentive to supply also goes down.
Technology
• Advances in technology reduce the number of inputs needed to produce a given supply of goods.
• Costs go down, profits go up, leading to increased supply.
Expectations
• If suppliers expect prices to rise in the future, they may store today's supply to reap higher profits later.
Number of Suppliers
• As more people decide to supply a good the market supply increases (Rightward Shift).
Taxes and Subsidies
• When taxes go up, costs go up, and profits go down, leading suppliers to reduce output.
• When government subsidies go up, costs go down, and profits go up, leading suppliers to increase output.
Decrease in Supply
Change in supply (a shift of the curve)
Pric
e (p
er u
nit)
Quantity supplied (per unit of time)
S0
$15
1,250 1,500
S1
Increase in Supply
Change in supply (a shift of the curve)
Pric
e (p
er u
nit)
Quantity supplied (per unit of time)
S1
$15
1,250 1,500
S0
Change in quantity supplied (a movement along the curve)
Change in Quantity Supplied
Pric
e (p
er u
nit)
Quantity supplied (per unit of time)
S0
$15A
1,250 1,500
B
• Changes in price cause changes in quantity supplied represented by a movement along a supply curve.
• Changes in anything else eg income, taxes, subsidies etc...results in shifts in supply curve
Shifts in Supply Versus Movements Along a Supply Curve
3.5 Putting Supply and Demand Together
• Equilibrium is a concept in which opposing dynamic forces cancel each other out.
Equilibrium
• In a free market, the forces of supply and demand interact to determine equilibrium quantity and equilibrium price.
Equilibrium• Equilibrium price – the price toward
which the invisible hand drives the market.
• Equilibrium quantity – the amount bought and sold at the equilibrium price.
What Equilibrium Isn’t
• Equilibrium isn’t a state of the world, it is a characteristic of a model.
• Equilibrium isn’t inherently good or bad, it is simply a state in which dynamic pressures offset each other.
What Equilibrium Isn’t
• When the market is not in equilibrium, you get either excess supply or excess demand, and a tendency for price to change.
The Graphical Interaction of Supply and Demand
A
The Graphical Interaction of Supply and Demand
Pric
e pe
r D
VD
$5.00
4.00
3.50
3.00
2.50
2.00
1.50
1.00
S
D
Quantity of DVDs supplied and demanded
C
Excess demand
1 2 3 4 5 6 7 8 9 10 11 12
Excess supply
E
The Graphical Interaction of Supply and Demand
• When price is $3.50 each, quantity supplied equals 7 and quantity demanded equals 3.
• The excess supply of 4 pushes price down.
The Graphical Interaction of Supply and Demand
• When price is $1.50 each, quantity supplied equals 3 and quantity demanded equals 7.
• The excess demand of 4 pushes price up.
The Graphical Interaction of Supply and Demand
• When price is $2.50 each, quantity supplied equals 5 and quantity demanded equals 5.
• There is no excess supply or excess demand, so price will not rise or fall.
Equilibrium (Graph)
Excess Supply
• Excess supply – a surplus, the quantity supplied is greater than quantity demanded
• Prices tend to fall.
Excess Demand
• Excess demand – a shortage, the quantity demanded is greater than quantity supplied
• Prices tend to rise.
Price Adjusts
• The greater the difference between quantity supplied and quantity demanded, the more pressure there is for prices to rise or fall.
Price Adjusts• Equilibrium price: when quantity
demanded equals quantity supplied, prices have no tendency to change.
3.6 Shifts in Supply and Demand
• Shifts in either supply or demand change equilibrium price and quantity.
Increase in Demand
• An increase in demand creates excess demand at the original equilibrium price.
• The excess demand pushes price upward until a new higher price and quantity are reached.
Pric
e (p
er D
VD
s)
A
S0
Quantity of DVDs (per week)
$2.50
2.25
0 98 10
Excess demand
D1
Increase in Demand
D0
B
The Effects of a Shiftof the Demand Curve
Decrease in Supply
• A decrease in supply creates excess demand at the original equilibrium price.
• The excess demand pushes price upward until a new higher price and lower quantity are reached.
A
Decrease in Supply
Pric
e (p
er D
VD
s)
Quantity of DVDs (per week)
$2.50
2.25
0 98 10
D0
S1
S0C
B Excess demand
Pric
e (p
er D
VD
s)
A
S0
Quantity of DVDs (per week)
$2.50
2.25
0 98 10
D1
Increase in Demand and Supply
D0
B
S1
A
Decrease in Supply and Increase in Demand
Pric
e (p
er D
VD
s)
Quantity of DVDs (per week)
$2.50
2.25
0 98 10
D0
S1
S0
B
D1
A Price Floor
Rent Controls