Demand and Supply

Lecture 4

In This Lecture

1. Prices and Competitive Conditions2. The meaning of demand and demand schedules

and curves3. The difference between a shift in demand and a

change in the the quantity demanded4. The meaning of supply and supply schedules and

curves5. The difference between shifts in supply and a

change in the quantity supplied

Prices• Prices represent the term of trade between individuals

• In a barter economy, prices could be expressed as how many coconuts are required in a trade for each fish.

• In a monetary economy, prices are expressed as the number of units of currency (dollar, euro, peso, etc.) required in trade for a unit of a ‘good.’

• Note the ratio of the currency price of a fish to the currency price of a coconut tells you how many coconuts you have to give up to get a fish (same as in the barter economy)

• Relative prices (ratios of one price to another) represent opportunity costs!

Competitive Conditions

If trading relationships between individuals are competitive, then no one individual or group of individuals through their actions can influence the price of a good.

Individuals in competitive situations will take the price as given.

Trade: It takes two to tango

• At a given price, I could decide to acquire ownership of a good -- I would be a ‘demander’ in this situation

• At a given price, I could decide to sell my ownership of the good to another individual -- in this situation I would be a ‘supplier’

ND Football Tickets

Value of Ticket to:

Peter $200

Paul$150

Mary$100

Jack$100

Jill $50

The value to the potential buyer of the good is the maximum amount he or she is willing and able to pay to good.

Don’t currently have a ticket but will demand a ticket only if the value to the individual exceeds their opportunity cost (relative price)

Demand a ticket if

Benefit ≥ Cost

ND Football Tickets

Value of Ticket

Peter$200

Paul$150

Mary$100

Jack$100

Jill $50

200

150

100

50

Price

TicketsDemand Curve

0 1 2 3 4 5

Peter

Paul

Mary and Jack

Jill

Demand Schedule

Donuts

Quantity of Donuts

Jill Jack Total

Price

$1 0 1 1

75¢ 0 3 3

50¢ 1 5 6

25¢ 2 7 9

• Why must the price decline for the individuals to demand more?

– As the individual consumes more of the good, the value they place on the next unit of consumption declines (diminishing marginal utility).

– Individuals will increase their demand only if the price falls.

Donuts

Quantity of Donuts

Jill Jack Total

Price

$1 0 1 1

75¢ 0 3 3

50¢ 1 5 6

25¢ 2 7 9

0 1 2 3 4 5 6 7 8 9

$1

75¢

50¢

25¢

Price

Donuts

When Price of the Good Falls

More of the good is demanded because

• Individuals who at the original price demanded the good may demand more

• Individuals who at the original price didn’t demand any of the good may start demanding the good

Remember this represents movement along a Demand Curve

Continuous Demand

Smooth Demand Curve Because:

• Many individuals

• Ask at any price

• Can demand fractions of units

Price

Quantity

Shifts in Demand Curve Change in Other Factors:

• Increase in Population

• Changes in Income– Normal good (income rises)– Inferior good (income rises)

• Change in prices of other goods– Substitutes (price rises)– Complements (price rises)

• Changes in Tastes• Changes in Expectations• Changes in Weather

Shifts Demand

Outward

Outward

Inward

Outward

Inward

Supply

• In the football tickets example, ND allocates the tickets according to some procedure but then the individuals who receive tickets may sell them or keep them

• In the donut example, donuts are produced and then sold to customers

• In either example, the question is what quantity of the goods will offered for sale at a given price

ND Football Tickets

Value to:

Professor W $150

Professor X $100

Professor Y $50

Professor Z $50

Value to an owner of an object or good is the minimum price at which they would be willing to part with the good.

They would ‘supply’ the good (be willing and able to sell the good) if the price they could get for the good exceeded the value they placed on the good

Sell if: PRICE ≥ Value to individual

Z and Y

200

150

100

50

Price

Tickets 0 1 2 3 4

ND Football Tickets

Value to:

Professor W $150

Professor X $100

Professor Y $50

Professor Z $50

X

W

Supply Function

Donuts

Quantity of Donuts

Tasty Dunking Total

Price

$1 4 6 10

75¢ 3 5 8

50¢ 2 4 6

25¢ 0 0 0

• Why do firms require a hirer price to supply more?

– As they produce more, the cost of production rises (diminishing returns to scale).

– Consequently as their costs rise they will only be willing to supply more if the price rises.

Donuts

0 1 2 3 4 5 6 7 8 9 10

$1

75¢

50¢

25¢

Price

Donuts

Quantity of Donuts

Tasty Dunking Total

Price

$1 4 6 10

75¢ 3 5 8

50¢ 2 4 6

25¢ 0 0 0

As the Price of the Good Rises

More is supplied because

• Existing suppliers provide more

• New suppliers start producing and supplying the good

This occurs with movement along a supply curve!

Shifts in Supply Curve

Change in Other Factors:

• Changes in Input Prices (increases)

• Changes in Technology

• Change in Expectations

Shifts Supply

Inward

Outward

Assignment for Next Lecture

• Do Homework 3 on ‘Homework Assignment’ by Wednesday, September 6 at 5 pm

• ReRead Chapter 3

• Topics Next Time

– Markets and Competitive Equilibrium