economics 111.3 winter 14 january 17 th, 2014 lecture 5 ch. 3
TRANSCRIPT
Economics 111.3 Winter 14
January 17th, 2014Lecture 5
Ch. 3
Shifts in Demand: a recapDemand Shifters are
changes in:• tastes (preferences)• number of buyers• money (nominal)
income• prices of related goods• expectations
Normal good – a good, for which, all else equal, an increase in income leads to an increase in
quantity demanded
Inferior good – a good, for which, all else equal, an increase in income leads to a
decrease in quantity demanded
4. Changes in prices of related goods.
Change in Demand, cont’d
Related Goods
Substitutes — goods used in the place of another good
Complements — goods used in conjunction with another good
Change in Demand, cont’d
• when two products are SUBSTITUTES, price of one & demand for the other move in the same direction
Good A and Good B are substitutes.If price of Good A Falls…
Market for Good B
when two products are COMPLEMENTS, price of one and demand for the other move in opposite directions
Changes in prices of related goods, cont’d
Market for blank tapes
Study question• If the demand curve for product B shifts to the
right as the price of product A declines, it can be concluded that: A) both A and B are inferior goods. B) A is a superior good and B is an inferior good. C) A is an inferior good and B is a superior good. D) A and B are complementary goods.
E) A and B are substitute goods.
5. Changes in expectations about future prices or incomes
• If you expect prices to fall in the future, you may put off purchases today.
• If you expect your income to rise, you may consume more now.
Change in Demand, cont’d
Example: Demand for Tapes
The demand for tapes decreases if:– the price of a substitute falls.– the price of a complement rises.– income falls (a tape is a normal
good).– the population decreases.– the price of a tape is expected to
fall in the future.
Study questionWhich of the following statements is correct?
A) A decline in the price of product X will increase the demand for substitute product Y. B) A decrease in income will decrease the demand for an inferior good. C) An increase in income will reduce the demand for a normal good.
D) An increase in the price of C will decrease the demand for complementary product D.
Individual and Market Demand Goods
• 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 consumers (“demanders”).
Individual Demand 1
$0
$1
$2
$3
$4
$5
0 20 40 60 80
quantity
pri
ce
Individual Demand 2
$0
$1
$2
$3
$4
$5
0 20 40 60 80
quantity
pri
ce
Market Demand
$0
$1
$2
$3
$4
$5
0 50 100 150
quantity
pri
ce
35 39
74
price QD–1st buyer
QD–2nd
buyer
QD–market
$5 10 12
$4 20 23
$3 35 39
$2 55 60
$1 80 87
22
43
74
115
167
+ =
Market Demand
Supply: a schedule or a curve showing the amounts that producers are willing and able to make available for sale at each of a series of possible prices, during
some specified period of time
0
1
2
3
4
5
6
0 10 20 30 40 50 60
pri
ce
quantity
SupplyPrice per
bushel
Quantity supplied per week
$5 60
4 50
3 35
2 20
1 5
Law of Supply
• all else being constant, as price rises, the quantity supplied rises (& vice-versa)
• Rationale:– Revenue motive: price is revenue to suppliers– Cost motive: higher price necessary to induce
higher supply, to cover higher costs of production
A Change in the Quantity Supplied Versus a Change in Supply
• When price of the product changes, there is a movement along the supply curve
• When any other determinant of supply changes, there is a shift in the supply curve
Supply Shifters are changes in:• factor prices• technology• taxes and subsidies• prices of other goods• price expectations• number of sellers
Determinants of Supply
Changes in factor prices:• increase will decrease supply and shift curve to the
left as less will be supplied at each price
Rationale:1. If costs rise, then profits go down, and there is less
incentive to supply.2. If costs go up substantially, the firm may even shut
down.
Changes in Supply
Changes in technology:• new technology will decrease costs &
increase supply (This is especially true when new technology replaces labour)
Changes in Supply
PA S S′
QA
Changes in taxes and subsidies (taxes in reverse):
• increases in taxes will reduce supply
Changes in Supply
PA SS′
QA
Changes in prices of other goods:• higher prices of substitutes in production
will reduce supply and vice versa
Changes in Supply
PA SS′
QA
Changes in price expectations:• of the future price of a product• difficult to generalizeChanges in number of sellers:• as the number of sellers increases, so does
supply
Changes in Supply
Equilibrium As The Marriage of Supply and Demand
• Supply and demand come together to determine equilibrium quantity and equilibrium price.
Equilibrium, cont’d• When quantity demanded equals quantity
supplied, prices have no tendency to change.• Equilibrium is a concept in which opposing
dynamic forces cancel each other out.• Equilibrium isn’t a state of the world—it's a
characteristic of the model used to look at the world.
• Equilibrium isn’t inherently good or bad—but simply a state in which dynamic pressures offset each other.
The Law of Supply and Demand
• Conventional (free market) Economics claims that the price of any good adjusts to bring the supply and demand for that good into balance.
• Excess supply – a situation in which quantity supplied is greater than quantity demanded. The same as “surplus”
• Excess demand – a situation in which quantity demanded is greater than quantity supplied. The same as “shortage”
Excess supply
Excess demand
The Law of Supply and Demand, cont’d
• The larger the difference between quantity demanded and quantity supplied, the greater the pressure for prices to rise (if there is excess demand) or fall (if there is excess supply).