ewmba201a: introduction to supply and demand
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EWMBA201a: Introduction to Supply and Demand. Buyers Consumers: finished goods and services. Firms: raw materials, labor, intermediate goods. Sellers Firms: finished goods. Workers: skilled and unskilled labor. Resource owners: land, raw materials. Economic units come in two classes. - PowerPoint PPT PresentationTRANSCRIPT
EWMBA201a: Introduction to Supply and Demand
Professor Wolfram EWMBA201a - Fall 2006 Page 2
Economic units come in two classes.
Buyers– Consumers: finished goods
and services.
– Firms: raw materials, labor, intermediate goods.
Sellers– Firms: finished goods.
– Workers: skilled and unskilled labor.
– Resource owners: land, raw materials.
MARKET: A collection of economic units resulting in the possibility of exchange.
- Can be a physical location: NYSE floor, Fulton Street
Fish market.
- Can be a related set of transaction that are not in the same
geographical location: Berkeley housing market, labor market for IT
professionals.
Professor Wolfram EWMBA201a - Fall 2006 Page 3
Demand, the buyer side of the market
Demand: the quantities of a good or service that people are willing to buy at various prices within some given time period, other factors besides price held constant.
• Willing to buy: a consumer would both like to (i.e., has the taste for it) and is able to (i.e., have sufficient income to pay for it) buy the good.
• Time period: especially for non-durables, the amount I’m willing to buy depends on the time period.
• Other factors: the focus of demand is on the relationship between price and quantity.
A demand curve describes the relationship between the price and the quantity customers are ready to purchase at that price.
Professor Wolfram EWMBA201a - Fall 2006 Page 4
A demand curve example
How do buyers respond to a change in price?
– Lower price buyers willing to purchase more.
– Higher price buyers willing to purchase less.
Price (per slice) Quantity
demanded
$6.00 0
$4.50 1000
$3.00 5000
$1.50 6000
$0 7000
The daily demand for pizza in Berkeley:
Professor Wolfram EWMBA201a - Fall 2006 Page 5
The demand for pizza in Berkeley graphically
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
Professor Wolfram EWMBA201a - Fall 2006 Page 6
Demand versus quantity demanded
Quantity
Pric
e
0
Quantity
Pric
e
0
$1.5
6000
Demand
Quantity demanded
“Demand” describes the entire curve.
“Quantity demanded” describes a particular point, corresponding to a particular price.
Professor Wolfram EWMBA201a - Fall 2006 Page 7
What, other than price, drives demand?
P
Q
Demand Curve B
Demand Curve A
- TASTES (e.g. advertising)
- PRICES OF RELATED
PRODUCTS (substitutes and
complements)
-INCOME
-DEMOGRAPHICS
Professor Wolfram EWMBA201a - Fall 2006 Page 8
A supply curve summarizes the supply side of the market.
Supply: the quantities of a good or service that firms are willing to sell at various prices within some given time period, other factors besides price held constant.
• This definition is identical to the definition of demand, except that we’ve substituted the word “sell” for the word “buy.”
A supply curve describes the relationship between the price and the quantity firms are willing to supply at that price.
Professor Wolfram EWMBA201a - Fall 2006 Page 9
A supply curve example
How do firms respond to a change in price?
– Lower price firms willing to supply less.
– Higher price firms willing to supply more.
Price (per slice) Quantity
supplied
$6.00 7000
$4.50 6000
$3.00 5000
$1.50 1000
$0 0
The daily supply of pizza in Berkeley:
Professor Wolfram EWMBA201a - Fall 2006 Page 10
The supply of pizza in Berkeley graphically
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
Professor Wolfram EWMBA201a - Fall 2006 Page 11
Demand and supply on the same graph
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
S
D
Professor Wolfram EWMBA201a - Fall 2006 Page 12
What happens if the price is $4.50?
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
D
S
Professor Wolfram EWMBA201a - Fall 2006 Page 13
What happens if the price is $4.50?
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
D
S
QSQD
Professor Wolfram EWMBA201a - Fall 2006 Page 14
What happens if the price is $4.50?
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
D
S
QSQD
Surplus
Professor Wolfram EWMBA201a - Fall 2006 Page 15
What happens if the price is $4.50?
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
D
S
QSQD
Surplus
Professor Wolfram EWMBA201a - Fall 2006 Page 16
What happens if the price is $1.50?
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
D
S
Professor Wolfram EWMBA201a - Fall 2006 Page 17
What happens if the price is $1.50?
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
D
S
QS QD
Shortage
Professor Wolfram EWMBA201a - Fall 2006 Page 18
What happens if the price is $1.50?
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
D
S
QS QD
Shortage
Professor Wolfram EWMBA201a - Fall 2006 Page 19
What happens if the price is $3.00?
Quantity
Pric
e
$6
$3
0
$4.5
$1.5
1000 5000 6000 7000
D
S
Professor Wolfram EWMBA201a - Fall 2006 Page 20
The market mechanism
If the market price is above the equilibrium price (P>P*), there will be a surplus until:
• producers tend to lower their prices, and
• quantity demanded tends to expand.
If the market price is below the equilibrium price (P<P*), there will be a shortage until:
• producers tend to raise their prices, and
• quantity demanded tends to contract.
At the market clearing price (P = P*),, there is no tendency for the price to change and the market is in equilibrium.
• Consumers can buy all they want, given the price.
• Firms can sell all they want, given the price.
Professor Wolfram EWMBA201a - Fall 2006 Page 21
Supply versus quantity supplied
Quantity
Pric
e
0
Quantity
Pric
e
0
$1.5
6000
Supply
Quantity supplied
“Supply” describes the entire curve.
“Quantity supplied” describes a particular point, corresponding to a particular price.
Professor Wolfram EWMBA201a - Fall 2006 Page 22
What, other than price, drives supply?
P
Q
Supply Curve B
Supply Curve A
- PRICE OF INPUTS (both
substitutes and complements)
- TECHNOLOGY