markets: supply and demand. markets market : a group of buyers and sellers of a certain good or...
TRANSCRIPT
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Markets: Supply and Demand
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Markets
• Market : A group of buyers and sellers of a certain good or service
• Competitive Market : Many buyers and many sellers so each has small if any impact on the price
• Role of Price: information -“price signal”
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• Perfectly Competitive Market: many buyers and sellers – none have any influence over the market price
• Everybody is a price taker
• Monopoly : only one seller, so sets the price• Monopsony : only one buyer, so sets the price
• Other markets: somewhere between these extremes
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Demand
• Quantity demanded–Amount of a good buyers are willing and
able to purchase at a certain price • Law of demand–Other things equal (ceteris paribus) when
the price of the good rises the quantity demanded of a good falls
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• Demand Schedule/Curve : one a table, the other a graph– Both represent the relationship between price and
quantity demanded
• Individual Demand : Demand of a single individual
• We will focus on linear demand curves:– A simplifying assumption
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Price of Coffee Quantity Demanded (cups)
$0.00 6
$0.50 5
$1.00 4
$1.50 3
$2.00 2
$2.50 1
$3.00 0
1 2 3 4 5 6
$1.00
$2.00
$3.00
Price
Quantity
Sara’s Demand Schedule and Demand Curve
Note: we say price affects quantity – Q=f(P) but price is on “y” axis – comes from historical perspective and fish markets – Marshal?
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• Market Demand : Sum of all individuals’ demand in that market
• Market Demand Curve : Sum up individual demand curves horizontally
Price of Coffee Sara David Market
$0.00 6 12 18
$0.50 5 10 15
$1.00 4 8 12
$1.50 3 6 9
$2.00 2 4 6
$2.50 1 2 3
$3.00 0 0 0
Market Demand Schedule
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$1.00
$2.00
$3.00
Price
$1.00
$2.00
$3.00
Price
$1.00
$2.00
$3.00
Price
6 18124 128
Market Demand Curve Creation
Sara’s Demand
David’s Demand
Market Demand
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More on Demand Curves• Shifts in Demand– Increased Demand• Anything that increases the quantity demanded at all
prices• Curve shifts to the right
– Decreased Demand• Anything that decreases the quantity demanded at all
prices• Curve shifts to the left
• Note: Difference between change in quantity demanded and shift in demand
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P
Q
Increased Demand
Decreased Demand
Change in quantity demanded
Change in Demand vs Change in Quantity Demanded
Change in Demand
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• What things shift demand (change demand)– Income– Price of related goods– Tastes– Expectations– Number of buyers
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On Effect of Income
• Normal Good: – When income goes up demand goes up– When income goes down demand goes down
• Inferior Good:– When income goes up demand goes down– When income goes down demand goes up
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On Effect of Related Goods
• Substitutes (need 2 goods):– An increase in the price of one leads to an
increase in demand for the other– A decrease in the price of one leads to an decrease
in demand for the other• Compliments (need 2 goods):– An increase in the price of one leads to an
decrease in demand for the other– A decrease in the price of one leads to an
increase in demand for the other
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• Tastes: Like it more, increase demand
• Expectations: What you think might happen in the future (income, price changes) can affect current demand
• Number of buyers: more buyers, increase demand
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Remember The Difference
• Change in price – Change in quantity demanded (movement along demand curve)
• Change in all others (income, tastes, price of other goods, etc.) – Change in demand (shift in demand curve)
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Example Reducing Soda Consumption
• Tax sugar – will increase the price– Leads to a movement along the demand curve
• Education On Healthy Diet – will change tastes– Lead to a shift in the demand curve
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P
Q
P’
Q’
P’’
Q’’
Tax
Q’’’
Movement along demand due to change in price
Shift in demand due to change in tastes
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Supply
• Quantity Supplied:– Amount of the good that suppliers are willing and
able to supply at a specific price
• Law of Supply:– All other things being equal, if price goes up
quantity supplied will go up
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• Supply Schedule/Curve : one a table, the other a graph– Both represent the relationship between price and
quantity supplied
• Individual Supply : Supply of a single individual/firm (seller)
• We will focus on linear supply curves:– A simplifying assumption
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Price of Coffee Quantity Supplied (cups)
$0.00 0
$0.50 1
$1.00 2
$1.50 3
$2.00 4
$2.50 5
$3.00 6
1 2 3 4 5 6
$1.00
$2.00
$3.00
Price
Quantity
Starbuck’s Supply Schedule and Supply Curve
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• Market Supply : Sum of all suppliers individual supply in that market
• Market Supply Curve : Sum up individual supply curves horizontally
Price of Coffee Starbucks Seattle’s Best Market
$0.00 0 0 0
$0.50 1 2 3
$1.00 2 4 6
$1.50 3 6 9
$2.00 4 8 12
$2.50 5 10 15
$3.00 6 12 18
Market Supply Schedule
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$1.00
$2.00
$3.00
Price
$1.00
$2.00
$3.00
Price
$1.00
$2.00
$3.00
Price
6 18122 64
Market Supply Curve Creation (sort of)
Starbuck’s Supply
Seattle’s Supply
MarketSupply
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More on Supply Curves• Shifts in Supply– Increased Supply• Anything that increases the quantity supplied at all
prices• Curve shifts to the right
– Decreased Supply• Anything that decreases the quantity supplied at all
prices• Curve shifts to the left
• Note: Difference between change in quantity supplied and change in supply
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P
Q
Increased Supply
Decreased Supply
Change in quantity supplied
Change in Supply vs Change in Quantity Supplied
Change in Supply
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• What things shift supply curve (change supply)– Price of inputs: input prices go up, supply goes
down– Technology: better tech., increase in supply– Expectations: beliefs about future can affect
current supply– Number of sellers: more sellers increases supply
• Again remember difference between change in supply (shift of curve) and change in quantity supplied (movement on curve)
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Equilibrium
• Market equilibrium: when markets “clear”, quantity demanded = quantity supplied
• Equilibrium price: the price at which the market clears
• Equilibrium quantity: the amount of the good bought/sold at the equilibrium
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P
Q
$1.50
9
Equilibrium
Equilibrium Price
Equilibrium Quantity
Market Demand Market Supply
Equilibrium Between Demand and Supply
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Out of Equilibrium
• Surplus: excess supply – Quantity supplied > quantity demanded– Downward pressure on price to clear market
• Shortage: excess demand– Quantity demanded > quantity supplied– Upward pressure on price to clear market
• Note difference between shortage and scarcity
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Surplus
Price higher than eq. price
QuantityDemanded
QuantitySupplied
P
Q
Price lower than eq. price
Shortage
QuantityDemanded
QuantitySupplied
SupplySupply
Demand
Demand
Shortage and Surplus
Excess Supply Excess Demand
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Changes to Equilibrium
• Analyzing Changes in the market after some “shock” or change
• 1st is supply changed, is demand changed• How is it changed• Graphically make the change and determine
new equilibrium• Beware of drawing conclusion based on scale
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Example: Study finds eating ice-cream increases students GPAWhat happens? – Demand increases, quantity supplied increases
P’’
P’
Q’’Q’
Original Eq.
New Eq.
DemandIncreases
Quantity Supplied Increases
Price increased in mktQuantity increased in mkt
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Example: Study finds eating ice-cream increases students GPA and price of sugar goes upWhat happens? – Demand increases, Supply Decreases
P’’
P’
Q’’Q’
Original Eq.
New Eq.
DemandIncreases Supply Decreases
Price increased in mktQuantity increased in mkt
But: b/c of scale
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Example: Study finds eating ice-cream increases students GPA and price of sugar goes upWhat happens? – Demand increases, Supply Decreases
P’’
P’
Q’’ Q’
Original Eq.
New Eq.
DemandIncreases
Supply Decreases
Price increased in mktQuantity decreased in mkt
But: b/c of scale
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• So in analyzing market changes be careful of possible ambiguous answers
• If supply and demand both change do their changes have the same qualitative effect on price/quantity
• If the same then effect is known• If different the effect depends on which is
larger
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