supply and demand. supply and demand demand relationship between demand and price the law of demand...
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Supply andSupply andDemandDemand
Supply and Demand
Demand
Demand
Relationship between demand and price the law of demand the income effect the substitution effect
The demand curve assumptions
other things being equal (ceteris paribus) a given time period
the axes individual's and market demand curves
The demand curve:The demand for potatoes (monthly)The demand curve:
The demand for potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
Market demand(tonnes 000s)
700A
Point
A
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
Market demand(tonnes 000s)
700
500
A
B
Point
A
B
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
60
Market demand(tonnes 000s)
700
500
350
A
B
C
Point
A
B
C
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
60
80
Market demand(tonnes 000s)
700
500
350
200
A
B
C
D
Point
A
B
C
D
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
ce p
er k
g)
Price(pence per kg)
20
40
60
80
100
Market demand(tonnes 000s)
700
500
350
200100
A
B
C
D
E
Point
A
B
C
D
E
Demand
Market demand for potatoes (monthly)Market demand for potatoes (monthly)
Demand
Other determinants of demand
tastes
number and price of substitute goods
number and price of complementary goods
income
distribution of income
expectations
Demand
Movements along and shifts in the demand curve
change in price
movement along D curve
change in any other determinant of demand
shift in D curve
increase in demand rightward shift
decrease in demand leftward shift
D1
Pric
e
P
O Q0 Q1
Quantity
An increase in demandAn increase in demand
D0
Possible causes of a rise in demand• Tastes shift towards this product• Rise in price of substitute goods• Fall in price of complementary goods• Rise in income• Expectations of a rise in price
Demand
Demand functions
simple demand functions
Qd = a – bP
more complex demand functions
Qd = a – bP + cY + dPs – ePc
estimated demand equations
problems of estimating demand equations
demand functions and the demand curve
0
10
20
30
40
50
0 2 4 6 8 10
D
P
Q (000s)
Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P
0
10
20
30
40
50
0 2 4 6 8 10
P
5
Qd (000s)
9
D
P
Q (000s)
Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P
0
10
20
30
40
50
0 2 4 6 8 10
P
510
Qd (000s)
98
D
P
Q (000s)
Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P
0
10
20
30
40
50
0 2 4 6 8 10
P
51015
Qd (000s)
987
D
P
Q (000s)
Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P
0
10
20
30
40
50
0 2 4 6 8 10
P
5101520
Qd (000s)
9876
D
P
Q (000s)
Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P
Supply and Demand
Supply
Supply
Relationship between supply and price short-run supply long-run supply
The supply curve assumptions
other things remain equal (ceteris paribus) a given time period
the axes individual's and market supply curves
The supply curve:The supply of potatoes (monthly)
The supply curve:The supply of potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
P
20
Q
100a
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
P
20 40
Q
100200
ab
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
c
P
20 40 60
Q
100200350
abc
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
c
d P
20 40 60 80
Q
100200350530
abcd
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
c
d
e
P
20 40 60 80100
Q
100200350530700
abcde
Market supply of potatoes (monthly)Market supply of potatoes (monthly)
Supply
Relationship between supply and price short-run supply long-run supply
The supply curve assumptions
other things remain equal (ceteris paribus) a given time period
the axes individual's and market supply curves why supply curves generally slope up
Supply
Other determinants of supply
costs of production
profitability of alternative products (substitutes in supply)
profitability of goods in joint supply
nature and other random shocks
aims of producers
expectations of producers
Supply
Movements along and shifts in the supply curve
change in price
movement along S curve
change in any other determinant of supply
shift in S curve
increase in supply rightward shift
decrease in supply leftward shift
Supply
Supply functions
simple supply functions
Qs = a + bP
more complex supply functions
Qs = a + bP + cC + dPs – ePj
non-linear functions
estimated supply equations
problems of estimating supply equations
P
QO
S0
Increase
S1Possible causes of a rise in supply
• Fall in costs of production
• Reduced profitability of alternative products that could be supplied
• Increased profitability of goods in joint supply
• Benign shocks
• Expectations of a fall in price
Shifts in the supply curveShifts in the supply curve
P
QO
S2 S0 S1
IncreaseDecrease
Shifts in the supply curveShifts in the supply curve
Supply and Demand
Price and output determination
Price and output determination
Equilibrium price and output
response to shortages and surpluses
shortage (D > S)
price rises
surplus (S > D)
price falls
significance of ‘equilibrium’
Equilibrium price and output:The Market Demand and Supply of Potatoes (Monthly)
Equilibrium price and output:The Market Demand and Supply of Potatoes (Monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
D
C
Aa
c
d
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)
Bb
The determination of market equilibrium (potatoes: monthly)
The determination of market equilibrium (potatoes: monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
D
C
B
Aa
b
c
d
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)
SHORTAGE
(300 000)
The determination of market equilibrium (potatoes: monthly)
The determination of market equilibrium (potatoes: monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
E
C
B
Aa
b
c
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)
D dSURPLUS
(330 000)
The determination of market equilibrium (potatoes: monthly)
The determination of market equilibrium (potatoes: monthly)
0
20
40
60
80
100
0 100 200 300 400 500 600 700 800
D d
Qe
Quantity (tonnes: 000s)
E
B
Aa
b
e
Supply
Demand
Pri
ce (
pen
ce p
er k
g)The determination of market equilibrium
(potatoes: monthly)The determination of market equilibrium
(potatoes: monthly)
Effects of shifts in the demand curve
movement along the supply curve and the new demand curve
Price and output determination
P
QO
Pe1
Qe1
S
D1
g
Initial equilibrium at point g
Effect of a shift in the demand curveEffect of a shift in the demand curve
P
QO
Pe1
Qe1
S
D1
g
Effect of a shift in the demand curveEffect of a shift in the demand curve
P
QO
Pe1
Qe1
S
D1
D2
g
Effect of a shift in the demand curveEffect of a shift in the demand curve
P
QO
Pe1
Qe1
S
g h
D1
D2
Pe2
Qe2
i New equilibrium at point i
Effect of a shift in the demand curveEffect of a shift in the demand curve
Effects of shifts in the demand curve
movement along the supply curve and the new demand curve
Effects of shifts in the supply curve
movement along demand curve and new supply curve
Price and output determination
P
QO
Pe1
Qe1
D
S1
g Initial equilibrium at point g
Effect of a shift in the supply curveEffect of a shift in the supply curve
P
QO
Pe1
Qe1
D
S1
g
Effect of a shift in the supply curveEffect of a shift in the supply curve
P
QO
Pe1
Qe1
D
S1
S2
g
Effect of a shift in the supply curveEffect of a shift in the supply curve
P
QO
Pe1
Pe3
Qe3Qe1
D
S1
S2
j g
k
New equilibrium at point k
Effect of a shift in the supply curveEffect of a shift in the supply curve
Effects of shifts in the demand curve
movement along the supply curve and the new demand curve
Effects of shifts in the supply curve
movement along demand curve and new supply curve
Identifying the position of demand and supply curves
Price and output determination
P
O Q
S1
S2
1000
20p
800
30p b
aWhat has caused a movement from point a to point b?
Problems in identifying the position and shape ofthe demand curve: shift in supply curve
Problems in identifying the position and shape ofthe demand curve: shift in supply curve
P
O Q
D
S1
S2
800 1000
20p
30p b
aShift in supply
alone.
Problems in identifying the position and shape ofthe demand curve: shift in supply curve
Problems in identifying the position and shape ofthe demand curve: shift in supply curve
P
O Q
S1
1000
20p a
D1
D2
S2
800
30p b Shift in both supply and demand.
Problems in identifying the position and shape of the demand curve: shift in supply and demand curves
Problems in identifying the position and shape of the demand curve: shift in supply and demand curves
Supply and Demand
The Control of Prices
The control of prices
Equilibrium price and the absence of shortages and surpluses
Minimum prices justification
effects
P
Q O
Pe
S
D
Minimum price: price floorMinimum price: price floor
P
Q O
Pe
minimumprice
Qd Qs
S
D
surplus
Minimum price: price floorMinimum price: price floor
The control of prices
Minimum prices justification effects dealing with resulting surpluses
Maximum prices justification effects
P
Q O
Pe
S
D
Maximum price: price ceilingMaximum price: price ceiling
P
Q O
Pe
S
D
Qs Qd
maximumprice
shortage
Maximum price: price ceilingMaximum price: price ceiling
The control of prices
Minimum prices justification effects dealing with resulting surpluses
Maximum prices justification effects dealing with resulting shortages rationing black markets
P
QO
Pg
Pe
Qs Qd
D
S
Price ceiling
No black market
Effect of price control on black-market pricesEffect of price control on black-market prices
P
QO
Pg
Pe
Qs Qd
D
S
Pb
If black marketeers buy all the supplies at Pg, the black market equilibrium
price will be Pb.
Effect of price control on black-market pricesEffect of price control on black-market prices