supply & demand three functions of price a. determines value b. communicates between buyers and...
TRANSCRIPT
SUPPLY & DEMAND Three functions of priceA. Determines valueB. Communicates between
buyers and sellersC. Rationing device
DEMAND Single Consumer Demand Schedule
Average Priceof dvd movies
Quantity Demanded
$25 0
$20 2
$15 4
$10 6
$5 8
MARKET DEMAND
Market Demand
Quantity Purchased
Average Price
of DVD Movies
Sting Ice
Cube Morrissey
Total
$25 0 1 0 1
$20 2 2 1 5
$15 4 3 2 9
$10 6 4 3 13
$5 8 5 4 17
DEMAND CURVE
DEMAND CONT.
The Law of Demand implies the following with respect to a demand curve (all of these say exactly the same thing): The demand curve is downward sloping The demand curve has a negative slope The demand curve shows an inverse
relationship between price and quantity demanded
DEMAND CONT.
The Law of Demand simply proposes that as the price of a good declines the quantity you would be willing and able to purchase during some period of time increases, given that everything else remains unchanged.
Demand vs. QD
Change in Demand Versus Change in Quantity Demanded First we said that according to the Law of
Demand that a change in price will lead to a movement along a stable demand curve and result in a change in the quantity demanded. For example, more will be purchased but only at a lower price. The only thing that can change the quantity demanded is a change in the market price.
Demand vs. QD cont.
Second we said that if one of the ceteris paribus assumptions is violated (e.g., a change in income) there will be a change in demand. Economists use the term "demand" to refer to the entire demand curve. Consequently when we say there has been an increase in demand we mean that the entire demand curve has shifted to the right. More will now be purchased at the same price.
Demand Shift
Shifters of demand
Non-Price Determinants of Demand # of buyers
increase => demand increasesdecrease => demand decreases
Consumer Tastesincrease => demand increasesdecrease => demand decreases
Shifters cont.
Consumer income (normal good)
Increase => demand increases
Decrease => demand decreases Consumer income (inferior good)
Increase => demand decreases
Decrease => demand increases
Shifters cont.
Price of Substitutes
Increase => demand increases
Decrease => demand decreases Price of Complements
Increase => demand decreases
Decrease => demand increases
Shifter cont.
Belief that the future price will
Increase => demand now will increase
Decrease => demand now will decrease
Belief that your future income will
Increase => demand now will increase
Decrease => demand now will decrease
SUPPLY
The Law of Supply states that firms will produce and offer for sale greater quantities of a good or service the higher the market price, given that everything else remains unchanged.
SUPPLY SCHEDULE
SUPPLY CURVE
SUPPLY CONT.
The Law of Supply implies the following with respect to a supply curve (all of these say exactly the same thing): The supply curve is upward sloping The supply curve has a positive slope The supply curve shows a direct
relationship between price and quantity demanded
Change in Supply vs. QS
Change in Supply versus Change in Quantity Supplied First we said that according to the Law of
Supply that a change in price will lead to a movement along a stable supply curve and result in a change in the quantity supplied. For example, more will be produced for sale but only at a higher price.
Change (Supply vs. QS) cont.
Second we said that if one of the ceteris paribus assumptions is violated (e.g., a change in technology) there will be a change in supply. Economists use the term "supply" to refer to the entire supply curve. Consequently when we say there has been an increase in supply we mean that the entire supply curve has shifted to the right. More will now be produced at the same price.
Change in Supply
Shifters of the Supply Curve
Non-Price Determinants of Supply # of sellers
increase => Supply increases decrease => Supply decreases
Addition of technology Supply will always increase
Shifters cont.
Cost of Labor
Increase => supply decreases
Decrease => supply increases Cost of Natural Resources
Increase => supply decreases
Decrease => supply increases Operating Costs (electricity)
Increase => supply decreases
Decrease => supply increases
Shifters Cont.
Business TaxesIncrease => supply decreasesDecrease => supply increases
Government RegulationsIncrease => supply decreasesDecrease => supply increases
Government subsidies Increase => supply increasesDecrease => supply decreases
EQUILIBRIUM
A market is in equilibrium when the quantity demanded is equal to quantity supplied at the market price. At the equilibrium market price there are exactly the same number of goods that suppliers are willing to sell as consumers are willing to buy.
MARKET PRICE
Equilibrium Price - the price at which the quantity demanded is equal to the quantity supplied. Other things being unchanged, there is no tendency for this price to change.
MARKET EQUILIBRIUMMarket Demand and Supply Schedules for DVD Movies
Average
Price of DVD Movies
Quantity Demanded
Quantity Supplied
$25 1 17 $20 5 13
$15 9 9 <- Equilibrium
$10 13 5 $5 17 1
MARKET EQUILIBRIUM
DISEQUILIBRIUM
How can you tell if your market is not in equilibrium? The easiest way for the firm to tell is by monitoring its inventory. When the quantity supplied is not equal to the quantity demanded at the current market price we have either undesired inventory build or undesired inventory decline. Store shelves start overflowing because you are producing more than is being sold or the store shelves go bare because people are buying your product faster than you can make it.
SHORTAGE
SURPLUS
SHORTAGE &CEILINGS
Price Ceiling - a legal requirement that maintains the market price below the equilibrium price.
Shortage - the amount that the quantity demanded exceeds the quantity supplied when the market price is below the equilibrium price.
SURPLUS & FLOORS
Price Floor - a legal requirement that maintains the market price above the equilibrium price.
Surplus - the amount that the quantity supplied exceeds the quantity demanded when the market price is above the equilibrium price
Increase in Demand
Price S P1 b P a D1 D Q Q1 Quantity
Decrease in Demand
Price S P a P1 b D1 D Q1 Q
Increase in Supply
Price S S1 P a P1 b D Q Q1 Quantity
Decrease in Supply
S1
Price S P1 b P a D Q1 Q Quantity