Transcript Document

Supply and Demand:
An Introduction
Principles of Macroeconomics
Dr. Gabriel X. Martinez
Ave Maria University
Supply and Demand:
An Introduction
 How do consumers get the goods and
services they want in the right quantities and
qualities?
– Some goods and services are allocated by the
market forces of supply and demand.
Economic forces are necessary reactions to
scarcity and opportunity costs.
Market forces are economic forces acting
through the market.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
2
Buyers and Sellers in
Markets
 A Market
– Consists of all buyers and sellers of a good or
service
 What do you think?
– What determines the price of pizza, gasoline, a
car wash, or other goods and services?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
8
Buyers and Sellers in the
Market
 The Price of a good is determined by
– the interaction between
– the value that consumers give to the good
– and the cost of producing it.
– Value is studied with the demand curve.
– Cost is studied with the supply curve
– Market Equilibrium happens when value equals
cost.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
9
Buyers and Sellers in
Markets
 The Demand Curve
– A schedule or graph that tells us the quantity of
a good that buyers wish to buy at each price.
Demand reflects people’s
willingness to pay
a given price
for a given quantity
of a good or service.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
10
Buyers and Sellers in
Markets
 A Property of Demand
– As price of a good or service goes down
the quantity consumers wish to buy will
increase.
P ↓ QD ↑
– Therefore, the demand curve is downwardsloping.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
11
The Yearly Demand
Curve for Cell phones
Price
($ per phone)
4
3
2
Demand
8
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12
16
Chapter 3 - Supply and Demand:
An Introduction
Quantity
(million of phones per year)
12
Buyers and Sellers in
Markets
 The Supply Curve
– A curve or schedule showing the quantity of a
good that sellers wish to sell at each price.
Question
–Will the opportunity cost of producing
additional cell phones increase or decrease
as you produce more cell phones?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
13
Buyers and Sellers in
Markets
 The Supply Curve
– Sellers must receive a higher price to produce
additional units of a product to cover the higher
opportunity costs of each additional unit.
P ↓ QS ↓
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
14
Buyers and Sellers in
Markets
Supply reflects
the cost of producing
a given quantity
of a good or service.
Price must be equal to (or higher than)
cost
for the seller to supply the good or service.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
15
The Yearly Supply
Curve of Cell phones
Price
($ per phone)
Supply
4
3
2
8
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Companies, Inc. All rights reserved.
12
16
Chapter 3 - Supply and Demand:
An Introduction
Quantity
(million of phones per year)
16
Market Equilibrium
 Equilibrium
– A system is in equilibrium when there is no
tendency for it to change.
 The forces in the system are balanced.
 Market Equilibrium
– Occurs in a market when all buyers and sellers
are satisfied with their respective quantities at
the market price.
 The economic forces are balanced.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
17
The Equilibrium Price and
Quantity of Cell phones
Price
($ per phone)
Supply
Equilibrium at $3
Quantity Demanded =
Quantity Supplied
4
3
2
Demand
8
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Companies, Inc. All rights reserved.
12
16
Chapter 3 - Supply and Demand:
An Introduction
Quantity
(millions of phones per year)
18
Market Equilibrium
 Equilibrium Price and Equilibrium Quantity
– The values of price and quantity for which
quantity supplied
and
quantity demanded
are equal
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
19
Market Equilibrium
 What Do You Think?
– Would buyers prefer a lower price than the
equilibrium price?
– Would sellers prefer a higher price than the
equilibrium price?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
20
Market Equilibrium
 What Do You Think?
– If prices are lower than the equilibrium price,
there will be excess demand.
– If prices are higher than the equilibrium price,
there will be excess supply.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
21
Excess Supply
Excess supply = 8 million
phones per year
Price
($ per phone)
Supply
4
Excess supply
causes prices to fall
3
2
Demand
8
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
12
16
Chapter 3 - Supply and Demand:
An Introduction
Quantity
(millions of phones per year)
22
Excess Demand
Price
($ per phone)
Supply
4
Excess demand = 12 million
phones per year
3
Excess demand
causes prices to rise
2
Demand
6
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Companies, Inc. All rights reserved.
18
Chapter 3 - Supply and Demand:
An Introduction
Quantity
(million phones per year)
23
Market Equilibrium
 What Do You Think?
– Is the market equilibrium always an ideal
outcome for all market participants?
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
26
Predicting and Explaining
Changes in Prices and
Quantities
 Distinguishing Between
– A change in the quantity demanded…
 A movement along the demand curve
that occurs in response to a change in price
 We often see this when the supply curve shifts and the market
equilibrium changes.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
27
Predicting and Explaining
Changes in Prices and
Quantities
 … And
– A change in demand
 A shift of the entire demand curve
– Caused by anything besides price, for example
 Changes in people’s preferences,
 Changes in incomes or population,
 Changes in prices of other goods.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
28
An Increase in Quantity
Demanded vs. an Increase in
Demand
Price
($/can)
6
D
Increase in
quantity
demanded
5
4
3
2
1
0
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Companies, Inc. All rights reserved.
D
2
4
6
8
12
Chapter 3 - Supply and Demand:
An Introduction
Quantity
(1000s of cans/day)
29
An Increase in Quantity
Demanded vs. an Increase in
Demand
Price
($/can)
6
D
D’
5
4
3
Increase in demand
2
1
0
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Companies, Inc. All rights reserved.
D
12
Chapter 3 - Supply and Demand:
An Introduction
D’
14
Quantity
(1000s of cans/day)
30
Predicting and Explaining
Changes in Prices and
Quantities
 Change in the quantity supplied
– A movement along the supply curve that occurs
in response to a change in price.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
31
Predicting and Explaining
Changes in Prices and
Quantities
 Change in supply
– A shift of the entire supply curve.
 Caused by anything besides price, for example
– Changes in the cost of labor (wages),
– Changes in the cost of other factors of production,
– Changes in the technology of production.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
32
An Increase in Quantity
Supplied vs. an Increase in
Supply
Price
($/can)
S
6
5
Increase in
quantity supplied
4
3
2
S
1
0
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
2
4
6
8
10
Chapter 3 - Supply and Demand:
An Introduction
Quantity
(1000s of cans/day)
33
An Increase in Quantity
Supplied vs. an Increase in
Supply
Price
($/can)
6
S
S’
5
4
3
Increase in supply
2
1
S’
S
0
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
2
4
6
8
10
Chapter 3 - Supply and Demand:
An Introduction
Quantity
(1000s of cans/day)
34
Demand, Supply, and Market
Equilibrium
 Four Rules for Figuring out the Effects of
Shifts of Demand and Supply
– If Quantity Rises,
 And Prices Rise, Demand has increased.
– That is, demand has shifted out.
 And Prices Fall, Supply has increased.
– If Quantity Falls,
 And Prices Fall, Demand has shifted in.
– That is, demand has decreased.
 And Prices Rise, Supply has shifted in.
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand:
An Introduction
35
Four Rules Governing the Effects
of Supply and Demand Shifts: I
Price
An increase in demand will lead to an
increase in both the equilibrium price
and quantity
S
Increase in Demand
D ↑  P ↑ QD ↑
P’
Movement along
Supply curve
P ↑ QS ↑
P
D
Q
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
D’
Q’
Chapter 3 - Supply and Demand:
An Introduction
Quantity
36
Four Rules Governing the Effects
of Supply and Demand Shifts: II
Price
A decrease in demand will lead to a
decrease in both the equilibrium
price and quantity
S
Decrease in Demand
D ↓  P ↓ QD ↓
P
Movement along
Supply curve
P ↓ QS ↓
P’
D’
Q’
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
D
Quantity
Q
Chapter 3 - Supply and Demand:
An Introduction
37
Four Rules Governing the Effects
of Supply and Demand Shifts: III
An increase in supply will lead to a
decrease in the equilibrium price and
an increase in the equilibrium quantity
Price
S
S’
P
P’
D
Q
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Q’
Chapter 3 - Supply and Demand:
An Introduction
Increase in
Supply
S ↑  P ↓ QS ↑
Movement
along Demand
curve
P ↓ QD ↑
Quantity
38
Four Rules Governing the Effects
of Supply and Demand Shifts: IV
Price
An decrease in supply will lead to
an increase in the equilibrium price and
a decrease in the equilibrium quantity
S’
P’
P
D
Q’
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Decrease in
S
Supply
S ↓  P ↑ QS ↓
Movement
along Demand
curve
P ↑ QD ↓
Quantity
Q
Chapter 3 - Supply and Demand:
An Introduction
39
Reasons for changes in Q
High Quantity due to High Demand
Price
($/ticket)
S
PS
PW
DS
DW
QW
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
QS
Chapter 3 - Supply and Demand:
An Introduction
1000s of
tickets
40
Reasons for changes in Q
Price
($/bushel)
High Quantity due to High Supply
SW
SS
PS
PW
D
QW
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
QS
Chapter 3 - Supply and Demand:
An Introduction
Millions of
bushels
41
The Effects of Simultaneous
Shifts in Supply and Demand
Q falls because
D shifts more
than S.
Price
($/bag)
S
S’
P
S’ after reduction in cost of
production
D’ after fall in willingness to
buy
P’
D
D’
Q’
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
Q
Chapter 3 - Supply and Demand:
An Introduction
Millions of bags
per month
42
The Effects of Simultaneous
Shifts in Supply and Demand
Price
($/bag)
Q rises because D
shifts less than S.
S
S’
P
D’ after fall in willingness to
buy
P’
D’
D
Q Q’
Copyright c 2004 by The McGraw-Hill
Companies, Inc. All rights reserved.
S’ after reduction in cost of
production
Chapter 3 - Supply and Demand:
An Introduction
Millions of bags
per month
43