Transcript Supply and Demand

Chapter 2
Supply and Demand
Contents
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Supply and Demand Curves
Equilibrium Quantity and Price
Adjustment to Equilibrium
Some Welfare Properties of Equilibrium
Free Markets and The Poor
Price Supports
The Rationing and Allocative Function of Prices
Determinants of Supply and Demand
Predicting and Explaining Changes in Price and Quantity
The Algebra of Supply and Demand
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Supply and Demand Curves
A Market: consists of the buyers and sellers of a good or service.
Law of Demand: the empirical observation that when the price of a product falls,
people demand larger quantities of it.
Law of Supply: the empirical observation that when the price of a product rises ,
firms offer more of it for sale.
The Demand and Supply Curves for Lobsters in Hyannis, MA., July 20, 2011
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Equilibrium Quantity and Price
Equilibrium quantity and price:
it is the price-quantity pair at
which both buyers and sellers are
satisfied.
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Excess supply: the amount by
which quantity supplied exceeds
quantity demanded.
Excess demand: the amount by
which quantity demanded exceeds
quantity supplied.
2-5
Some Welfare Properties of Equilibrium
If price and quantity take anything other than their
equilibrium values, however, it will always be possible to
reallocate so as to make at least some people better off
without harming others.
An Opportunity for Improvement in the Lobster Market
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Rent Controls
A price ceiling for rents is a level
beyond which rents are not
permitted to rise.
The price ceiling creates an
excess demand of 40,000 units
=(80,000 – 40,000) units.
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Price Supports
A price support (or price floor) keep
prices above their equilibrium levels.
Require the government to become an
active buyer in the market.
Purpose of farm price supports is to
ensure prices high enough to provide
adequate incomes for “family farmers.”
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Factors that Shift Demand Curves
Factors the Shift the Demand Curve
(SHIFT FACTORS)
Incomes
Normal goods - the quantity
demanded at any price rises with
income.
Inferior goods - the quantity
demanded at any price falls with
income.
Tastes
Price of Substitutes and Complements
Complements - an increase in the
price of one good decreases demand
for the other good.
Substitutes - an increase in the price
of one will tend to increase the
demand for the other.
Expectations
Populations
NON_SHIFT FACTOR
Price
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Factors the Shift the Supply Curve (SHIFT FACTORS)
Technology
Factor Prices
The Number of Suppliers
Factors that Shift Supply Schedules
Expectations
Weather
NON_SHIFT FACTOR
Price
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S= Summer, W =winter
Case 1: An increase in supply → a decrease
in the equilibrium price and an increase in
the equilibrium quantity.
Case 2:An increase in demand → an
increase in both the equilibrium
price and quantity.
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Case III: A decrease in supply → an increase in the
equilibrium price and a decrease in the equilibrium
quantity.
Case IV: A decrease in demand → a decrease in both
the equilibrium price and quantity [not shown]
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2.1: Supply function: P = 2+ 3Qs
2.2: Demand function: P =10 – Qd
Let Q* = Qd = Qs
Then
2 + 3Q* = 10 – Q*
4Q* =10-2=8
Q* =8/2 = 2
Plug Q* into either demand or supply
function.
We choose the supply function, so P* =
2+ 3*2 = 8
2-13
Note: A Tax (T) is a shift
factor on the S curve.
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2-15
Note: A Tax (T) is a shift
factor on the D curve.
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Assume T =$2 is on the seller
Assume T =$2 is on the buyer
s
d
Given: p=Q ; P=10-Q
Given: p=Qs; P=10-Qd
Set Q =10-Q and assume that at
Set Q =10-Q and assume that at
s
d
equilibrium, Q =Q .
equilibrium, Qs=Qd.
Thus, 2Qs =10 or Qs=Qd=Q*=5
Thus, 2Qs =10 or Qs=Qd=Q*=5
So P=10-5=$5
So P=10-5=$5
Pbuyer =$5+$1=$6; Pseller=$5-$1=$4
Pbuyer =$5+$1=$6; Pseller=$5-$1=$4
Summary: It doesn’t matter whether the tax is on buyers or sellers, the result is the same on Pbuyers and
Psellers.
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Problem: Consider a market whose supply and demand curves are given by P= 4Qs and
P= 12 - 2Qd respectively. How will the equilibrium price and quantity in this market be
affected if a tax of 6 per unit of output is imposed on sellers? If the same is imposed
on buyers?
Answer: The original price and quantity are given by P*= 8 and Q* = 2 respectively.
The supply curve with the tax is given by P = 6+4Qs. Letting P’ and Q’ denote the new
equilibrium values of price and quantity, we now have 6 +4Q’ =12 - 2Q’ which yields
Q’=1, P’ =10, where P’ is the price paid by buyers and P’-6=4 is the price received by
sellers.
Alternatively, the demand curve with a tax of 6 levied on buyers is given by P=12 - 6 -
2Qd = 6 - 2Qd, and we have 4Q’ =6’ – 2Q’ which yields Q’=1 and P”=4 where P” is
the price received by sellers. That is, P”+T = P” + 6 = 10 is the price paid by buyers.
Question: Suppose demand for seats at football games is P = 1900 – (1/50)Q and supply is fixed at Q =90,000 seats.
(a) Find the equilibrium price and quantity of seats for a football game (using algebra and a graph).
(b) Suppose the government prohibits ticket scalping (selling tickets above their face value), and the face value of tickets is $50
(this policy places a pricing ceiling at $50). How many consumers will be dissatisfied (how large is excess demand)?
(c) Suppose the next game is a major rivalry, so demand jumps to P = 2100 – (1/50)Q. How many consumers will be
dissatisfied with this game?
(d) How do distortions of this price ceiling differ from the more typical case of upward-sloping supply?
Answer:
a) The equilibrium quantity is Q = 90,000 seats and the equilibrium price is P = 1900 – (1/50)(90,000) = 1900 – 1800 =
$100.
b) At a price ceiling of P = $50, quantity demanded is found by solving 50 = 1900 – (1/50)Q for Q = 92,500 seats. Since the
stadium only holds Q = 90,000 seats, there will be 92,500 – 90,000 = 2,500 dissatisfied fans who want to buy a ticket at P =
$50 but cannot find one available.
c) Quantity demanded for the higher demand is found by solving 50 = 2100 – (1/50)Q for
Q = 102,500 seats. Now there
will be 102,500 – 90,000 = 12,500 dissatisfied fans who want to buy a ticket at P = $50 but cannot find one available. The
excess demand is12,500 – 2,500 = 10,000 seats more than for the not so big game.
d) Normally a price ceiling both raises quantity demanded and lowers quantity supplied. Here, only the first effect is present
because the stadium capacity is fixed.
S
$300
D’
D
$100
$50
90
0
92.5
102.5
105