Transcript Demand and Supply

DEMAND AND SUPPLY
Economics 101
Lecturer: Jack Wu
RISING GASOLINE PRICES

Between September 2004 and September 2005,
the monthly average retail price of gasoline
jumped from $1.85 per gallon to $3.08 per gallon.
Sales of full-size SUVs dropped 16.8% over the
same time period (with a particularly sharp
42.5% drop for full-size GM SUVs).
ECONOMIC QUESTIONS
Why did the gasoline price rise at that time?
 Why did the sale of full-size SUVs drop?

DEMAND AND SUPPLY
Demand and supply are the two words that
economists use most often.
 Demand and supply are the forces that make
market economies work.
 Modern microeconomics is about supply, demand,
and market equilibrium.

MARKET

A market is a group of buyers and sellers of a
particular good or service.
Can be highly organized
 E.g.: agricultural commodities
 Can be less organized
 E.g.: ice cream

Buyers determine demand.
 Sellers determine supply

COMPETITIVE MARKET

A competitive market is a market in which there
are many buyers and sellers so that each has a
negligible impact on the market price.
PERFECT COMPETITION
Products are the same
 Numerous buyers and sellers so that each has no
influence over price
 Buyers and Sellers are price takers

NO COMPETITION
Monopoly: One seller, and seller controls price
 Monopsony: One buyer, and buyer controls price

IMPERFECT COMPETITION

Oligopoly
Few sellers
 Not always aggressive competition


Monopolistic Competition
Many sellers
 Slightly differentiated products
 Each seller may set price for its own product

DEMAND
Quantity demanded is the amount of a good that
buyers are willing and able to purchase.
 Law of Demand


The law of demand states that, other things equal,
the quantity demanded of a good falls when the price
of the good rises.
DEMAND SCHEDULE

Demand Schedule

The demand schedule is a table that shows the
relationship between the price of the good and the
quantity demanded.
EXAMPLE OF DEMAND SCHEDULE

Price
($ per movie)
10.00
7.50
5.00
2.50
0.00
Quantity
(movies per month)
0
1
2
4
7
DEMAND CURVE

Demand Curve

The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded.
INDIVIDUAL DEMAND CURVE
Price ($ per movie)
10
7.50
individual demand curve
5
2.50
0
1
2
4
Quantity (Movies a month)
7
TWO VIEWS
for every possible price, it shows the quantity
demanded
 for each unit of item, it shows the maximum price
that the buyer is willing to pay

ANOTHER EXAMPLE OF DEMAND
SCHEDULE
ANOTHER WAY OF DEMAND CURVE
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
in price ...
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Copyright © 2004 South-Western
NEGATIVE PRICE?
A negative price case:
Hoover’s special promotion -- two free air tickets
(worth more than £400) for purchase of appliance
over £100.


promotion attracted over 100,000 customers
Hoover incurred £48 million loss
CETERIS PARIBUS
When a demand curve is drawn, everything but
price and quantity demanded is held constant.
 Definition: a Latin phrase, translated as “other
things being equal”.

MARKET DEMAND
Market demand refers to the sum of all
individual demands for a particular good or
service.
 Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.

MARKET DEMAND AS THE SUM OF INDIVIDUAL DEMANDS
(DEMAND SCHEDULE)
Price of ice-cream cone
Catherine
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
12
10
8
6
4
2
0
Nicholas
+
7
6
5
4
3
2
1
Market
=
19
16
13
10
7
4
1
21
MARKET DEMAND AS THE SUM OF INDIVIDUAL DEMANDS
Catherine’s
Nicholas’s
Market
+
=
demand
demand
demand
Price of
Ice
Cream
Cones
$3.00
DCatherine
Price of
Ice
Cream
Cones
$3.00
Price of
Ice
Cream
Cones
$3.00
DNicholas
2.50
2.50
2.00
2.00
2.00
1.50
1.50
1.50
1.00
1.00
1.00
0.50
0.50
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
0
1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones
2.50
0
DMarket
2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones
22
CHANGE IN QUANTITY DEMANDED

Change in Quantity Demanded
Movement along the demand curve.
 Caused by a change in the price of the product.

CHANGES IN QUANTITY DEMANDED
Price of IceCream
Cones
B
$2.00
A tax that raises the
price of ice-cream
cones results in a
movement along the
demand curve.
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones
CHANGE IN DEMAND

Change in Demand
A shift in the demand curve, either to the left or
right.
 Caused by any change that alters the quantity
demanded at every price.

CHANGE IN DEMAND
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0
Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
SHIFT IN THE DEMAND CURVE
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers

DEMAND AND INCOME
Changes in income
 normal good – demand increases
with income
 inferior good – demand falls with
income
-- example: potato
INFERIOR GOOD V.S. BADS
Inferior good is different from “bads”.
 Examples of “bads”: pollution or garbage

DEMAND AND PRICES OF RELATED
GOODS

Prices of Related Goods
When a fall in the price of one good
reduces the demand for another
good, the two goods are called
substitutes.
 When a fall in the price of one good
increases the demand for another
good, the two goods are called
complements.

CASE STUDY
Two ways to reduce the quantity of smoking
demanded:
-- Public service announcements, mandatory health
warnings on cigarette packages, and the
prohibition of cigarette advertising on TV (shift
demand curve)
-- Raising the price of cigarettes through tobacco
taxes (move along demand curve)

SHIFTS IN DEMAND CURVE VS. MOVEMENTS ALONG DEMAND CURVE
(a) A Shift in the Demand Curve
(b) A Movement along the Demand Curve
Price of
A policy to discourage
A tax that raises the
smoking shifts the
price of cigarettes
Cigarettes,
demand curve to the left per Pack
results in a movement
Price of
Cigarettes,
per Pack
along the demand curve
$4.00
C
$2.00
B
A
D2
2.00
D1
20
0
10
Number of Cigarettes Smoked per Day
A
D1
12
20
0
Number of Cigarettes Smoked per Day
32
SUMMARY
variable
change
Demand
Shift
Income (Normal)
Rise (fall)
Rise (fall)
Right (left)
Income (Inferior)
Rise (fall)
Fall (rise)
Left (right)
Price of substitute
Rise (fall)
Rise (fall)
Right (left)
Price of complement
Rise (fall)
Fall (rise)
Left (right)
Taste
Rise (fall)
Rise (fall)
Right (left)
Expected Price
Rise (fall)
Rise (fall)
Right (left)
Number of buyers
Rise (fall)
Rise (fall)
Right (left)
SUPPLY
Quantity supplied is the amount of a good that
sellers are willing and able to sell.
 Law of Supply


The law of supply states that, other things equal, the
quantity supplied of a good rises when the price of
the good rises.
SUPPLY SCHEDULE

Supply Schedule

The supply schedule is a table that shows the
relationship between the price of the good and the
quantity supplied.
EXAMPLE OF SUPPLY SCHEDULE
SUPPLY CURVE

Supply Curve

The supply curve is the graph of the relationship
between the price of a good and the quantity
supplied.
Price of
Ice-Cream
Cone
$3.00
1. An
increase
in price ...
2.50
2.00
1.50
1.00
0.50
0
1 2
3
4
5
6
7
8
9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
Copyright©2003 Southwestern/Thomson Learning
TWO VIEWS
For every possible price, it shows the production
rate
 For each unit of item, it shows the minimum
price that the seller is willing to accept

MARKET SUPPLY
Market supply refers to the sum of all individual
supplies for all sellers of a particular good or
service.
 Graphically, individual supply curves are
summed horizontally to obtain the market supply
curve.

MARKET SUPPLY AS THE SUM OF INDIVIDUAL SUPPLIES
(SUPPLY SCHEDULE)
Price of ice-cream cone
Ben
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
0
0
1
2
3
4
5
Jerry
+
0
0
0
2
4
6
8
Market
=
0
0
1
4
7
10
13
41
MARKET SUPPLY AS THE SUM OF INDIVIDUAL SUPPLIES
Price of
Ice
Cream
Cones
$3.00
Ben’s
supply
+
SBen
Price of
Ice
Cream
Cones
$3.00
Jerry’s
supply
=
Price of
Ice
Cream
Cones
SJerry
$3.00
2.50
2.50
2.50
2.00
2.00
2.00
1.50
1.50
1.50
1.00
1.00
1.00
0.50
0.50
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones
0
1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones
0
Market
supply
SMarket
2 4 6 8 10 12 14 16 18
Quantity of Ice-Cream Cones
42
CHANGE IN QUANTITY SUPPLIED

Change in Quantity Supplied
Movement along the supply curve.
 Caused by a change in price.

CHANGE IN QUANTITY SUPPLIED
Price of IceCream
Cone
S
C
$3.00
A rise in the price
of ice cream
cones results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
CHANGE IN SUPPLY

Change in Supply
A shift in the supply curve, either to the left or right.
 Caused by a change in a determinant other than
price.

FIGURE 7 SHIFTS IN THE SUPPLY CURVE
Price of
Ice-Cream
Cone
Supply curve, S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
0
Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
SHIFT IN THE SUPPLY CURVE
Input prices
 Technology
 Expectations
 Number of sellers

SUMMARY
variable
change Supply
Shift
Input (factor)
price
Rise
(fall)
Fall (rise)
Left (right)
Technology
Rise
(fall)
Rise (fall)
Right (left)
Expected
Price
Rise
(fall)
Fall (rise)
Left (right)
Number of
sellers
Rise
(fall)
Rise (fall)
Right (left)
EQUILIBRIUM

Equilibrium refers to a situation in which the
price has reached the level where quantity
supplied equals quantity demanded.
EQUILIBRIUM PRICE AND QUANTITY

Equilibrium Price



The price that balances quantity supplied and
quantity demanded.
On a graph, it is the price at which the supply and
demand curves intersect.
Equilibrium Quantity
The quantity supplied and the quantity demanded at
the equilibrium price.
 On a graph it is the quantity at which the supply and
demand curves intersect.

Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
1
2
3
4
5
6
7
8
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
SURPLUS AND SHORTAGE

Surplus

When price > equilibrium price, then quantity
supplied > quantity demanded.
There is excess supply or a surplus.
 Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.


Shortage

When price < equilibrium price, then quantity
demanded > the quantity supplied.
There is excess demand or a shortage.
 Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward equilibrium.

MARKETS NOT IN EQUILIBRIUM
(a) Excess Supply
Price of
Ice
Cream
Cones
Surplus
(b) Excess demand
Supply
Price of
Ice
Cream
Cones
Supply
$2.50
2.00
$2.00
Demand
Quantity
demanded
0
1.50
Demand
Quantity
supplied
4
10
7
Quantity of Ice-Cream Cones
Quantity
supplied
0
Shortage
Quantity
demanded
4
7
10
Quantity of Ice-Cream Cones
53
ALTERNATIVE EXAMPLE: #2 LEAD
PENCILS
Price
Quantity demanded
Quantity supplied
0.05
1000
400
0.10
800
500
0.15
600
600
0.20
400
700
0.25
200
800
QUICK QUIZ 1
Draw demand and supply curves
 Find equilibrium price and quantity

QUICK QUIZ 2
How would following events shift either the
demand or the supply of #2 lead pencil?
-- an increase in the use of standardized exams
(using opscan forms)
-- a decrease in the price of ink pens
-- a start of a school year

INCREASE IN DEMAND
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream . . .
Supply
New equilibrium
$2.50
2.00
2. . . . resulting
in a higher
price . . .
Initial
equilibrium
D
D
0
7
3. . . . and a higher
quantity sold.
10
Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
DECREASE IN SUPPLY
Price of
Ice-Cream
Cone
S2
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
S1
New
equilibrium
$2.50
Initial equilibrium
2.00
2. . . . resulting
in a higher
price of ice
cream . . .
Demand
0
4
7
3. . . . and a lower
quantity sold.
Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning
SUMMARY
DISCUSSION
Each of the events listed below has an impact on
the market for bicycles.
1.An increase in the price of automobile.
2.A decrease in incomes of consumers if bicycles are a
normal good.

DISCUSSION-CONTINUED
3.An increase in the price of steel used to make
bicycle frames.
4.An environmental movement shifts tastes toward
bicycling.
DISCUSSION-CONTINUED
5.Consumers expect the price of bicycles to fall in
the future.
6.A technological advance in the manufacture of
bicycles.
DISCUSSION-CONTINUED
7.A reduction in the price of bicycle helmets and
shoes.
8.A decrease in incomes of consumers if bicycles are
an inferior good.