Transcript Demand and supply

Demand and supply
In a market system, the
3 fundamental
questions are resolved by a
decentralized decision making
process encompassing
a large number of buyers
and sellers. A vast number
of individual decisions to buy
and sell add up to “market forces”—
or the forces of demand and supply.
Markets, demand, and supply
A market is group of
buyers and
sellers with the potential
to trade
Markets
• Defining the good or service
• Buyers and sellers
• Geography of the market
Imperfect Competition
If a market is imperfectly
competitive, buyers or
sellers have some
influence over market
price. Buyers or sellers are
price makers, not takers
Perfect competition
In perfectly
competitive markets
(or just competitive
markets), each buyer
and seller takes the
market price as a
given
Supply and Demand
The supply and
demand model is
designed to explain
how prices are
determined in perfectly
competitive markets.
What is demand?
Definitions:
Demand: The quantities of a good or
service buyers are willing (and able) to buy
at alternative market prices, ceteris paribus.
Quantity demanded: The quantity of a
good or service buyers are willing (and able)
to buy at a specific price, ceteris paribus.
Demand schedule
The schedule showing the quantities
demanded of a good or service at
various prices, ceteris paribus
Maple Syrup
Price
(per Bottle)
$1.00
2.00
3.00
4.00
5.00
Quantity Demanded
(Bottles per Month)
7,500
6,500
5,000
4,000
3,500
Demand curve
The Demand Curve shows
the relationship between the
price of a good and the
quantity demanded, holding
constant all other variables
that affect demand
The Demand Curve
Price
Maple Syrup
When the price
is $4.00 per bottle,
4,000 bottles are
demanded (point A).
A
$4.00
B
At $2.00 per bottle,
6,000 bottles are
demanded (point B).
$2.00
D
0
4,000
6,500
Number of Bottles
Individual demand
An individual’s quantity
demanded of any good
is the total amount that
individual would choose
to buy at a particular
price.
Here we derive the market demand curve by
summing up the individual demand curves for
cantaloupe.
(1)
Price
(2)
Anita's QD
(per month)
$2.50
1
(3)
Bo's QD
(per month)
2
(4) = (3) + (2)
Total QD
(per month)
3
2.00
2
4
6
1.50
3
7
10
1.00
4
8
12
Deriving the market demand curve
for cantaloupe
Price ($)
Anita
2.50
BO
2.00
1.50
Market
demand
1.00
0
3
4
6
7
10
12 Quantity
Law of demand
Holding all other
factors that can
influence demand
constant, market price
and quantitydemanded are
inversely related.
Why is the demand curve downward
sloping? The Substitution effect
Price
oranges
•As the price of oranges
decrease, ceteris paribus,
oranges become cheaper
relative to substitutes.
•Some buyers substitute
oranges for tangerines,
nectarines, and other fruits.
P2
P1
D
0
q1
q2
Quantity
Shift of the demand curve
Price
Price
(per Bottle)
Original
Quantity Demanded
(Bottles per Month)
New Quantity Demanded
After Increases in Income
(Bottles per Month)
$1.00
2.00
3.00
4.00
5.00
7,500
5,000
5,000
4,000
3,500
9,500
8,000
7,000
6,000
5,500
Maple Syrup
$2.00
B
C
D1
0
5,000
8,000
D2
Number
of Bottles
Change in demand versus
movement along the demand curve
• A change in demand (increase or
decrease in demand) refers to a shift of
the demand curve—resulting from a
change in some factor that can influence
the demand for this good other than its
price.
• A movement along the demand curve
results from a change in the price of the
good, holding all other factors constant.
Shift versus movement along the
demand curve
Price
A → B : Movement along the demand curve
D1 → D2 : Increase in demand
Maple Syrup
A
$4.00
B
$2.00
C
D1
0
4,000
5,000
8,000
D2
Number
of Bottles
Determinants of demand
Besides price, what
factors might influence
the demand for maple
syrup, or any other
good or service.
Determinants of demand
A change in any of the following factors would
cause a change in demand, or a shift of the entire
demand curve. These influences on demand include:
The price of substitute goods
The price of complementary goods
Income
Expectations
Number of buyers
Tastes and preferences
Substitutes
A good that can be consumed in the
place of another.
•Cheesecake—Tiramisu
•Orange juice—grapefruit juice
•Pizza-tacos
•Cab rides—subway rides
•VCRs-DVD players
•Pork-chicken
Let the price of chicken increase, ceteris
paribus.
This should
cause the
demand for pork
to shift to the right
Price/lb.
P2
A
H
P1
B
D2
D1
0
q1
q2
Quantity
(lbs.)
Complements
A good that is consumed with another
good
•Computers—printers
•Tortilla chips-salsa
•Tents—sleeping bags
•Airline service—rental cars
•Shot guns--shells
Cheaper air fares should
stimulate sales in the rental car
business
Rental
fee
P2
A
H
P1
B
D2
D1
0
q1
q2
Cars rented per day
Normal and Inferior Goods
•A normal good is a good for which demand
increases (shifts right) when income
increases.
Examples: Scotch whiskey, Swiss-made
watches, lobster, air travel, vacations
abroad.
•An inferior good is a good for which
demand decreases (shifts left) when income
increases.
Examples: macaroni, used clothing, bus
service.
Expectations
Price/lb
Salmon
D1
D2
0
If buyers anticipate that
prices of fresh salmon
will be falling shortly, they
may purchase less today.
Quantity
(lbs.)
Demand could shift right
due to:
Price
Increase in the price of
substitutes
P2
A
H
Decrease in the price of
complements
B
Increase in income
(normal good)
P1
D2
D1
0
q1
q2
Quantity
Increase in the number of
buyers
Change of preferences
What is Supply?
•Quantity supplied : The amount of a good or
service sellers are willing (and able) to sell
during a specified period at a specific price,
ceteris paribus.
•Supply: The relationship between the
quantity supplied of a good and the price of
the good when all other influences on selling
plans remain the same.
The Supply Schedule
A list of quantities supplied at each
different price when all other influences
on selling plans remain the same.
Price
($ per
bottle)
Quantity-supplied
(millions of bottles
per day)
$1.00
2,500
$2.00
4,500
$3.00
5,000
$4.00
6,000
$5.00
6,500
The Supply Curve A graph of the relationship between
the quantity supplied of a good and
its price when other influences on
selling plans remain constant.
Price
Supply
Curve
2.00
A
B
1.00
C
D
0
2,500
4,500
Number
of Bottles
Law of supply
Holding all other
factors that can
influence selling plans
constant, market price
and quantity-supply
are directly related.
Change in supply versus
change in quantity- supplied
• Change in quantity supplied:
movement along a supply curve in
response to a change in price
• Change in supply: shift of a supply
curve in response to some variable
other than price
Changes in Quantity Supplied
and Supply
Maple Syrup
Price
per
Bottle
$4.00
A decrease in labor costs
causes the supply curve
for maple syrup to shift
from S 1 to S2. At each
price, more bottles are
supplied after the shift.
S1
G
6,000
S2
J
8,000 Number of Bottles
What can cause a change in
supply
• Change in input prices
• Change in the profitability of
producing alternative products
• Change in technology
• Change in productive capacity
• Change in expectations about
future prices
Inputs can be economic resources
(raw materials, labor) or semifinished articles (aluminum,
camshafts, soybeans)
Prices of Inputs
•A rise in price of an input causes a
decrease in supply that shifts the
supply curve to the left
•A fall in price of an input causes an
increase in supply that shifts the
supply curve to the right
Profitability of Alternate Goods
• Alternate goods: other goods a firm could
produce using some of the same kinds of
inputs as the original good
•
When an alternate good becomes more
profitable to produce because
– its price rises
–the cost of producing it falls
–the supply curve for the original good
shift leftward
will
Technology
•Cost-saving technological
advances increase the
supply of a good, shifting
the supply curve to the
right
Productive Capacity
•An increase in productive
capacity shifts the supply curve
rightward.
•A decrease in productive
capacity shifts the supply curve
leftward.
Expectation of Future Prices
•A rise in the expected price
of a good will decrease the
supply, shifting the supply
curve leftward.
Expectation of Future Prices
(a)
Price
S
Price increase
moves us
rightward along
supply curve
P2
Price decrease
moves us
leftward along
supply curve
P1
P3
Q3
Q1
(b)
Price
Entire supply curve
shifts rightward when:
• price of input
• profitability of alternate
good
• productive capacity
• expected price
• technology improves
Q2
Quantity
(c)
Price
S1
S2
Quantity
Entire supply curve
shifts leftward when:
• price of input
• profitability of alternate
good
• productive capacity
• expected price
S2
S1
Quantity
Putting demand and supply
together
Equilibrium: state of
rest - a situation that,
once achieved, will
not change unless
there is a change in
something we have
been assuming
constant
Putting demand and supply
together
Maple Syrup
Price
per
Bottle
$3.00
S
E
C
H
$1.00
D
0
2,500
5,000
7,500
Bottles