Transcript Supply and Demand

Supply and Demand
Overheads
Equilibrium
Equilibrium is defined a state of rest;
a situation that, one achieved, will not change,
unless some external factor,
previously held constant, changes.
Market Equilibrium
A market is said to be in equilibrium
if the price in the market is such that
the quantity supplied (QS) in the market
and the quantity demanded (QD) in the market
are equal.
Price
Demand and Supply of Hamburger Patties
Supply = Demand
3.5
3
2.5
2
1.5
1
D0
S0
0.5
0
0
2000
4000
3333.33
6000
8000
6666.66
10000 12000
Quantity
Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
1000
2000
3000
4000
5000
6000
7000
8000
9000
Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200
Excess supply and excess demand
Excess supply
At a given price, the excess of the
quantity supplied over the quantity demand
is called the excess supply.
Excess supply = QS (P) - QD (P)
Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
1000
2000
3000
4000
5000
6000
7000
8000
9000
Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200
At a price of $2.10, excess supply (QS (P) - QD (P) ) is given by
7,000 - 2,600 = 4,400
Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
1000
2000
3000
4000
5000
6000
7000
8000
9000
Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200
At a price of $1.20, excess supply (QS (P) - QD (P) ) is given by
4,000 - 6,200 = -2,200
Excess demand
At a given price, the excess of the
quantity demanded over the quantity supplied
is called the excess demand.
Excess Demand = QD (P) - QS (P)
Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
1000
2000
3000
4000
5000
6000
7000
8000
9000
Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200
At a price of $0.90, excess demand (QD (P) - QS (P) ) is given by
7,400 - 3,000 = 4,400
Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
1000
2000
3000
4000
5000
6000
7000
8000
9000
Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200
At a price of $2.10, excess demand (QD (P) - QS (P) ) is given by
2,600 - 7,000 = -4,400
Market Equilibrium
A market is in equilibrium when the price is
such that the quantity supplied
is equal to quantity demanded.
A market is in equilibrium when the price is
such that excess supply equals
excess demand equals zero.
Excess supply and excess demand and price pressure
When the quantity demanded in the market
exceeds the quantity supplied at a given price,
QD (P) > QS (P)
there is excess demand,
and the price will tend to rise.
Excess demand and excess supply
and price pressure
When the price in the market rises,
quantity demanded falls
& quantity supplied rises
until an equilibrium is reached at which
quantity demanded equals quantity supplied.
The process of price rising so that
excess demand falls to zero is called
price rationing
Price
Graphical analysis of excess supply
QS (P) > QD (P)
3.5
3
Supply = Demand
Price Falls
2.5
2
1.5
1
D0
S0
0.5
0
0
2000
4000
6000
8000
10000 12000
Quantity
Price
Graphical analysis of excess demand
Supply = Demand
3.5
3
Price Rises
2.5
2
1.5
1
D0
S0
0.5
0
0
2000
4000
6000
QD (P) > QS (P)
8000
10000 12000
Quantity
Algebraic analysis of supply and demand
Equilibrium  Supply = Demand
To find an equilibrium in a market:
1.
Set supply equal to demand
and solve for P.
2.
Substitute P in the supply and
demand equations
to get the quantities.
Example Demand Equation
QD = 20 - 2P
Demand
Price
QD = 20 - 2P
14
12
10
8
6
4
2
0
D0
0
2
4
6
8 10 12 14 16 18 20 22 24
Quantity
Example Supply Equation
QS -4 + 2P
Supply
Price
QS -4 + 2P
14
12
10
8
6
4
2
0
S0
0
2
4
6
8 10 12 14 16 18 20 22 24
Quantity
Price
Demand and Supply
QD = 20 - 2P
QS -4 + 2P
14
12
10
8
6
4
2
0
D0
S0
0
2
4
6
8 10 12 14 16 18 20 22 24
Quantity
Example Calculation
Set supply equal to demand and solve the equation for P.
QD = 20 - 2P = -4 + 2P = QS
20 - 2P = -4 + 2P
+4
+4
24 - 2P = 2P
+2P +2P
24 = 4P
24 = 4P
4
4
6 = P
QD = 20 - 2P
= 20 – 2(6)
=8
Some notes on solving equations
We get equivalent equations if on both sides
of the equality sign we do the following:
a.
add the same number
b.
subtract the same number
c.
multiply by the same number  0
d.
divide by the same number  0.
Comparative Statics or
What happens when things change
Demand Shifts
Increases in demand (shifts to the right)
will increase the equilibrium price and quantity.
Decreases in demand (shifts to the left)
will decrease the equilibrium price and quantity.
Price
Changes in Demand
16
S0
D0
D1
D2
14
12
10
8
6
4
2
0
0
5
10
15
20
Quantity
25
Supply Shifts
Increases in supply (shifts to the right)
will decrease the equilibrium price
and increase the equilibrium quantity.
Decreases in supply (shifts to the left)
will increase the equilibrium price
and decrease the equilibrium quantity.
Price
Changes in Supply
D0
S0
S2
S1
14
12
10
8
6
4
2
0
0
5
10
15
20
Quantity
Price Ceilings
A price ceiling occurs when some outside force
sets a price for the market
that is below the equilibrium price.
When quantity supplied & quantity demanded differ,
the short side of the market —
whichever of the two quantities is less —
will prevail.
Price
Price Ceiling
Supply  Demand
3.5
3
Queuing
2.5
2
1.5
1
D0
S0
0.5
0
0
2000
4000
6000
QD (P) > QS (P)
8000
10000 12000
Quantity
The results:
Queuing
Shortages
A black market
Price Floors
A price floor occurs when some outside force
sets a price for the market
that is above the equilibrium price.
When quantity supplied & quantity demanded differ,
the short side of the market —
whichever of the two quantities is less —
will prevail.
Price
Price Floor
Supply  Demand
QS (P) > QD (P)
3.5
3
Excess Supply
2.5
2
1.5
1
D0
S0
0.5
0
0
2000
4000
6000
8000
10000 12000
Quantity
The results:
Excess supply
Unemployment