Transcript (increase in supply)…..

Markets
Are a mechanism that brings buyers and sellers
together to exchange goods, services, and
resources….
…it is a device for allocating or rationing goods,
services, and resources.
• Product market: where consumer goods are
bought and sold. Business firms are the seller,
consumers are the buyers
• Resource market: where the resource services
are bought and sold. Resource
owners(consumers) are the sellers and business
firms are the buyers
Definition: relationship between the price and
the quantity demanded of a good.
• Quantity demanded: amount of an item that
buyers are willing and able to purchase over a
certain time period, at a specific price, ceteris
paribus.
1. Price
2. Income
Normal good: Buy more of a good when income
increases
Inferior good : Buy less of that good when income
increases
3. Tastes and Preferences
4. Prices of related goods
Substitutes:Two goods that perform the same function
(interchangeable)
Complements: Two goods that are used together to
enhance one another
5. Expectations (of future price, expected income, etc.)
6. Number of consumers
1. Price
• By holding all other variables constant we get our first
prediction (hypothesis)...
… Law of Demand: The price and quantity demanded of
a good are inversely related, ceteris paribus.
• Demand schedule: A list of possible prices with the
corresponding quantity demanded at that price.
It is a representation of the law of demand.
• What if the price was......... then what would be
quantity demanded at that price.
• Think of it like answering a survey.…
…no other variable changes except the one you ask about
Example: A demand schedule
Price (per pound)
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
For Coffee
Quantity Demanded (pounds per week)
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Demand curve - a curve representing the law of demand.
Price
$7.00
Plot the demand schedule on the graph....
Connect the dots and we get......
A Demand Curve!
$6.00
$5.00
$4.00
$3.00
$2.00
Price
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
Quantity
Demanded
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
$1.00 As the price of a good decreases, buyers are willing and able
0
to purchase more of this good, all other variables constant
1
2
3
4
5
6
7
8 9 10
Quantity Demanded (QD)
(In thousands)
If the price of the good decreases, the quantity demanded of the
good increases….
...This is shown by moving down the demand curve
Price
$7.00
Increase in Quantity Demanded
$6.00
$5.00
$4.00
$3.00
Demand Curve
$2.00
$1.00
0
1
2
3
4
5
6
7
8 9 10
Quantity Demanded (QD)
(In thousands)
What about the other variables?
• To construct a demand curve a number of
variables are held constant...
(Income, Expectations, prices of related goods, etc)
• What would happen to the demand curve if one
of these variables were to change?
• Example: Suppose consumers income increases
and coffee is a normal good.
People will want to buy more coffee...
...not just at one specific price but at all prices...
Which means all points on the Demand curve
SHIFT to the RIGHT...
…in
other
words
the
Demand
curve
...So
if
the
price
were
$7.00,
coffee
drinkers
Price
has
SHIFTED
to theinstead
right of 1,000
would
by 2,000 pounds
$7.00
$6.00
$5.00
$4.00
$3.00
Demand Curve
$2.00
Increase in Demand
$1.00
0
1
2
3
4
5
6
7
8 9 10
Quantity Demanded (QD)
(In thousands)
Price
Quantity
Demand
$7.00
1,000
$6.50
2,000
$6.00
3,000
$5.50
4,000
$5.00
5,000
$4.50
6,000
$4.00
7,000
$3.50
8,000
$3.00 9,000
QD
(new)
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
If Demand
the price were
$4.00
Curve
coffee drinkers would
(after income increase)
buy 8,000 pounds instead
of 7,000
What if consumers income went down instead; then they would buy
less at all prices.....causing the Demand curve to shift to the left.
Price
$7.00
$6.00
Decrease in Demand
$5.00
$4.00
Demand Curve
$3.00
Demand Curve
$2.00
(after income decrease)
$1.00
0
1
2
3
4
5
6
7
8 9 10
Quantity Demanded (QD)
(In thousands)
Changes in demand vs.
Changes in quantity demanded
• If one of the variables held constant when first
constructing the demand curve (all other variables
besides the price of the good) were to change...
... this would shift the demand curve either to the right
(increase in demand) or to the left (decrease in demand).
• If the price of the good were to change then there would
be either a decrease in quantity demanded (if price rises)
or an increase in quantity demanded (if price falls)…
…this is shown by moving up or down the original demand
curve
Changes in demand vs. Changes in quantity demanded
Price
Changes in quantity demanded
(caused by the price of the good)
Original Demand curve
Quantity Demanded
Changes in Demand (caused by a “ceteris paribus” variable)
Will shift the position of the demand curve.
How do the other “ceteris paribus” variables affect
the demand curve?
1. Prices of related goods
• Substitutes
If the price of tea increases, then consumers will wish to
buy more coffee...since coffee is now cheaper compared
to tea.
In general, as the price of a substitute good increases,
the demand for the other good(coffee) increases.
• Therefore, there is a direct relationship between the
demand for a good and the price of a substitute good.
• Other examples: Foreign cars - American cars,
chicken - beef, Coke - Pepsi, etc.
• Consumers always purchase more of the good that is
now cheaper relative to the other good.
“Ceteris paribus” Variables
1. Prices of related goods
• Complements
• If the price of sugar and cream were to increase, then
consumers will desire to buy less coffee.
As the price of a complementary good increases, the
demand for the other good(coffee) decreases.
• Therefore, there is an inverse relationship between the
demand for a good and the price of a complementary
good.
• Other examples: Cars - gasoline, Computers - software,
Compact discs - Compact disc players,
Hot dogs - mustard
• Demand decreases because the two joined products
(Coffee-sugar-cream) now are more expensive.
“Ceteris paribus” Variables
2. Tastes & Preferences
If consumers prefer a good there is an increase in
demand. If a good falls out of favor there is a decrease in
demand
Advertising could have an effect on tastes & preferences
3. Expectations
Of future prices, availability of goods, income.
If you believe that prices will increase in the future, you
will want to buy more today before the price increase
(increase in demand)
Important for prices of commodities, stocks, and bonds
4. # of consumers: more consumers, increase in
demand
• Definition: relationship between the price of a
good and the quantity supplied of a good.
• Quantity supplied: amount of an item that
sellers are willing and able to make available to
market over a certain period, at a specific price,
ceteris paribus.
1. Price of the good
2. Price of inputs (resources)
3. Technology
4. Prices of other goods that can be produced by
the firm
5. Expectations of future price
6. Number of Firms
7. Taxes and Subsidies
1. Price
• By holding all other variables constant we get our
second prediction (hypothesis).
Law of Supply: The price and quantity supplied of a
good are directly related, ceteris paribus.
• Supply schedule: A list of possible prices with the
corresponding quantity supplied at that price.
It is a representation of the law of supply.
• What if the price was... then what would be quantity
supplied at that price.
Example: A supply schedule
Price (per pound)
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
For Coffee
Quantity Supplied (pounds per week)
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Supply curve...a curve representing the law of supply
Price
$7.00
Plot the supply schedule on the graph....
Price
Connect the dots and we get..
$6.00
$5.00
$4.00
$3.00
A Supply Curve
$2.00
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
Quantity
Supplied
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
$1.00 As the price of a good increases, business firms are willing to
0
make more of the good available for sale, ceteris paribus
1
2
3
4
5
6
7
8 9 10
Quantity Supplied (QS)
(In thousands)
Changes in quantity supply vs. Changes in supply
Price
Changes in quantity Supplied
(caused by the price of the good) Original Supply curve
Decrease in Supply
Increase in Supply
Quantity Supplied
Changes in Supply (caused by a “ceteris paribus” variable)
Will shift the position of the Supply curve.
How do the “ceteris paribus” variables affect the
Supply curve?
• Price of inputs (resources)
If the price of an input increases (labor, materials,etc) this
makes a good more expensive to produce (raises costs).
This lowers the potential profit of the firm and the firm
will wish to decrease the supply of the good
• Opposite example: The decline in the price of computer
processors and chips makes costs decline for computer
manufacturers and they increase supply
• Summary: A decline in input prices increases supply. A
rise in input prices decreases supply.
“Ceteris paribus” variables (Supply)
• Technology...allows a firm to produce the same
amount of a good with less resources, which results in
lower costs and an increase in supply
• Price of other goods the firm can produce...
Example: If a farmer who grows coffee beans finds that
another crop will pay them more…
… they devote less land to coffee(a decrease in supply)
and more land to the other crop
• Expectations...of future prices
If firms expect higher prices in the future they will
make less available today (decrease in supply). Why?
So they will have more to sell in the future (at the higher
prices
“Ceteris paribus” variables (supply)
• Number of firms
The more firms that produce the good the greater is the
supply of the good (more it shifts to the right)
• Taxes and Subsidies
Excise taxes...a tax on a good (gas, cigarette,etc)
• An increase in excise taxes will raise the cost of the
good, lower potential profits, cause a decrease in
supply
• A subsidy gives money (directly or indirectly) to firms,
lowers the cost of the good and will increase supply.
• Examples: Public colleges and universities receive
money from state governments.
• Immunizations are also subsidized by the government
Market Equilibrium
• Equilibrium: Definition At rest, no tendency to change, forces in balance.
• Market equilibrium…
…the price, once reached, when there will be no
tendency to change. The price the market comes
to rest at and there are forces in balance.
• This can only occur when the…
Quantity demand (QD) = Quantity supplied (QS)
• Price is a rationing device…
…based on willingness and ability to pay
Price
Supply curve
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
Demand Curve $3.00
Price
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
QD
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
QS
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
$1.00
0
1
2
3
4
5
6
7
8
Quantity Demanded & Supply
of Coffee(in thousands)
9 10
Quantity demanded = Quantity supplied occurs where the demand
curve intersects the supply curve.
This will determine the equilibrium price and quantity. Equilibrium
price = $5.00 and 5,000 pounds of coffee are bought and sold at that
price
Price
Supply curve
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
Shortage
$3.50
(Excess Demand)
Demand Curve $3.00
Price
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
QD
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
QS
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
$1.00
0
1
2
3 4
5
6 7 8
9 10
Quantity Demanded & Supply
of Coffee(in thousands)
Economically (not graphically), how would equilibrium be reached?
Suppose that the price for coffee were $3.50 instead........
...At the price of $3.50 QS = 2,000 and QD = 8,000 ( QD > QS)
• Consumers wish to buy more coffee than firms are willing to
make available at $3.50. This means we have a...
Price
Supply curve
$7.00
$6.00
$5.00
$4.00
$3.00
Shortage
(Excess Demand)
$2.00
$1.00
Some consumers
are going without
coffee when the
price is $3.50…
Demand
Curve
Price
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
QD
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
QS
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Quantity Demanded & Supply
0
of Coffee(in thousands)
1
2 3 4 5 6 7 8
9 10
Some of these consumers are willing to pay more for coffee than go without...
Like an auction, these consumers will bid up the price in order to get coffee...
As the price is bid up some consumers drop out of the bidding...QD decreases
and coffee grower put more of their product on the market (QS increases)
This will continue consumers are able to buy all they wish to.
Only when QD = QS can this occur. Which is at the equilibrium price!
Supply curve
Price
$7.00
Surplus
(Excess Supply)
$6.00
$5.00
$4.00
At the price
of $6.00 some
coffee
growers are
not able to
sell all they
wish to…
$3.00
$2.00
$1.00
0
1
2
3
4
5
6
7 8
Price
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
Demand Curve
QD
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
QS
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Quantity Demanded & Supply
of Coffee(in thousands)
9 10
Suppose that the price for coffee were $6.00 instead...
At the price of $6.00 QS = 7,000 and QD = 3,000 ( QD < QS)
Coffee growers would like to sell more coffee than consumers wish
to buy at $6.00. This means we have a…
Some growers will want to sell more and to do so will cut prices!
Supply curve
Price
$7.00
Price
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
Demand Curve
Surplus
(Excess Supply)
$6.00
$5.00
$4.00
$3.00
$2.00
QD
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
QS
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
$1.00
0
1
2
3
4
5
6
7 8
Quantity Demanded & Supply
of Coffee(in thousands)
9 10
As prices are decreased, consumers will wish to buy more
(QD increases), and some coffee growers will take their product
off the market (QS decreases)
This will continue until all growers are able to sell all they wish to.
Only when QS = QD can this occur. It is at the Equilibrium price!
Supply curve
Price New Equilibrium
$7.00
Think of the graph as
a “snapshot” of the
Market.
If the price of a substitute
good increases, there is an
increase equilibrium price
and quantity.
$6.00
$5.00
$4.00
New Demand Curve
$3.00
$2.00
Demand Curve
$1.00
0
1
2
3
4
5
6
7
8
Quantity of Coffee
9 10 (In thousands)
The increase in Demand causes both equilibrium
If something changes(the
Supply
curve shifts)
price and quantity
to or
go Demand
up:
in
the Market
the(Normal
“snapshot”
change...
Increase
in Income
good),will
Decrease
in price of a
Example: If the
price
of tea(a
substitute
increases,
complementary
good,
Expected
higher
prices ingood)
the future
, more
consumers,
in preferences
for(increase
the good. in demand)
consumersIncrease
will want
more coffee
Supply curve1 Let’s return to our original
Price
equilibrium...
$7.00
Supply curve2
$6.00
The decline in the
price of an input
increases the
New
equilibrium quantity
Equilibrium and decreases the
equilibrium price
$5.00
$4.00
$3.00
$2.00
Demand Curve
$1.00
0
1
2
3
4
5
6
7
8
Quantity of Coffee
9 10 (In thousands)
The
increase
supplyofcauses
an increase
in equilibrium
quantity
Suppose
theinprice
land(for
growing
coffee) decreases...
anddecline
a decrease
equilibrium
price:
...the
in in
the
price of an
input will increase the
An
increase in technology,
a fall in the
price
other goods
that
profitability
of coffee growers
who
willofwant
to produce
can
be (increase
produced, in
expected
fall in future price, more firms
more
supply)…..
producing the good, a fall in taxes or an increase in subsidies
Other Examples
Making predictions about
price and quantity
7
Price
Question: How would an increase in the price of oil affect the
price and quantity of cars?
S2
S1
Suppose the price of oil
were to increase......the price of gasoline
will increase
$3.00
$2.00
If the price of a complement
increases this will cause a decrease
in demand for the other good...
D1
Q2
Q1
Quantity of Gasoline
...since oil is an important input in the production of gas...
...the increase in it’s price will raise the cost of producing gas...
...this lowers potential profit and firms reduce production...
..the supply curve shifts to the left...
How are gasoline and cars related?
They are complements!
Price
of
Cars
Question: How would an increase in the price of oil affect the
price and quantity of cars?
S1
If the price of a complement
increases this will cause a decrease
in demand for the other good....
…a decrease in the demand for cars!
P1
P2
D2
Q2 Q1
D1
Quantity of Cars
The result is a decline in the price of cars as well as a decline in
the amount of cars bought and sold.
This example is to show you how markets are related to one
another. Other examples for you to think about...
If the price of Coke increases, what happens to the price of
Pepsi?
If the price of computers decrease, what happens to the price of
computer software?
Summary of Demand and Supply
Curves Shifting
Shift
•
•
•
•
Increase in Demand
Decrease in Demand
Increase in Supply
Decrease in Supply
Effect on
Eq. Price
Increase
Decrease
Decrease
Increase
Effect on
Eq. Quantity
Increase
Decrease
Increase
Decrease
Example:
Both Demand and Supply
curves shifting
at the same time
S1988
Price
$800
Around 1988, the cellular phone was just
beginning to be used....it’s price was very
high, and only wealthy individuals used them..
S2008
$50
D1988
Q1
D2008
Q2
Quantity of Cellular phones
Today, many people besides the wealthy have a cellular phone..
..in other words there has been a large increase in demand the
last 20 years
According to this graph the price of cellular phones should be
over $1,000. Yet good ones today are around $50. Yet we know
that demand has increased...How to explain this?
There has also been a large increase in Supply
as well the last 20 years!
S1988
Price
The increase in supply causes prices to decrease
$800
S2008
$50
D1988
Q1
D2008
Q2
1. Decrease in price of inputs
2. Increase in technology
3. Increase in number of firms
making cellular phones
Quantity of Cellular phones
The increase in supply is greater than the increase in demand.
Increase in Demand: Increase Price, Increase Quantity
Increase in Supply: Decrease Price, Increase Quantity
When added together: We observe the quantity increases, both
supply and demand cause quantity to go up(re-enforce one
another)
Since we know price goes down it must be that the force pushing
price down( supply) > force pushing the price up(demand).
Price
Question: What would happen if everyone expects the price
S2
of an item to increase?
S
1
Suppose most market participants
expect continued economic growth in
China...
...Demand increase, Supply decreases
$65
$40
D2
D1
Q1
Quantity of oil (billions of bbls.)
Oil consumers will want to buy more oil today before the
expected price increase......
..But those non-OPEC producers of oil would rather sell
in the future when it’s price is higher...
...which means selling less today...
The price of oil increases today
based on future expectations!
What if markets are not
allowed to reach
equilibrium?
Government intervention in Market
(Price not used as a rationing device)
How does the market ration?
• Through the equilibrium prices that are set...
...Based on willingness and ability to pay.
• Changes in prices re-allocate resources in the economy.
• Example: Suppose the demand for computer software
increases…
...This increases the price of software, which leads to more
profitability of software firms...
…and encourages more firms to produce more software...
…to do this they need to hire more computer
programmers, by increasing wages...
…which will encourage more people to become computer
programmers.
Price
S1
$90
Before looking at Government intervention
let’s look at a case of private industry and
price rationing
However at the price of $30 there are
55,000 people who want to see the
concert. There is a shortage at the
price of $30 a ticket
$30
D1
20,000
55,000
Quantity of Concert Tickets
• A popular music group will play one show at a 20,000 seat arena..
...The supply curve of seats is fixed at 20,000
• They decide to charge $30 a ticket so their fans can afford it
Price is no longer being used as a rationing device..The alternatives?
1. Waiting in line(queuing). Getting there first gets you the tickets
2. Hold a lottery to determine who can buy tickets (ration coupons)
3. Dealers can hold some tickets to best (favored) customers
Price
S1
Before looking at Government intervention
let’s look at a case of private industry and
price rationing
A popular music group will play one
show at a 20,000 seat arena
They decide to charge $30 a ticket
$90
$30
D1
20,000
55,000
Quantity of Concert Tickets
What if you can’t get a ticket with these alternative rationing
methods? Are you left out of this concert?
4. A Black market (scalping):
Charging a price above the face value of the ticket
Scalping can only exist when the existing price is
below the equilibrium price.
This only happens at popular events.
How would government intervention achieve the same effects as seen
Price
with low price tickets?
S1
Price Ceiling
1. As price decreases, the QD of
Bread will increase
2. As price decreases, the QS of
$2.00
Bread will decrease
Prices are kept artificially low
This was the reason long lines
were observed in the Soviet Union
for bread, meat, and toilet paper
Shortage
$0.60
D1
QS
60,000
100,000
QD
140,000
Quantity of Bread
Suppose the equilibrium price of bread were $2.00 per loaf.
Enough people complain that this price is too high for low income
people to afford.
The government can pass a law that says it is illegal to charge more
than $0.60 for a loaf of bread. What will be the effect?
This is called a Price ceiling: a maximum legal price that can be
charged for a good. Price is no longer used as a rationing device.
Must use one (or more) of the 4 alternatives just mentioned.
How would government intervention achieve the same effects as seen
Price
with low price tickets?
S1
Price Ceiling
1. As price decreases, the QD of
Bread will increase
2. As price decreases, the QS of
$2.00
Bread will decrease
Prices are kept artificially low
This was the reason long lines
were observed in the Soviet Union
for bread, meat, and toilet paper
Shortage
$0.60
D1
QS
60,000
100,000
QD
140,000
Quantity of Bread
This is called a Price ceiling: a maximum legal price that can be
charged for a good. Price is no longer used as a rationing device.
Must use one (or more) of the 4 alternatives just mentioned.
Who benefits? Consumers who can get the good at $0.60
Who is hurt? Firms that product bread, consumers who can’t find
bread.
When the government intervenes it creates winners and losers with
the policy.
Wage
$7.50
$6.50
S2
Unemployment
$5.00
275,000
The Minimum wage: a Price Floor
S1 Suppose the equilibrium wage
for non-skilled workers was
$5.00/hour
...Price Floor...a minimum price
that can be legally charged.
Who benefits?
Those who are still employed
D2 at the higher wages
Who is hurt?
Those who are now
D1 unemployed, those who can’t
find jobs, employers.
300,000 375,000 Quantity of hours workers
• The government can say that $6.50/hour will be the
minimum price that can be charged…
Of course, the equilibrium wage could always go above the
minimum wage…
...for example if supply goes down or demand goes up...
…the minimum wage will become irrelevant
Summary
Law of demand: Price and quantity demanded(QD) are
inversely related
Law of Supply: Price and quantity supplied(QS) are
directly related
Many variables will shift the Demand & Supply curves
Equilibrium price occurs where QD = QS.
Increase in demand increase equilibrium price & quantity
Increase in supply increases equilibrium quantity and
lowers equilibrium price
Price ceiling keeps price below equilibrium and causes a
shortage of the good
Price floor keeps price above equilibrium and causes a
surplus of the good.