Transcript Document

Ch. 3: Supply and Demand:
Theory
Del Mar College
John Daly
©2003 South-Western Publishing, A Division of Thomson Learning
Demand
• Demand is: the willingness and ability of
buyers to purchase different quantities of a
good at different prices during a specific
period of time.
• The Law of Demand: as the price of a good
rises, quantity demanded of that good falls;
as the price of a good falls, quantity
demanded of that good rises.
Prices
• Absolute Price: the price of a good in monetary
terms (Ex: A new Car costs $30,000).
• Relative Price: the price of a good in terms of
another good (Ex: A new Car costs 30 computers)
• Relative price is calculated by dividing the
absolute price of one product with the absolute
price of another product (Ex: A Car costs $30,000;
A Computer costs $1,000; The relative cost of a
Car is 30 Computers)
More Prices
• As the absolute price
of a good increases, if
nothing else changes,
the relative price of a
good increases (if a
Car costs $36,000 and
a computer costs
$1000, the relative
cost of the Car is 36
computers).
Why Quantity Demanded Goes
Down As Price Goes Up
• People substitute lower-priced goods for
higher-priced goods.
• The Law of Diminishing Marginal Utility:
for a given time period, the marginal
(additional) utility or satisfaction gained by
consuming equal successive units of a good
will decline as the amount consumed
increases.
Four Ways to Represent The Law
Of Demand
• In Words: “As price
rises, quantity
demanded falls”
• In Symbols: PQd
• In a Demand Schedule
• In a Demand Curve
The Demand Curve & Demand
Schedule
(a)
(b)
Causes of Change in the Demand
Curve
•
•
•
•
•
Income
Preferences
Prices of Related Goods
Number of Buyers
Expectations of Future Price
Income Changes in Demand
Shifts in Demand Curves
• The demand for a good increases if people
are willing and able to buy more of the good
at all prices.
• A normal good is a good the demand for
which rises(falls) as income rises(falls).
• An inferior good is a good the demand for
which rises(falls) as income falls(rises).
Preferences, Substitutes and
Related Goods
• Preferences affect the amount of a good they are
willing to buy at a particular price (Ex: favorite
food, favorite author)
• If the demand for product X increases as the price
for Y increases, and the demand for product X
falls as the price for Y falls, X and Y are
substitutes (Ex:Coke and Pepsi).
• If the price of product A falls as the demand for
product B rises, and the price of product A rises as
the demand for product B falls, A and B are
Related Goods (Ex: Ketchup and Hot Dog Buns).
Number of Buyers and
Expectation of Future Price
• The demand for a good in a particular market area
is related to the number of buyers in the area:
More Buyers, More Demand; Fewer Buyers, Less
Demand.
• Buyers who expect a price to be higher next
month will buy the good this month, increasing
demand. Buyers who expect a price to be lower
next month will wait to buy the good next month,
reducing demand.
Shifting the Demand Curve
• A change in Demand causes a shift in the Demand curve.
• A change in the Quantity Demanded moves a point along
the current Demand curve.
• If Demand increases, the curve shifts to the right.
• If Demand decreases, the curve shifts to the left.
Q&A
• As Sandi’s income rises, her demand for popcorn
rises. As Mark’s income falls, his demand for
prepaid telephone cards rises. What kinds of
goods are popcorn and telephone cards for the
people who demand each?
• Why are demand curves downward sloping?
• Give an example that illustrates how to derive a
market demand curve.
• What factors can change demand? What factors
can change quantity demanded?
Supply
• Supply is the willingness and ability of
sellers to produce and offer to sell different
quantities of a good at different prices
during a specific period of time
• Law of Supply: As the price of a good rises,
the quantity supplied of the good rises; and
as the price of a good falls, the quantity
supplied of the good falls.
The Supply Curve
Why Supply Curves Slope
Upwards
An Upward-sloping
supply curve reflects
the fact that under
certain conditions, a
higher price is an
incentive to producers
to produce more of a
good.
Market Supply Curve
• The Market Supply
Curve represents the
price-quantity
combinations for all
sellers of a particular
good.
• An Individual supply
curve represents the
price-quantity
combinations for a
single seller
Shifting the Supply Curve
• If the price of a relevant resource changes, the
supply curve will shift (EX: wood prices increase,
cost of a new house increases as well)
• Technology can increase the quantity supplied by
producing more of a product with the same
quantity of resources supplied.
• If the number of sellers increase, the supply curve
will shift.
• If the price of a good is expected to be higher in
the future, the supply curve will shift
Shifting the Supply Curve
• Taxes increase unit costs
• Government restrictions can change the supply curve by
increasing or limiting production.
• A Change in the Supply Curve is a shift in the Supply
Curve, not merely moving up and down the same curve.
Q&A
• What would the Supply Curve of houses in your
city look like in the next 10 hours? In three
months?
• Which way (if any) does the Supply Curve shift if
there is a decrease in the number of sellers? If
there is a per-unit tax is placed on the production
of the good? If the price of a relevant resource
falls?
• Why do most Supply Curves slope upward?
The Market
Putting Supply and Demand Together
Market Language
• If the quantity supplied is greater than the quantity
demanded, the good has a surplus or excess
supply.
• If quantity demanded is greater thean quantity
supplied, a shortage or excess demand exists.
• The price at which a quantity demanded equals the
quantity supplied is the equilibrium price, or the
market-clearing price.
• A market that has too much of a good or too little
of a good is considered to be in disequilibrium.
More Market Language
• The quantity that corresponds to the equilibrium
price is the equilibrium quantity.
• Any price at which quantity demanded is not equal
to quantity supplied is a disequilibrium price.
• A market that exhibits either a surplus or a
shortage is said to be in disequilibrium.
• A market in which quantity demanded equals
quantity supplied is said to be in equilibrium.
Moving to Equilibrium
• Why does the price fall when there is a surplus?
• Why does the price rise when there is a shortage?
• Mutually beneficial trade drives the market towards
equilibrium.
Viewing Equilibrium In Terms of
Consumers’ and Producers’ Surplus
• Consumers’ Surplus: the difference between
the maximum or highest amount buyers
would be willing to pay and the price they
actually pay.
• Producers’ Surplus: the difference between
the price sellers receive for the god and the
minimum or lowest price they would be
willing to sell the good for.
What Can Change Equilibrium
Price and Quantity
• Demand rises and supply is constant: Equilibrium
price rises, Equilibrium quantity rises.
• Demand falls, supply is constant: Equilibrium
price falls, Equilibrium quantity falls.
• Supply rises, demand is constant: Equilibrium
price falls, Equilibrium quantity rises.
• Supply falls, demand is constant: Equilibrium
price rises, Equilibrium quantity falls.
What Can Change Equilibrium
Price and Quantity Part 2
• Demand rises and supply falls by an equal
amount: Equilibrium rises, Equilibrium quantity
is constant.
• Demand falls and supply rises by an equal
amount: Equilibrium price falls, Equilibrium
quantity is constant.
• Demand rises by a greater amount than supply
falls: Equilibrium price and quantity rise.
• Demand rises by a lesser amount than supply falls:
Equilibrium price rises, Equilibrium quantity falls.
Q&A
• When a person goes to the store and buys
milk or bread, supply and demand cannot
apply because there is no auctioneer. Do
you Agree or Disagree? Why or Why not?
• The price of a given-quality personal
computer is cheaper today than it was 5
years ago. Is this a result of Lower Demand
for Computers? Why or Why Not?
Price Controls
•
•
1)
2)
3)
4)
5)
Price Ceiling: a government mandated price
above which legal trades may not be made.
Price Ceilings may cause:
Shortages
Fewer Exchanges
Non-price Rationing Devices
Buying and Selling at a Prohibited Price
Tie in Sales
Price Floor
• A price floor is a government mandated
minimum price below which legal trades
cannot be made.
• Price floors can cause Surpluses and Fewer
Exchanges.
Q&A
• Do buyers prefer lower prices to higher
prices?
• Who might argue for a Price Ceiling? A
Price Floor? Why would they argue their
viewpoint?