Transcript price

Chapter 3
Supply and Demand:
In Introduction
(Demand, Supply and Market Equilibrium)
Topics
Demand
 Supply
 Market Equilibrium

– Tendency to change
– Intervention
– Comparative study
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Demand
The quantity of a good that buyers wish
to buy at each price
 Demand curve: a schedule or graph
showing demand

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Demand: key points



willingness and ability to buy
a relationship between quantity demanded
and product price
Qd = f (P)
– quantity demanded is a function of price
– quantity demanded is determined by price



The law of demand:
Qd and P are negatively related
Demand Curve: downward sloping
Market demand: the sum of individual
demand
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Key Terms
(why downward sloping?)
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Substitution effect (of a price change):
(willingness to buy)
– change in quantity demanded of a good that
results because buyers switch to or from
substitutes when the price of the good changes
– Change in Qd when switch to or from substitutes
because of P changes
Income effect (of a price change):
(ability to buy)
– change in quantity demanded of a good that
results because a change in price changes the
buyer’s purchasing power
– Change in Qd when purchasing power changes
because of P changes
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Key Term
(why downward sloping?)

buyer’s reservation price
(willingness to pay)
– The largest dollar amount the buyer would
be willing to pay for a good
– The benefits the buyer expects to receive
(from having it)
– The reservation price of the marginal buyer
declines as the quantity of the good bought
increases
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The Daily Demand Curve
for Pizza in Chicago Figure 3.1, P.64
Exercise 3.1, P.64
-Reservation p
when Qd=10k
-Qd when P=$2.50
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D vs. Qd
D
Qd
A relationship
between P and Qd
A curve
A number at a given
P
A point on the curve
Reasons for change:
change in factors
other than P
Change: a shift of the
entire curve
Reasons for change:
change in P only
Change: a movement
along the curve
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Assumption: Other Things Equal
 the
other things:
factors affecting D
--price of related goods
complements vs. substitutes
--income: normal vs. inferior
--preference
--expectations (prices, income, …)
--population
--others
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An Increase in the Quantity Demanded
versus an Increase in Demand
Figure 3.10, P.73
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Supply:
Quantity of a good that sellers wish to
sell at each price
 Supply curve: a schedule or graph
showing supply
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Supply: Key Points



willingness and ability to sell
a relationship between price and quantity
supplied
Qs = f (P)
– Quantity supplied is a function of price
– quantity supplied is determined by price
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
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The Law of Supply:
Qs and P are positively related
Supply Curve: upward sloping
Market supply: the sum of individual supply
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Why upward sloping?
Increasin opportunity cost (the lowhanging-fruit principle)
 Seller’s reservation price: the smallest
dollar amount for which a seller would
be willing to sell an additional unit
(marginal cost)

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The Daily Supply Curve
of Pizza in Chicago
Figure 3.2,P.65
Exercise 3.2
-marginal cost
when Qd=10k
-Qd when P=$3.50
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S vs. Qs
S
Qs
A relationship
between P and Qs
A curve
A number at a given
P
A point on the curve
Reasons for change:
change in factors
other than P
Change: a shift of the
entire curve
Reasons for change:
change in P only
Change: a movement
along the curve
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A decrease in quantity supplied vs. a
decrease in supply
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Assumption: Other Things Equal
 the
other things:
factors affecting S
--prices of inputs
goods used to produce other goods
--price of related goods
goods that use the same resources
--technology
--expectations
--others
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Market Equilibrium

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Market:
where the buyers meet the sellers
Market Equilibrium:
– when there is no tendency to change (unless
caused by external forces)
– When buyers and sellers are satisfied with their
respective quantities at the market price
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Equilibrium price and equilibrium quantity
– Price and quantity when Qd=Qs
Change in D and impacts on Pe and Qe
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Change in S and impacts on Pe and Qe
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Equilibrium Price &Equilibrium Quantity
of Pizza in Chicago
Figure 3.3, P.66
Why
no tendency
to change?
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Key Terms

Excess supply: (surplus)
– Qs > Qd when P>Pe

Excess demand: (shortage)
– Qd > Qs when P<Pe
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Figure 3.4
Excess Supply
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Figure 3.5
Excess Demand
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What happens when there is excess
demand? Excess supply?

Tendency to change (not in equilibrium)
until reaching equilibrium
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Graphing Supply and Demand and Finding
the Equilibrium Price and Quantity
Figure 3.6
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What if intentionally stay away from
market equilibrium?

Government intervention
– Price ceiling
• rent control
• pizza price control
– Price floor
• agricultural products
• minimum wage
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Interventions
Interntions: welfare concerns or political
interests
 Results: inefficiencies in markets

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Price Controls
Legal restrictions on how high or low a
market price may go
 Price Ceiling:
– limiting price (on consumer goods to
protect consumers welfare)
– maximum price a seller can charge

Price Floor:
– support price (on production factors, e.g.
labor)
– minimum price a buyer is required to pay
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Example: Price Ceiling
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The Effects of a Price Ceiling
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Figure 3.8,P.70
Rent Controls
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Figure 3.9
Price Controls in the Pizza Market
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Problems with Price Ceilings
Shortages
Inefficiencies
misallocation to consumers
wasted resources
low quality
black
markets.
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Example: Price Floor
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The Effects of a Price Floor
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Problems with Price Floors
Surplus
Inefficiencies
misallocation of sales among sellers
Wasted resources
Inefficiently high quality
Illegal activity
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Price Controls cause Inefficiency
Consumer surplus
 Producer surplus
 Total surplus
 Deadweight loss

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Recall: Demand--the definition
The quantity of a good or service
consumers’ are willing and able to
buy at various prices
The maximum price the consumer
is willing and able to pay for the
next unit of the good or service.
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Two Different Prices
The maximum price
the consumers are willing to pay for
Vs.
The market price
the consumers actually paid for
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Consumer Surplus
Individual consumer surplus
the net gain to an individual buyer from the
purchase of a good.
equal to the difference between the buyer’s
willingness to pay and the price paid.
Total consumer surplus
the sum of the individual consumer surpluses
of all the buyers of a good
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Consumer Surplus
The total consumer surplus generated by purchases of a good at a
given price is equal to the area below the demand curve but 40
above that price.
A Fall in the Market Price
Increases Consumer Surplus
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Recall: Supply--the definition
The quantity of a good or service
producers are willing and able to sell
at various prices
The minimum price the producer is
willing and able to accept for
providing the next unit of the good
or service
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Two Different Prices
The minimum price
the producers are willing to accept
Vs.
The market price
the producers actually get
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Producer Surplus and the Supply
Curve
Individual producer surplus
the net gain to a seller from selling a good
equal to the difference between the price
received and the seller’s cost (the minimum
price the producer is willing to accept)
Total producer surplus
the sum of the individual producer surpluses
of all the sellers of a good
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Producer Surplus
The total producer surplus from sales of a good at a given price is
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the area above the supply curve but below that price.
A Rise in Price Increases Producer
Surplus
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Putting it together: Total Surplus
the total net gain to consumers
and producers from trading in the
market
the sum of the producer surplus
and the consumer surplus
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Total Surplus
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