Transcript ceteris paribus

Supply and demand model
Single most useful tool of economic analysis.
Explains how price of goods and the quantity bought
and sold are determined in (certain kinds of)
markets.
Remember: The point is to be able to make
conditional predictions:
How will price and quantity for a particular good be
affected if “X” occurs?
Market:
The buyers and sellers of a particular good or
service.
Competitive market:
A market in which there are many buyers and many
sellers so that each has a negligible impact on the
market price.
Perfectly competitive market:
In addition to “many buyers and sellers,” the goods
offered for sale are all the same.
In a competitive market:
Sellers and buyers don’t “set” price . . . instead they
“take” price as given. “Price takers.”
Price is determined “by the market” (through the
interaction of buyers and sellers).
Quantity demanded: The amount of a good that buyers
are (or a buyer is) willing and able to purchase.
“Desired purchases”
Desired purchases not necessarily the same as actual
purchases.
Quantity demanded always has a time dimension.
Let’s first consider individual demand for a particular
good (desired purchases by a single household).
What factors influence the quantity of a good that a
given household would be willing and able to
purchase?
Determinants of demand:
(Own) price:
Law of demand: Other things equal, when the price
of a good rises, the quantity demanded of the good
falls.
Income:
Normal good: Other things equal, an increase in
income leads to an increase in quantity demanded.
Inferior good: Other things equal an increase in
income leads to a decrease in quantity demanded.
Prices of related goods:
Substitutes: Two goods for which an increase in the
price of one, other things equal, leads to an increase
in the quantity demanded of the other.
Complements: Two goods for which an increase in
the price of one, other things equal, leads to a
decrease in the quantity demanded of the other.
Other determinants of demand include:
Tastes (not everyone likes the same things)
Expectations (about future prices, for example)
Demand curve:
A graph of the relationship between the price of a
good and the quantity demanded, other things equal.
price ($/lb.)
An individual consumer’s
demand for apples.
p1
p2
q1
q2
quantity (lbs./yr.)
Law of demand says that the demand curve
slopes down.
Price on the vertical axis; quantity on the
horizontal axis?
Individual demand vs. market demand.
Individual demands are added horizontally to get
market demand.
Consumer 1
demand
price ($/lb.)
Consumer 2
demand
price ($/lb.)
Market
demand
price ($/lb.)
0.65
0.45
14 22
10
30
quantity (lbs./yr.)
24
52
Change in quantity demanded resulting from a
ceteris paribus change in own price -price ($/lb.)
Market demand
for apples
p1
p2
Q1
Q2
quantity (lbs./yr.)
-- movement along a demand curve.
Change in quantity demanded resulting from a
ceteris paribus change in a demand determinant
other than own price -price ($/lb.)
p1
D2
D
Q1
Q2
1
quantity (lbs/yr.)
-- shift of demand. (Rightward shift is called
“an increase in demand.”)
A leftward shift in demand is called “a decrease
in demand”:
price ($/lb.)
p1
D1
D2
Q2
Q1
quantity (lbs./yr.)
Now redo everything for the case of supply (a little
more quickly this time):
Quantity supplied: The amount of a good that sellers
are willing and able to sell.
“Desired sales”
Desired sales not necessarily the same as actual sales.
Quantity supplied always has a time dimension.
Individual supply vs. market supply
Determinants of supply:
(Own) price:
Law of supply: Other things equal, when the price of
a good rises, the quantity supplied of the good rises.
Input prices
Technology
Expectations
Supply curve:
A graph of the relationship between the price of a
good and the quantity supplied, other things equal.
price ($/bu.)
An individual
producer’s supply
of soybeans.
p2
p1
q1
q2
quantity (bu./yr.)
Law of supply says that the supply curve slopes up.
Going from individual supply to market supply?
-- horizontal summation again. (Add up
individual quantities supplied at each price
to get market quantity supplied at that price.)
Very(!) important to distinguish between two different
kinds of changes in quantity supplied:
Those represented by
- movements along a supply curve.
- shifts of a supply curve.
Change in quantity supplied resulting from a
ceteris paribus change in own price -price ($/bu.)
Market
supply of
soybeans
p1
p2
Q2
Q1
quantity (bu./yr.)
-- movement along a supply curve.
Change in quantity supplied resulting from a
ceteris paribus change in a supply determinant
other than own price -S1
price ($/bu.)
S2
p1
Q1
Q2
quantity (bu./yr.)
-- shift of supply. (Rightward shift is called
“an increase in supply.”)
A leftward shift in supply is called “a decrease
in supply”:
S2
price
($/bu.)
S1
p1
Q2
Q1
quantity (bu./yr.)
Caution!
Caution!
Caution!
A rightward shift in supply (from S1 to S2) . . .
price ($/bu.)
S1
S2
quantity (bu./yr.)
. . . can also be thought of as a downward shift
in supply.
But it’s an increase (not decrease) in supply!!!