Transcript demand curve

Demand
• The term demand refers to the
entire relationship between the
quantity demanded and the
price of a good, other things
remaining the same. Demand
is described by both the
demand schedule and the
demand curve.
• The demand for MP3 files is
the relationship between the
price of MP3s and the quantity
of MP3s demanded, holding all
other
influences
on
the
quantity of MP3 files bought
constant.
Supply
•The term supply refers to the
entire relationship between the
quantity supplied and the price of
a good, other things remaining
the same. Supply is described by
both the supply schedule and the
supply curve.
•The supply of MP3 files is the
relationship between the price of
MP3 files and the quantity of
MP3 files supplied, holding all
other influences on the quantity
of MP3 files sold constant.
The Buying Decision
• The quantity of MP3 Players that
people plan to buy depends on:
– The price of an MP3 Player
– The prices of related goods
(such as tapes, portable CD
players, CDs, and services that
sell downloadable music ):
these are generically known as
SUBSTITUTES and
COMPLEMENTS
– Disposable Income
– Expectations of the future
– Size of the market: number of
consumers interested in MP3
Players.
– Consumer tastes/preferences
The “law of demand”
describes how these
factors influence
demand.
Law of Demand
Other things remaining the same,
the higher the price of a good,
the smaller is the quantity
demanded of that good.
• Why? For two reasons.
– If the price of a good rises,
the opportunity cost of
using that good rises, so
people buy less of that
good and more of some
substitute goods. This is a
substitution effect.
– If the price of a good rises,
real income falls, so
people buy less of all
goods including the good
whose price has risen. This
is a income effect.
Price/unit
D
Number
of units
Law of Demand
• The law of demand can be
illustrated by a demand
schedule or a demand curve.
• A demand schedule lists the
quantities demanded at each
price, holding constant all
other influences on buying
plans.
• A demand curve graphs the
quantity demanded at each
price holding constant all other
influences on buying plans.
• The demand curve can be
interpreted as a willingness to
pay curve.
• It tells us the highest price that
people are willing to pay for a
given quantity of the good.
Price/unit
p
D
q
Number
of units
Movements along the Demand Curve
• A change in the price
of the good in
question, all else
remaining the same:
– Is shown as a
movement along the
demand curve.
– And as a change in the
quantity demanded in
the horizontal axis..
Price/unit
A
PA
B
PB
D
QA
QB
Number
of units
Shifts of the Demand
• The demand curve shifts in
response to a change in
any influence, other than
own-price.
• Consumers’ incomes [+,-],
prices of substitutes [+],
prices of complements [-],
future expectations [+],
number of consumers [+]
Price/unit
D2
D1
Number
of units
The trickiest effect is from income: Demand increases with income
for normal goods [+], and demand decreases with income rising
for inferior goods [-]
The Selling Decision
• The quantity of MP3
Players that firms plan to
sell depends on:
– The price of a MP3 Player
– The prices of the factors of
production used to make
MP3 Players
– The prices of related goods
(such as tapes, portable CD
players, and CDs)
– Expected future prices
– The number of suppliers
– Technology
– Knowledge
– Institutional and Cultural
factors
The “law of supply” describes
how these factors influence
supply
Law of Supply
• Other things remaining the
same, the higher the price of a
good, the larger the quantity
supplied of that good.
• Why? If the quantity produced
of a good increases, the
opportunity of producing the
good also rises due to the law
of diminishing returns.
• Thus, firms are only willing to
produce and sell more of a
good if the price they get for
the additional units covers the
opportunity costs of producing
and selling the units, per the
marginal principle..
Price/unit
Number
of units
Law of Supply
• The law of supply can be
illustrated by a supply schedule
or a supply curve.
• A supply schedule lists the
quantities supplied at each price,
holding constant all other
influences on selling plans.
• A supply schedule graphs the
quantities supplied at each
different price, ceteris paribus.
• The supply curve can be
interpreted as the lower price
limits to the willingness to sell
by producers.
• It provides us with the lowest
price sellers will accept to sell a
unit of commodity.
Price/unit
S
p
q
Number
of units
Movements along the Supply Curve
• A movement along the
supply curve describes
how a change in the
price of a good, with
everything else
remaining the same,
affecting the quantity
supplied.
• If the price of a good
rises from PA to PB, then
the quantity supplied
would also rise from QA
to QB (and viceversa)
Price/unit
B
PB
S
A
PA
QA
QB
Number
of units
Change (Shift) of Supply Curve
• The key influences on a firm’s
selling plans are:
– Number of firms that produce
a good [+]
– Prices of factors of production
[-]
– Technology [+]
– Prices of substitute goods [+]
– Prices of complements [-]
– Future expectations [+]
• When any of these factors
change, there is a change in
supply—the curve shifts.
• A change in supply is shown by a
new supply schedule or by a new
supply curve, i.e. a shift in the
supply curve.
Price/unit
S1
S2
Number
of units
Price Determination
• Price as a regulator
• Equilibrium (equilibrium price and
equilibrium quantity)
Price as a regulator
• The price of a good regulates the quantities demanded
and supplied.
• The higher the price of a good, other things remaining
the same, the smaller the quantity demanded and the
greater the quantity supplied for that good.
• The lower the price of a good, other things remaining the
same, the greater is the quantity demanded and the
smaller is the quantity supplied for that good.
• If the price is too high, there is a surplus of goods and if
the price is too low, there is a shortage of goods.
Price as a regulator
• If there is a shortage of a good, the price rises,
and if there is a surplus of a good, the price falls.
• When there is neither a shortage nor a surplus
of a good, the quantity demanded equals the
quantity supplied and the price does not change.
• This price is then the equilibrium price
representing the quantity demanded and
supplied. The equilibrium quantity is the
quantity that is bought and sold.
Equilibrium
• You can describe changes in prices and
quantities by studying the effects of:
– A change in demand
– A change in supply
– A change in both demand and supply
Effects on Equilibrium from Change in Demand
• A change in the demand for MP3s can result from a
change in any of the following:
– The price of a substitute for a Walkman, such as a portable CD
player
– The price of a complement to a Walkman, such as an audio tape
– Income
– Relevant population
– Tastes/Preferences of consumers
• If demand increases, both the price and quantity
increase (U to Z on next graph).
• If demand decreases, both the price and the quantity
decrease (U to T on next graph).
Effects on Equilibrium from Change in Demand
Price
S
D1 to D2:
•Price of a substitute rises
•Price of a complement falls
•Consumer income increases
•Good becomes more appealing
Z
P3
U
P2
P1
T
D2
D1
D0
Y2
Y6 Y3
D1 to D0:
•Price of a substitute falls
•Price of a complement rises
•Consumer income decreases
•Good becomes less appealing
Quantity
Effects on Equilibrium from Change in Supply
• A change in the supply for Walkmans can result
from a change in any of the following:
– The price of a factor of production, such as the wage
rate of the labor that produces Walkmans
– The price of a substitute in production to Walkmans,
such as a car tape deck
– The number of firms that make Walkmans
– The technology used to produce Walkmans
• If supply increases, the price falls and quantity
increases (See U to Y on next graph).
• If supply decreases, the price rises and the
quantity decreases (See U to X on next graph).
Effects on Equilibrium from Change in Supply
S2
Price
S1
S0
X
P3
U
S1 to S0:
•Price of an input falls
•Price of a substitute increases
•# of competitors increases
•Technology increases
input productivity
P2
Y
P1
D
Y1
Y6
Y4
S1 to S2:
•Price of an input rises
•Price of a substitute falls
•# of competitors decreases
Quantity
Equilibrium Changes
• If both demand and supply increase, the quantity
increases but the price can rise, fall, or remain
unchanged. (U to Z, Y or V)
• If both demand and supply decrease, the
quantity decreases but the price can rise, fall, or
remain unchanged. (U to T, X or W)
• If demand increases and supply decreases, the
price rises but the quantity can increase,
decrease, or remain unchanged. (U to X, Z or S)
• If demand decreases and supply increases, the
price falls but the quantity can increase,
decrease, or remain unchanged. (U to T, Y or R)
Equilibrium Changes
S2
Price
S1
S
S0
P4
Z
X
P3
P2
W
U
V
T
P1
Y
D2
R
P0
D1
D0
Y0
Y1
Y2
Y6
Y3
Y4
Y5
Quantity