Transcript IMI611S 2015-Intermediate Micro 2

Chapter 2
Supply and
Demand
Topics
1.
2.
3.
4.
5.
6.
2-2
Demand.
Supply.
Market Equilibrium.
Shocking the Equilibrium.
Effects of Government Interventions.
When to Use the Supply-and-Demand
Model.
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Demand: Determinants of Demand
• The following factors determine the
demand for a good:
 Price of the good
 Tastes
 Information
 Prices of other goods
• Complements and substitutes
 Income
 Government rules and regulations
 Other factors
2-3
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Demand: The Demand Curve
• Quantity demanded - the amount of a
good that consumers are willing to buy at
a given price, holding constant the other
factors that influence purchases.
• Demand curve - the quantity demanded
at each possible price, holding constant
the other factors that influence purchases
2-4
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p, $ per kg
Figure 2.1 A Demand Curve
14.30
Demand curve for pork, D1
Law of Demand
consumers demand more
of a good the lower its
price, holding constant all
other factors that
influence consumption
4.30
3.30
2.30
0
200 220 240
286
Q, Million kg of pork per year
2-5
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p, $ per kg
Figure 2.2 A Shift of the
Demand Curve
Effect of a 60¢ increase in the price of beef
3.30
D2
D1
0
2-6
176
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220
232
Q, Million kg of pork per year
The Demand Function
• The processed pork demand function is:
Q = D(p, pb, pc, Y)
 where Q is the quantity of pork demanded
 p is the price of pork (dollars per kg)
 pb is the price of beef (dollars per kg)
 pc is the price of chicken (dollars per kg)
 Y is the income of consumers (thousand
dollars)
2-7
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From the Demand Function to the
Demand Curve
•
Estimated demand function for pork:
Q = 171−20p + 20pb + 3pc + 2Y
•
Using the values pb = 4, pc = 3.33 and Y =
12.5, we have
Q = 286−20p

2-8
which is the linear demand function for pork.
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From the Demand Function to the
Demand Curve (cont.)
p, $ per kg
Q = 286−20p
14.30
Demand curve for pork, D1
If
pp =
$3.30 then,
If
decreases
by $1by
Ifp pincreases
= 0, then
InIfgeneral,
Q = 220
(to $2.30) then,
$1
(to
$4.30)
Q
=
286
DQQ
=
-20
D
p
= 240
then,
= slope D p
Q = 200
4.30
3.30
2.30
0
2-9
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200 220 240
286
Q, Million kg of pork per year
Solved Problem 2.1
• How much would the price have to fall for
consumers to be willing to buy 1 million
more kg of pork per year?
2 - 10
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Solved Problem 2.1
1. Express the price that consumers are
willing to pay as a function of quantity.
Q = 286−20p
20p = 286 - Q
p = 14.30 − 0.05Q
2 - 11
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Solved Problem 2.1
2. Use the inverse demand curve to determine
how much the price must change for
consumers to buy 1 million more kg of pork
per year.
Δp = p2 − p1
= (14.30 − 0.05Q2) − (14.30 − 0.05Q1)
= –0.05(Q2 − Q1)
= –0.05ΔQ.

2 - 12
The change in quantity is ΔQ = Q2 − Q1 = (Q1 +
1)−Q1 = 1, so the change in price is Δp = –0.05.
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Summing Demand Curves
• The total demand shows the total quantity
demanded at each price
• The total quantity demanded at a given
price is the sum of the quantity each
consumer demands at that price
• Q = Q1 + Q2 = D1(p) + D2(p)
2 - 13
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Application Aggregating the Demand
for Broadband Service
2 - 14
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Supply: Determinants of Supply
• The following factors determine the supply
for a good:
 Price of the good
 Costs
 Government rules and regulations
2 - 15
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Supply: The Supply Curve
• Quantity supplied - the amount of a
good that firms want to sell at a given
price, holding constant other factors that
influence firms’ supply decisions, such as
costs and government actions
• Supply curve - the quantity supplied at
each possible price, holding constant the
other factors that influence firms’ supply
decisions
2 - 16
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p, $ per kg
Figure 2.3 A Supply Curve
An increase in the price…
Supply cu rve, S1
5.30
3.30
causes a movement
along the curve….
0
176
220
and a decrease in the
quantity supplied….
2 - 17
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300
Q, Million kg of pork per year
p, $ per kg
Figure 2.4 A Shift of a Supply Curve
A $0.25 increase in
the price of hogs…..
shifts the supply
curve to the left
S2
S1
3.30
reducing the
quantity supplied at
the previous price.
0
2 - 18
176
205
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220
Q, Million kg of po rk per year
The Supply Function
• The processed pork supply function is:
Q = S(p, ph)
 where Q is the quantity of pork supplied
 p is the price of pork (dollars per kg)
 ph is the price of a hog (dollars per kg)
2 - 19
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From the Supply Function to the Supply
Curve
•
Estimated demand function for pork:
Q = 178 + 40p−60ph
•
Using the values ph = $1.50 per kg
Q = 88 + 40p.
•
2 - 20
What happens to the quantity supplied if the
price of processed pork increases by Δp =
p2−p1?
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Summing Supply Curves
• The total supply curve shows the total
quantity produced by all suppliers at each
price
• Horizontal sum of each producer’s supply
curve
 Sum of all quantities supplied at a given price
2 - 21
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Figure 2.5 Total Supply: The Sum of
Domestic and Foreign Supply
2 - 22
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Solved Problem 2.2
• How does a quota set by the United
States on foreign steel imports of Q affect
the total American supply curve for steel
given the domestic supply, Sd in panel a
of the graph, and foreign supply, Sf in
panel b?
2 - 23
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Solved Problem 2.2
2 - 24
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Market Equilibrium
• Equilibrium - a situation in which no one
wants to change his or her behavior
 equilibrium price is the price at which
consumers can buy as much as they want
and sellers can sell as much as they want
 equilibrium quantity is the quantity bought
and sold at the equilibrium price
2 - 25
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Market Equilibrium (cont.)
• Excess demand the amount by which the
quantity demanded exceeds the quantity
supplied at a specified price.
• Excess supply the amount by which the
quantity supplied is greater than the
quantity demanded at a specified price
2 - 26
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Figure 2.6 Market Equilibrium
p, $ per kg
Above the
equilibrium price….
Market equilibrium point!
Excess supply = 39
S
3.95
e
3.30
2.65
Excess demand = 39
D
Below the
equilibrium
price….
is below the
quantity
demanded
0
176
the quantity supplied….
2 - 27
194
207
220
the quantity demanded….
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is below the
quantity supplied
233
246
Q, Million kg of por k per year
Using Math to Determine the Equilibrium
• Demand: Qd = 286 − 20p
• Supply: Qs = 88 + 40p
• Equilibrium:
Qd = Qs
286 − 20p = 88 + 40p
60p = 198
P = $3.30
Q = 286 – 20(3.3) = 220
2 - 28
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Equilibrium: Practice Problem
• The demand function for a good is
Q = a−bp, and the supply function is
Q = c + ep, where a, b, c, and e are
positive constants. Solve for the
equilibrium price and quantity in terms
of these four constants.
2 - 29
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Qd=Qs
a-bp = c+ep
a-c = ep+bp
p(e+b) = a-c
p = (a-c)/(e+b)
2 - 30
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Shocking the Equilibrium
The equilibrium changes only if a shock
occurs that shifts the demand curve or the
supply curve. These curves shift if one of
the variables we were holding constant
changes.
2 - 31
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p, $ per kg
Figure 2.7a Equilibrium Effects of a
Shift of a Demand Curve
A $0.60 increase in the price
of beef shifts demand outward
Which puts an upward
pressure on the price to
a new equilibrium.
e2
3.50
3.30
S
D2
e1
D1
At the original price
there is now excess
demand….
Excess demand = 12
0
176
220
228 232
Q, Million kg of pork per year
2 - 32
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p, $ per kg
Figure 2.7b Equilibrium Effects of a
Shift of a Supply Curve
A $0.25 increase in the price of hogs
shifts the supply curve to the left
Which puts an upward
pressure on the price to a
new equilibrium.
S2
S1
e2
3.55
3.30
e1
D
At the original
price there is now
excess demand….
Excess demand = 15
0
176
205
215 220
Q, Million kg of pork per year
2 - 33
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Solved Problem 2.3
• Mathematically, how does the equilibrium
price of pork vary as the price of hogs
changes if the variables that affect
demand are held constant at their typical
values?
2 - 34
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Solved Problem 2.3
1. Solve for the equilibrium price of pork in
terms of the price of hogs.
Qd = 286−20p
Qs = 178 + 40p−60ph
286−20p = 178 + 40p−60ph
-60p = -108 – 60ph
-p = -1.8 – ph
2. Show how the equilibrium price of pork varies
with the price of hogs.

2 - 35
Since Δp = Δph, any increase in the price of hogs
causes an equal increase in the price of
processed pork.
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Equilibrium Effects of Government
Interventions
• Government action can cause
 a shift in the supply curve, the demand curve,
or both
 the quantity demanded to be different from
quantity supplied
2 - 36
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Equilibrium Effects of Government
Interventions (cont.)
• Policies that shift supply curves
 Licensing laws, quotas
• Policies that cause demand to differ from
supply
 Price ceilings, price floors
2 - 37
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p, Price of rice per pound
Figure 2.8 A Ban on Rice Imports
Raises the Price in Japan
–
A ban on rice imports
shifts the total supply
of rice in Japan…
S (ban)
p2
S (no ban)
e2
p1
which causes the
equilibrium to change
and the price to increase.
e1
D
Q2
2 - 38
Q1
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Q, Tons of rice per year
Solved Problem 2.4
• What is the effect of a United States quota
on sugar of Q on the equilibrium in the
U.S. sugar market? Hint: The answer
depends on whether the quota binds (is
low enough to affect the equilibrium).
2 - 39
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Solved Problem 2.4
2 - 40
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p, $ per gallon
Figure 2.9 Price Ceiling on Gasoline
S1
Supply shifts to the
left….
but gas stations must
continue to charge a
price of p1…..
e1
–
p1 = p
Price ceiling
D
which creates excess
demand.
2 - 41
Q1= Qd
Qs
Excess demand
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Q, Gallons of gasoline per month
Solved Problem 2.5
• Suppose that there is a single labor market in
which everyone is paid the same wage. If a
binding minimum wage, w, is imposed, what
happens to the equilibrium in this market?
• Answer:
 Show the initial equilibrium before the minimum wage
is imposed.
 Draw a horizontal line at the minimum wage, and
show how the market equilibrium changes.
2 - 42
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Figure 2.10 Minimum Wage
2 - 43
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Why Supply Need Not Equal Demand
• The quantity that firms want to sell and
the quantity that consumers want to buy
at a given price need not equal the actual
quantity that is bought and sold.
 Example: price ceiling.
2 - 44
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Perfectly Competitive Markets
• Everyone is a price taker.
• Firms sell identical products.
• Everyone has full information about the
price and quality of goods.
• Costs of trading are low.
2 - 45
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Figure 2A.1 Regression
2 - 46
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