Transcript Document

Lecture 3
Supply and Demand
Theory of Supply
• A thought experiment with the following assumptions:
– All apartments are identical
– Each apartment has a different owner
– There are 10 owners interested in selling their
apartments
– Owners are intelligent, well-informed people; they
weigh the costs and benefits of their actions
– Owners care only about their own monetary interests
(self-interested rational behavior)
– They are only interested in price, but they have
different ideas about what is an acceptable price
Theory of Supply
• Supply schedule
A table showing the quantity of a good or service that would
be offered by the sellers at each possible price
• Supply curve
Shows the same information in a graph
A Supply Schedule for Apartments
Price ($1000s)
100 99 98 97 96 95 94 93 92 91 90
Quantity of Apartments Supplied 10 9 8 7 6 5 4 3 2 1 0
A Supply Schedule for Apartments
Price ($1000s)
100 99 98 97 96 95 94 93 92 91 90
Quantity of Apartments Supplied 10 9 8 7 6 5 4 3 2 1 0
Theory of Supply
• Change in quantity supplied
Movement along a supply curve in response to a price change
• Change in supply
A shift of the supply curve in response to a determinant other
than price
• Ceteris paribus
«All else constant» or «other things equal»
• Market supply
The supply from all sellers in the market
• Individual supply
The supply from one individual seller
When does the supply curve shift
to the right (outward)?
When does the supply curve shift
to the left (inward)?
100
S2
S1
Price of Belts ($)
80
60
40
20
0
10
20
30
Quantity of Belts (number per month)
40
50
Nonprice determinants of supply
1.
2.
3.
4.
Available technology of production
Resource prices
The number of producers
Producer expectations about future prices and
technology
5. Prices of related goods and services
Theory of Demand
• Assumptions:
– 10 potential buyers for these apartments
– They are well-informed
– They make decisions based on rational selfinterest
– They regard $100,000 as too high, but some of
them are willing to buy the apartments as price
falls
Theory of Demand
• Demand schedule
A table showing the quantity of a good or service that
buyers are willing to purchase at each possible price
• Demand curve
Shows the same information in a graph
A Demand Schedule for Apartments
Price ($1000s)
Quantity of Apartments Demanded
100 99 98 97 96 95 94 93 92 91
0
1 2 3 4 5 6 7 8 9
90
10
A Demand Schedule for Apartments
Price ($1000s)
Quantity of Apartments Demanded
100 99 98 97 96 95 94 93 92 91
0
1 2 3 4 5 6 7 8 9
90
10
Theory of Demand
• Change in quantity demanded
Movement along a demand curve in response to a price change
• Change in demand
A shift of the demand curve in response to some determinant other
than price
• Effective demand
The desire for a product combined with a purchasing ability on side
of the consumer
• Market demand
The demand from all buyers in the market
• Individual demand
The demand from one individual buyer
• Derived demand
Demand for an input based on demand for the output it will help to
produce
When does the
demand curve shift to
the right (outward)?
When does the
demand curve shift to
the left (inward)?
50
Price of Tables ($)
45
40
35
30
D1
25
D2
0
5
10
15
20
Quantity of Tables (number per month)
25
Nonprice determinants of demand
1. Tastes and preferences
2. Incomes and/or available assets
3. Availability and prices of related goods and
services
4. Consumer expectations about future prices and
incomes
5. The number of consumers
The theory of market adjustment
Combined Supply and Demand Schedules for Apartments
Price ($1000s)
Quantity of Apartments Supplied
Quantity of Apartments Demanded
100 99 98 97 96 95 94 93 92 91
10 9 8 7 6 5 4 3 2 1
0
1 2 3 4 5 6 7 8 9
90
0
10
Market adjustment
• Surplus
A situation in which the quantity that sellers wish to sell at the
stated price is greater than the quantity that buyers will buy at
that price
• Shortage
A situation in which the quantity that buyers wish to buy at the
stated price is greater than the quantity that sellers are willing
to sell at that price
• Equilibrium
A situation that has reached a resting point, where there are no
forces that create change
Market adjustment
• Market-clearing equilibrium
A situation in which the quantity supplied is equal to the
quantity demanded
• Theory of market adjustment
The theory that market forces will tend to make price and
quantity to move toward the equilibrium point
• Market disequilibrium
A situation of either shortage or surplus
Market clearing equilibrium
Market adjustment
• Static model
A model that ignores time, implicitly assuming that all
adjustments occur anonymously
• Dynamic model
A model that takes into account the passage of time
required for changes to occur
Shifts in Supply
Supply and Demand Schedules After an Increase in Supply (Only)
Price ($1000s)
Quantity of Apartments Supplied
Quantity of Apartments Demanded
100 99 98 97 96 95 94 93 92 91
12 11 10 9 8 7 6 5 4 3
0
1 2 3 4 5 6 7 8 9
90
2
10
Shifts in Demand
Supply and Demand Schedules After an Increase in Demand (Only)
Price ($1000s)
Quantity of Apartments Supplied
Quantity of Apartments Demanded
100 99 98 97 96 95 94 93 92 91
10 9 8 7 6 5 4 3 2 1
4
5 6 7 8 9 10 11 12 13
90
0
14
Summary of the Effects of Shifts in Supply and Demand
Effect on
Equilibrium
Price
Effect on
Equilibrium
Quantity
Increase in
Supply
fall
rise
Decrease in
Supply
rise
fall
Increase in
Demand
rise
rise
Decrease in
Demand
fall
fall
Price
1981
2006
1979
1974
1978
1973
1986
1996
1995
2001
Quantity
Year
Quantity (millions of barrels per day)
Price (2000 dollars per barrel)
Explaining real-world prices and
quantities
1981
2006
Price (2000 dollars per barrel)
1980
1979
1985
2004
1978
1996
1969
1986
1995
Quantity (millions of barrels per day)
Can the empirical data from the year 2006 be
represented as an equilibrium in the oil market?
Or is it a disequilibrium?
Oil market: 1979-1981
Oil market: 1995-1996
Price floor
A law or
agreement that
puts a lower
limit on prices
Price ceiling
A law or
agreement that
puts a upper
limit on prices