Transcript Powerpoint Chapter 17 - Demand, Supply, and Equilibrium

Chapter 17
Demand, Supply, and Equilibrium
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-1
Chapter Objectives
•
•
•
•
•
•
Individual and market demand
Changes in demand
Individual and market supply
Changes in supply
Graphing supply and demand curves
Finding equilibrium price and quantity
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-2
Demand Defined
• Demand is the schedule of quantities of a
good or service that people will purchase at
different prices
– The law of demand: when the price of a good
is lowered, more of it is demanded; When it is
raised, less is demanded
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-3
Individual and Market
Demand
• The law of demand holds for both
individuals and markets
• Individual demand is the schedule of
quantities that a person would purchase
at different prices
• Market demand is the schedule of
quantities that everyone in the market
would buy at different prices
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-4
Table 1 Hypothetical Individual Demand
and Market Demand Schedules
Quantity demanded by Venus
30
Price QD
$30
0
P 24
25
2
r
20
3
15
3
10
4
c
5
5
e 6
18
i
12
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-5
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Table 1 Hypothetical Individual Demand
and Market Demand Schedules
Quantity demanded by Martina
30
Price QD
$30
1
P 24
25
1
r
20
2
15
3
10
5
c
5
6
e 6
18
i
12
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-6
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Table 1 Hypothetical Individual Demand and
Market Demand Schedules
Quantity demanded by Serena
30
Price QD
$30
2
P 24
25
3
r
20
5
15
6
10
7
c
5
7
e 6
18
i
12
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-7
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Table 1 Hypothetical Individual Demand
and Market Demand Schedules
Quantity demanded by Lindsay
30
Price QD
$30
1
P 24
25
3
r
20
4
15
6
10
7
c
5
8
e 6
18
i
12
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-8
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Venus Martina Serena Lindsay Total
$30
0
1
2
1
4
30
P 24
r
18
i
c
12
e 6
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-9
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Venus Martina Serena Lindsay Total
$30
0
1
2
1
4
$25
2
1
3
3
9
30
P 24
r
18
i
c
12
e 6
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-10
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Venus Martina Serena Lindsay Total
$30
0
1
2
1
4
$25
2
1
3
3
9
$20
3
2
5
4
14
30
P 24
r
18
i
c
12
e 6
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-11
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Venus Martina Serena Lindsay Total
$30
0
1
2
1
4
$25
2
1
3
3
9
$20
3
2
5
4
14
$15
3
3
6
6
18
30
P 24
r
18
i
c
12
e 6
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-12
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Venus
$30
0
$25
2
$20
3
$15
3
$10
4
Martina
1
1
2
3
5
Serena
2
3
5
6
7
Lindsay Total
1
4
3
9
4
14
6
18
7
23
30
P 24
r
18
i
c
12
e 6
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-13
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Venus
$30
0
$25
2
$20
3
$15
3
$10
4
$ 5
5
Martina
1
1
2
3
5
6
Serena
2
3
5
6
7
7
Lindsay Total
1
4
3
9
4
14
6
18
7
23
8
26
30
P 24
r
18
i
c
12
e 6
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-14
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Venus
$30
0
$25
2
$20
3
$15
3
$10
4
$ 5
5
Martina
1
1
2
3
5
6
Serena
2
3
5
6
7
7
Lindsay Total
1
4
3
9
4
14
6
18
7
23
8
26
Market
Demand
30
P 24
r
18
i
c
12
e 6
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Quantity
17-15
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
What Is the Market?
• The market is where people buy and sell
– Local markets
• Gasoline, groceries
– Regional
• Automobiles
– National or international
• Computers
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17-16
Changes in Demand
A change in demand would be a change in the schedule
Price QD(1) QD(2)
$30
4
5
$25
9
11
$20
14
18
$15
18
28
$10
23
38
$ 5
26
50
30
25
20
15
10
D1
D2
5
0
10
20
30
40
50
Quantity
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17-17
An Increase in Demand
An increase in demand is an increase in the quantity
people are willing to purchase at all prices
Price QD(1) QD(2)
$30
4
5
$25
9
11
$20
14
18
$15
18
28
$10
23
38
$ 5
26
50
30
25
20
15
10
The demand
curve shifts to the
right
D1
D2
5
0
10
20
30
40
50
Quantity
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17-18
An Increase in Demand
A decrease in demand means people are willing to
purchase less at all prices
Price QD(1) QD(2)
$30
4
5
$25
9
11
$20
14
18
$15
18
28
$10
23
38
$ 5
26
50
30
25
20
15
10
The demand
curve shifts to the
left
D1
D2
5
0
10
20
30
40
50
Quantity
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17-19
Changes in Demand
A and B are on the same line, therefore, they are on the same
schedule. If they are on the same schedule, there can be no change
in demand
C
A
B
D1
D2
Move from point A to point B
A change in quantity demanded
17-20
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Changes in Demand
Movement from A to B is simply a change in quantity
demanded in response to a change in price
C
A
B
D1
D2
Move from point A to point B
A change in quantity demanded
17-21
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Changes in Demand
There is an increase in demand because people are willing to
buy more at all prices on G’s curve which is to the right of F’s
curve
E
G
I
F
H
Move from point F to point G
An increase in demand
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17-22
Changes in Demand
There is a decrease in demand because people are willing to
buy less at all prices on H’s curve which is to the left of G’s
curve
E
G
I
F
H
Move from point G to point H
A decrease in demand
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17-23
Changes in Demand
As long as we remain on the same curve, there is no change in
demand
E
G
I
F
H
Move from point H to point I A change in quantity in demanded
17-24
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Changes in Demand
As long as we remain on the same curve, there is no change in
demand
L
J
G
K
M
N
Move from point J to point K A change in quantity in demanded
17-25
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Changes in Demand
From K to L is an increase in demand because L’s demand
curve is entirely to the right of K’s curve
L
J
G
K
M
N
Move from point K to point L
An increase in demand
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17-26
Changes in Demand
From L to M is a decrease in demand because M’s demand
curve is entirely to the left of L’s curve
L
J
G
K
M
N
Move from point L to point M
A decrease in demand
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-27
Changes in Demand
We don’t know on which of an infinite number of possible
demand curves N is situated, therefore, the most we can say is
that there is a change in demand
L
J
G
K
M
N
Move from point M to point N
A change in demand
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17-28
What Causes Changes in
Demand?
• Changes in income
• Changes in the price of related goods
and services
• Changes in taste and preferences
• Changes in price expectations
• Changes in population
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17-29
Changes in Income
• The demand for NORMAL goods varies
directly with income
– When income goes up people buy more
therefore demand goes up
• The demand for INFERIOR goods varies
inversely with income
– When income goes up people buy less,
therefore demand goes down
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17-30
Changes in the Price of Related
Goods and Services
• Goods and services are related in
two ways
– They can be used as a substitute for the
other
• Hot dogs and hamburgers; Tuna and
salmon
– They can complement the other
• Videos & VCRs; Gasoline & cars, tires
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17-31
Prices of Substitute Goods
• Directly related
– If the price of hamburgers goes up
– The price of hot dogs would also go up
• As the price of hamburgers goes up
people will buy less hamburgers and more
hot dogs. This increases the demand for
hot dogs . . . thus increasing the price of
hot dogs
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-32
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17-33
Prices of Complementary
Goods
• Inversely related
– Prices of weenies go up . . . the price of
hot dog buns goes down
• The price of weenies goes up . . . people
buy less weenies. If people buy less
weenies, they will also buy less hot dog
buns
• This decreases the demand for hot dog
buns and lowers the price of hotdog buns
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-34
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17-35
Changes in Taste and
Preferences
• Taste and preferences tend to change
over time
– Smaller cars and less fattening foods
– Preferring designer clothing and brand
name sneakers
– Fewer people are smoking (has been helped
by a campaign to reduce smoking)
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17-36
Changes in Price Expectations
• If people expect the price of something to
rise, they rush out to stock up before it
does
– This increases the demand
• If people expect the price of something to
fall, they will hold off buying it
– This decreases the demand
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-37
Changes in Population
• As the nation’s population increases, the
demand for particular goods and services
increase
– General growth increases the demand for food,
housing, autos, etc.
• The changing age distribution affects demand
– Next three decades there will be a higher demand
for retirement homes, nursing homes, wheel chairs,
bifocal glasses, etc.
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-38
Supply Defined
• Supply is a schedule of quantities of a
good or service that people are willing to
sell at various prices
– As prices rise, people are willing to sell more
– Thus, there is a positive or direct
relationship between price and quantity
• Price rises . . . quantity supplied rises
• Prices declines . . . quantity supplied declines
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-39
Individual and Market Supply
Hypothetical supply of American Cars, 2001 (in thousands)
Price
GM
Ford
Daimler
Chrysler
Japanese
Owned Firms
$20,000
5311
2356
1245
535
9,447
18,000
4617
1984
991
384
7,976
16,000
4002
1584
762
270
6,618
14,000
3623
1216
601
208
5,648
12,000
3190
996
491
181
4,858
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Total
17-40
Hypothetical Supply of American Cars, 2001
20,000
18,000
Market supply
16,000
14,000
12,000
456789
Output (in millions)
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-41
Changes in Supply
Move from E to F
A change in quantity supplied
G
F
E
H
I
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17-42
Changes in Supply
Move from F to G
An increase in supply
G
F
E
H
I
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17-43
Changes in Supply
Move from G to H
A change in supply
G
F
E
H
I
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17-44
Changes in Supply
Move from H to I
A change in quantity supplied
G
F
E
H
I
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17-45
Changes in Supply
An increase in supply
Move from J to K
M
L
N
J
K
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17-56
17-45
Changes in Supply
A change in quantity supplied
Move from K to L
M
L
N
J
K
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17-47
Changes in Supply
A decrease in supply
Move from L to M
M
L
N
J
K
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17-48
Changes in Supply
A change in supply
Move from M to N
M
L
N
J
K
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17-49
What Causes Changes in Supply?
• The main reason for a change in supply is
changes in the cost of production
– cost of raw materials, labor, capital,
insurance, interest, rent, wages, etc.
– when these cost go up . . . supply decreases
– this causes the price to increase
S2
S1
P2
P1
D
Q2
Q1
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-50
What Causes Changes in Supply
• Technological advance
– A technological improvement will increase
supply
– Companies are able to produce more at reduced
cost cost with an improvement in quality
– A supply increase will cause the price to
decline
S2
S1
P2
P1
D
Q2
Q1
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-51
What Causes Changes in Supply
• Prices of other goods
– Changes in the prices of other goods can
shift the supply curve for a product
• If the price of corn rises, a farmer may cut back
on the production of wheat
• If the price of hair transplants declines, some
dermatologist may do more facelifts
S2
S1
P2
P1
D
Q2
Q1
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-52
What Causes Changes in Supply
• Change in the Number of Suppliers
– When new firms enter an industry, supply
rises
– When firms leave an industry, Supply falls
S2
S1
P2
P1
D
Q2
Q1
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-53
What Causes Changes in Supply
– Changes in taxes
• The basic effect of taxes is to reduce supply
• The effect of taxes on supply will be covered later in
the next chapter
S2
S1
P2
P1
D
Q2
Q1
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-54
What Causes Changes in Supply
– Expectation of price increases
• Suppliers will hold current production off the
market in anticipation of the higher prices
• The effect is that of reducing supply
S2
S1
P2
P1
D
Q2
Q1
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-55
What Causes Changes in Supply
– Expectation of price decreases
• Suppliers will try to sell all they have before the
price drops
• The effect is that of increasing supply
S2
S1
P2
P1
D
Q2
Q1
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-56
Graphing the Demand and
Supply Curves
Hypothetical Demand Schedule
Price
Quantity Demanded(QD)
$10
1
$ 9
2
$ 8
4
$ 7
7
$ 6
12
10
9
8
7
D
6
2
4
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
6
8
Quantity
10
12
14
17-57
Graphing the Demand and
Supply Curves
10
Hypothetical Supply Schedule
Price
Quantity Supplied (QS)
$10
14
$ 9
12
$ 8
9
$ 7
5
$ 6
1
S
9
8
7
6
2
4
6
8
10
12
14
Quantity
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-58
Graphing the Demand and
Supply Curves
Hypothetical Demand and Supply
Schedules
Price
QD
QS
$10
1
14
$ 9
2
12
$ 8
4
9
$ 7
7
5
$ 6
12
1
10
S
9
8
7
D
6
2
4
6
8
Quantity
10
12
14
The equilibrium point is where the demand and supply curves cross
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-59
Graphing the Demand and
Supply Curves
Hypothetical Demand and Supply
Schedules
Price
QD
QS
$10
1
14
$ 9
2
12
$ 8
4
9
$ 7
7
5
$ 6
12
1
10
S
9
8
7
D
6
Equilibrium price is about $7.20
2
4
6
8
Quantity
10
12
14
Equilibrium quantity is 6
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-60
Graphing the Demand and
Supply Curves
Above equilibrium price there
are surpluses
Price always tends
toward equilibrium.
If price is above
equilibrium, sellers
will lower prices
until the price
declines to the
equilibrium price
10
Price
9
Price
8
Price
S
7
D
6
2
4
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
6
8
Quantity
10
12
14
17-61
Graphing the Demand and
Supply Curves
Below equilibrium price there
are shortages
10
S
9
Price always tends
toward equilibrium.
If price is below
equilibrium, buyers
will bid prices up
until the price rises
to the equilibrium
price
8
Price
Price
Price
7
D
6
2
4
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
6
8
Quantity
10
12
14
17-62
Finding Equilibrium Price and Quantity
If we draw our graphs accurately, we can usually find equilibrium
price and quantity in a couple of seconds, especially if we’ve used
graph paper. But sometime we need to do further analysis to find
really accurate equilibrium prices and quantities
Hypothetical Demand and Supply Schedule
Price
$15
$14
$13
$12
$11
Quantity Demanded
2
4
7
12
20
Quantity Supplied
19
17
12
6
3
How much is the equilibrium price?
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17-63
Finding Equilibrium Price and Quantity
Hypothetical Demand and Supply Schedule
Price
$15
$14
$13
$12
$11
Quantity Demanded
2
4
7
12
20
Quantity Supplied
19
17
12
6
3
How much is the equilibrium price?
First we add a “Units apart” column
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17-64
Finding Equilibrium Price and Quantity
Hypothetical Demand and Supply Schedule
Price
$15
$14
$13
$12
$11
Quantity Demanded
2
4
7
12
20
Units Apart
17
13
5
6
17
Quantity Supplied
19
17
12
6
3
How much is the equilibrium price?
First we add a “Units apart” column
Equilibrium price is closer to $13 than to $12
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-65
Finding Equilibrium Price and Quantity
Hypothetical Demand and Supply Schedule
Price Quantity Demanded Units Apart
$15
2
17
$14
4
13
$13
7
5
$12
12
6
$11
20
17
How much is the equilibrium price?
First we add a “Units apart” column
Quantity Supplied
19
17
12
6
3
Equilibrium price is a little closer to $13 than to $12
Therefore, equilibrium price has to be something greater than $12.50
and less than $13
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-66
Hypothetical Demand and Supply Schedule
Price Quantity Demanded Units Apart
$15
2
17
$14
4
13
$13
7
5
$12
12
6
$11
20
17
How much is the equilibrium quantity?
Quantity Supplied
19
17
12
6
3
Equilibrium quantity demanded is closer to 7 than 12. The midpoint between 12
and 7 is 9.5. Therefore, we know the equilibrium quantity demanded must be
something less than 9.5
Equilibrium quantity supplied is closer to 12 than 6. The midpoint between 12
and 6 is 9. Therefore, we know the equilibrium quantity supplied is something
more than 9.0
The equilibrium quantity has to be between 9.0 and 9.5. Anything between 9.1 and
9.4 would be acceptable. I would split the difference and say 9.2 or 9.3
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-67
Graph of the Previous Demand and Supply Schedule
S
15
14
13
$12.60 plus or
minus .05 is
about the best
you can do
12
D
11
4
8
12
16
20
Quantity
Remember, equilibrium price has to be something greater than
$12.50 and less than $13
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-68
Graph of the Previous Demand and Supply Schedule
S
15
14
13
$12.60 plus or
minus .05 is
about the best
you can do
12
D
11
4
8
12
16
20
Quantity
Remember, the equilibrium quantity has to be between 9.0 and 9.5. Anything
between 9.1 and 9.4 would be acceptable. I would split the difference and say 9.2
or 9.3 In this instance, this technique proved useful.
Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-69
Is This Type of Analysis Necessary?
• It isn’t when you’ve got an equilibrium price or
quantity that is clearly closer to one figure than
to another
– You will be able to spot this when you draw your
graph
• But when the demand and supply curves cross
about halfway between two figures, then you
will need to go back to the original schedule to
figure out more precisely where the equilibrium
point lies
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