Transcript Demand supply - AKM Fahmidul Haque

Basic Concepts in Economics: Theory of
Demand and Supply
Discussant :
Md. Alamgir
Assistant Professor, BIBM
Definition of economics
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Economics, the Science of Scarcity
The science of how individuals and
societies deal with the fact that wants are
greater than the limited resources
available to satisfy those wants.
The study of how individuals and societies
use limited resources to satisfy unlimited
wants.
Fundamental economic problem
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Scarcity.
The condition in which our wants are
greater than the limited resources
available to satisfy those wants.
Individuals and societies must choose
among available alternatives.
Opportunity Costs
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The most highly valued opportunity or
alternative forfeited when a choice is
made.
Economists believe that a change in
opportunity cost can change a person’s
behavior.
The higher the opportunity cost of
doing something, the less likely it will
be done.
Marginal Benefits
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Is additional benefits.
The benefits connected to consuming an
additional unit of a good or undertaking one
more unit of an activity.
Marginal Costs
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Is additional costs.
The costs connected to consuming an
additional unit of a good or undertaking
one more unit of an activity.
Building A Definition of Economics
~ Goods and Bads ~
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Good - Anything from which individuals
receive utility or satisfaction.
Utility - The satisfaction one receives
from a good.
Bad - Anything from which individuals
receive disutility or dissatisfaction.
Disutility - The dissatisfaction one
receives from a bad.
Economic goods, free goods,
and economic bads
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economic good (scarce good) - the
quantity demanded exceeds the
quantity supplied at a zero price.
free good - the quantity supplied
exceeds the quantity demanded at a
zero price.
economic bad - people are willing to
pay to avoid the item
Positive vs. Normative
Economics
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Positive - The study of “what is” in
economic matters.
Cause
Effect
Normative - The study of “what should
be” in economic matters
Judgment and Opinion
Examples?
Microeconomics
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Microeconomics deals with human
behavior and choices as they relate to
relatively small units—an individual, a
business firm, an industry, a single
market.
Macroeconomics
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Macroeconomics deals with human behavior and
choices as they relate to highly aggregate
markets (e.g., the goods and services market)
or the entire economy.
Barter vs. monetary economy
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Barter – goods are traded directly for
other goods
Problems:
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requires double coincidence of wants
high information costs
Monetary economy has lower
transaction and information costs
Relative and nominal prices
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Relative price = price of a good in
terms of another good
Nominal price = price expressed in
terms of the monetary unit
Relative price is a more direct measure
of opportunity cost
Markets
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In a market economy, the price of a
good is determined by the interaction of
demand and supply
Demand
The willingness and ability of buyers to purchase different quantities of a
good at different prices during a specific time period.
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A relationship between price and quantity
demanded in a given time period, ceteris
paribus.
Demand Schedule:The numerical tabulation
of the quantity demanded of a good at
different prices.
A demand schedule is the numerical
representation of the law of demand.
Downward Slopping Demand Curve
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The graphical representation of the
demand schedule and law of demand.
Demand schedule
Demand - Schedule and Graph
Law of demand
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An inverse relationship exists between
the price of a good and the quantity
demanded in a given time period,
ceteris paribus.
Law of Demand
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As the price of a good rises, the quantity
demanded of the good falls, and as the
price of a good falls, the quantity demanded
of the good rises,
ceteris paribus.
Price
Quantity
Ceteris Paribus
A Latin term meaning “all other things
constant” or “nothing else changes.”
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Ceteris paribus is an assumption used to
examine the effect of one influence on an
outcome while holding all other influences
constant.
Change in quantity demanded
vs. change in demand
Change in quantity demanded
Change in demand
Market demand curve
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Market demand is the horizontal summation
of individual consumer demand curves
Determinants of demand
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tastes and preferences
prices of related goods and services
income
number of consumers
expectations of future prices and
income
Tastes and preferences
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Effect of fads:
Prices of related goods
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substitute goods – an increase in the
price of one results in an increase in the
demand for the other.
complementary goods – an increase in
the price of one results in a decrease in
the demand for the other.
Change in the price of a
substitute good
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Price of coffee rises:
Change in the price of a
complementary good
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Price of DVDs rises:
Income and demand: normal goods
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A good is a normal good if an increase in
income results in an increase in the demand
for the good.
Income and demand: inferior goods
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A good is an inferior good if an increase in
income results in a reduction in the demand
for the good.
Demand and the # of buyers
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An increase in the number of buyers results
in an increase in demand.
Expectations
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A higher expected future price will increase
current demand.
A lower expected future price will decrease
current demand.
A higher expected future income will increase
the demand for all normal goods.
A lower expected future income will reduce
the demand for all normal goods.
International effects
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exchange rate – the rate at which one
currency is exchanged for another.
currency appreciation – an increase in
the value of a currency relative to other
currencies.
currency depreciation – a decrease in
the value of a currency relative to other
currencies.
International effects
(continued)
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Domestic currency appreciation causes
domestically produced goods and services to
become more expensive in foreign countries.
An increase in the exchange value of the U.S.
dollar results in a reduction in the demand for
U.S. goods and services.
The demand for U.S. goods and services will
rise if the U.S. dollar depreciates.
Factors Causing a Shift in the Demand
Curve
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Income
Preferences
Prices of substitute goods
Prices of complementary goods
Number of buyers
Expectations of future prices
Supply
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The relationship that exists between the price
of a good and the quantity supplied in a given
time period, ceteris paribus.
The willingness and ability of sellers to
produce and offer to sell different quantities
of a good at different prices during a specific
time period.
Law of Supply
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As the price of a good rises, the quantity
supplied of the good rises, and as the price of a
good falls, the quantity supplied of the good
falls, ceteris paribus.
Price
Quantity
Supply Curve
The graphical representation of the law of
supply, which states that price and quantity
supplied are directly related, ceteris paribus.
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Supply Schedule
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The numerical tabulation of the quantity supplied
of a good at different prices.
A supply schedule is the numerical representation
of the law of supply.
Supply schedule
Change in Quantity Supplied
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A change in quantity supplied refers to
a movement along a supply curve.
The only factor that can directly cause a
change in the quantity supplied of a
good is a change in the price of the
good, or own price.
Law of supply
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A direct relationship exists between the
price of a good and the quantity
supplied in a given time period, ceteris
paribus.
Reason for law of supply
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The law of supply is the
result of the law of
increasing cost.
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As the quantity of a good
produced rises, the marginal
opportunity cost rises.
Sellers will only produce and sell
an additional unit of a good if
the price rises above the
marginal opportunity cost of
producing the additional unit.
Change in supply vs. change
in quantity supplied
Change in supply
Change in quantity supplied
Individual firm and market
supply curves
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The market supply curve is the
horizontal summation of the supply
curves of individual firms. (This is
equivalent to the relationship between
individual and market demand curves.)
Determinants of supply
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the price of resources,
technology and productivity,
the expectations of producers,
the number of producers, and
the prices of related goods and services
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note that this involves a relationship in
production, not in consumption
Price of resources
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As the price of a resource rises, profitability
declines, leading to a reduction in the
quantity supplied at any price.
Technological improvements
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Technological improvements (and any
changes that raise the productivity of labor)
lower production costs and increase
profitability.
Expectations and supply
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An increase in the expected future price
of a good or service results in a
reduction in current supply.
Increase in # of sellers
Prices of other goods
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Firms produce and sell more than one
commodity.
Firms respond to the relative profitability of
the different items that they sell.
The supply decision for a particular good is
affected not only by the good’s own price but
also by the prices of other goods and services
the firm may produce.
International effects
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Firms import raw materials (and often the
final product) from foreign countries. The
cost of these imports varies with the
exchange rate.
When the exchange value of a dollar rises,
the domestic price of imported inputs will fall
and the domestic supply of the final
commodity will increase.
A decline in the exchange value of the dollar
raises the price of imported inputs and
reduce the supply of domestic products that
rely on these inputs.
Factors that Cause the Supply Curve
to Shift
Prices of relevant resources
 Technology
 Number of sellers
 Expectation of future prices
 Taxes and subsidies
 Government restrictions
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Market equilibrium
Surplus and Shortage
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Surplus (Excess Supply) - A condition in which
quantity supplied is greater than quantity
demanded.
Surpluses occur only at prices above equilibrium
price.
Shortage (Excess Demand) - A condition in
which quantity demanded is greater than quantity
supplied.
Shortages occur only at prices below equilibrium
price.
Move to Market Equilibrium
Moving to Market Equilibrium
Equilibrium
Demand and Supply as Equations
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Let’s now look at demand and supply as equations. Here is
a demand equation: Qd = 1,500 − 32P
To see what this equation says, we let price (P ) in the
equation equal $10 and then solve for quantity demanded
Qd. We get Qd = 1,180.
Qd = 1,500 - 32(10) = 1,180
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So this equation says that if price is $10, it follows that
quantity demanded is 1,180 units.
We could find other quantities demanded by plugging in
different dollar amounts for price (P).
Demand and Supply as Equations (Cont.)
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Now here is a supply equation: QS = 1,200 + 43P
To find what quantity supplied (QS) equals at a
particular price, we let $5 equal price (P ) and solve
for quantity supplied. We get 1,415.
QS = 1,200 + 43(5) = 1,415
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Now suppose we want to find equilibrium price and
quantity given our demand and supply equations.
How would we do it?
Demand and Supply as Equations (Cont.)
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First, we know that in equilibrium the quantity
demanded (Qd ) of a good is equal to the quantity
supplied (Qs ), so let’s set the two equations equal
to each other this way:
1,500 -32P = 1,200 + 43P
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Now we can solve for P. We add 32P to both sides of the
equal sign and subtract 1,200 from both sides. We are
left with: 75P = 300 ; It follows then that P = 300/75 or
$4.00.
Demand and Supply as Equations (Cont.)
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Once we know equilibrium price is $4.00, we can
place this value in either the demand or supply
equation to find the equilibrium quantity. Let’s place
it in the demand equation: Qd = 1,500 - 32(4.00) =
1,372
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Just to make sure that 1,372 is also the quantity
supplied, we put the equilibrium price of $4.00 into
theInsupply
equation:
1,200 43(4.00)
= 1,372
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summary,
given QS
our=demand
and supply
equations, equilibrium price is $4.00 and equilibrium
quantity is 1,372.
Consumer Surplus
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CS = Maximum buying price - Price paid
CS = the difference between the maximum
price
a buyer is willing and able to pay for a
good or service and the price actually
paid.
Producer Surplus
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PS = Price received - Minimum Selling Price
PS = the difference between the price sellers receive
for a good and the minimum or lowest price for
which they would have sold the good.
Consumer and Producer Surplus
Total Surplus (TS)
TS = CS + PS
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Total Surplus (TS) is the sum of
consumers’ surplus and producers’
surplus.
Total Surplus
Equilibrium
Utility
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Utility = level of happiness or
satisfaction associated with alternative
choices
utility maximization
Total and marginal utility
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total utility - the level of happiness
derived from consuming the good
marginal utility - the additional utility
that is received when an additional unit
of a good is consumed
Marginal utility
# of slices of pizza total utility
0
0
marginal utility
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1
70
70
2
110
40
3
130
20
4
140
10
5
145
5
6
140
-5
Law of diminishing MU
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law of diminishing marginal utility marginal utility declines as more of a
particular good is consumed in a given time
period, ceteris paribus
even though marginal utility declines, total
utility still increases as long as marginal utility
is positive. Total utility will decline only if
marginal utility is negative
Demand rises
Demand falls
Supply rises
Supply falls