Transcript Chapter 4
Demand, Supply and Market Equilibrium Chapter 4 1 Copyright 2002, Pearson Education Canada The Basic Decision-Making Units in the Economy: Firms and Households 2 Copyright 2002, Pearson Education Canada Firms and Households A firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy. Households are the consuming unit in the economy. 3 Copyright 2002, Pearson Education Canada The Entrepreneur The entrepreneur is the person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business. 4 Copyright 2002, Pearson Education Canada Markets Product or output markets are the markets in which goods and services are exchanged. Input or factor markets are the markets in which resources used to produce products are exchanged 5 Copyright 2002, Pearson Education Canada Labour Markets Labour markets are the input/factor markets in which households supply work for wages to firms that demand labour. 6 Copyright 2002, Pearson Education Canada Capital Markets Capital markets are the input/factor markets in which households supply their savings, for interest or for claims to future profits, to firms that demand funds in order to buy capital goods. 7 Copyright 2002, Pearson Education Canada Land Markets Land markets are the input/factor markets in which households supply land or other real property in exchange for rent. 8 Copyright 2002, Pearson Education Canada Factors of Production The inputs into the production process. Land, labour, and capital are the three key factors of production. 9 Copyright 2002, Pearson Education Canada The Circular Flow A circular flow diagram describes the interaction of firms and households in markets for outputs and inputs. 10 Copyright 2002, Pearson Education Canada The Circular Flow of Economic Activity (Figure 4.1) 11 Copyright 2002, Pearson Education Canada Determinants of Household Demand: The price of the product in question The income available to the household The households amount of accumulated wealth The prices of other products available Tastes and preferences Expectations about future income, wealth, and prices 12 Copyright 2002, Pearson Education Canada Quantity Demanded The quantity demanded represents the amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price. 13 Copyright 2002, Pearson Education Canada Changes in Quantity Demanded vs. Changes in Demand Changes in the price of a product affect the quantity demanded per period. Changes in any other factor, such as income or preferences, affect demand. An increase in income, for instance, tends to increase demand. While a drop in prices will increase the quantity demanded. 14 Copyright 2002, Pearson Education Canada The Demand Schedule A demand schedule is a table or chart showing how much of a given product a household would be willing to buy at different prices. 15 Copyright 2002, Pearson Education Canada The Demand Curve The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices. Demand curves are usually derived from demand schedules. 16 Copyright 2002, Pearson Education Canada The Demand Curve P D 0 17 Q Copyright 2002, Pearson Education Canada The Law of Demand The negative relationship between price and quantity demanded. As price rises, quantity demanded decreases. As price falls, quantity demanded increases This is why we observe a negative slope in demand curves. 18 Copyright 2002, Pearson Education Canada Anna’s Demand Schedule for Telephone Calls (Table 4.1) Price per call 0 0.50 3.50 7.00 10.00 15.00 19 Quantity Demanded in calls per month 30 25 7 3 1 0 Copyright 2002, Pearson Education Canada Anna’s Demand Curve Price $15.00 $10.00 $7.50 $3.50 $ .50 01 20 3 7 25 30 Quantity demanded Copyright 2002, Pearson Education Canada Other Determinants of Household Demand Income and Wealth Income: The total of all earnings received by a household in a given period of time Wealth: The total value of what a household owns less what it owes 21 Copyright 2002, Pearson Education Canada Income as a Determinant of Demand Normal Goods: Goods for which demand goes up when income is higher and for which demand goes down when income is lower. Inferior Goods: Goods for which demand falls when income rises. 22 Copyright 2002, Pearson Education Canada Prices of Other Goods and Services as Determinants of Demand Substitutes: Goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up. Perfect substitutes are identical products. Complements: Goods that “go together”; when the price of one increases, demand for the other goes down, and vice versa. 23 Copyright 2002, Pearson Education Canada Other Determinants of Household Demand: Tastes and Preferences - These are quite subjective and tend to change over time. Expectations - With respect to future income, wealth, prices, and availability. 24 Copyright 2002, Pearson Education Canada Shift of Demand vs. Movement Along Demand Curve Shift of a demand curve is the change that takes place in a demand curve when a new relationship between the quantity demanded of a good and the price of that good is brought about by a change in the original conditions. Movement along the demand curve is what happens when a change in price causes quantity demanded to change. 25 Copyright 2002, Pearson Education Canada Anna’s Demand for Telephone Calls Change in Quantity Demanded Price $15.00 The graph shows a shift in quantity demanded from 3 to 7 caused by a change in price from $7.50 to $3.50. $10.00 $7.50 $3.50 $ .50 01 26 3 7 25 30 Quantity demanded Copyright 2002, Pearson Education Canada A Anna’s Demand for Telephone Calls A Change in Demand $15.00 $10.00 $7.50 $3.50 D1 $ .50 01 27 3 7 25 30 When any factor except price changes the relationship between price and quantity is different; there is a of the D2 shift demand curve, in this case from D1 to D2. Copyright 2002, Pearson Education Canada Changes in Demand Income Changes Income Rises P P D2 Demand for inferior good shifts left 28 D1 Q D1 Demand for normal good shifts right D2 Q Copyright 2002, Pearson Education Canada Changes in Demand Prices of Related Goods P Price of hamburger rises P P Q D2 Demand for complement good (ketchup) shifts left 29 D1 Q Quantity of hamburger demanded falls D1 D2 Demand for substitute good (chicken) shifts right Q Copyright 2002, Pearson Education Canada From Household to Market Demand Demand for a good or service can be defined for an individual household, or for a group of households that make up a market. 30 Copyright 2002, Pearson Education Canada Market Demand Defined Market demand may be defined as the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service. 31 Copyright 2002, Pearson Education Canada Deriving market demand from the individual demand curves: P P $3.50 DA $1.50 0 P $3.50 DB $1.50 4 8 Qd DC $3.50 $1.50 0 3 Price Qd 0 4 9 Qd Market Demand $3.50 $1.50 0 32 8 20 Qd Copyright 2002, Pearson Education Canada Supply A firm’s decision about what quantity of product to supply depends on: The price of the good or service The cost of producing the product which depends on: The price of required inputs (land, labour, capital) The technologies to be used to produce the product The prices of related products 33 Copyright 2002, Pearson Education Canada Quantity Supplied The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period. 34 Copyright 2002, Pearson Education Canada The Law of Supply The positive relationship between price and quantity of a good supplied. An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied. 35 Copyright 2002, Pearson Education Canada The Supply Schedule and Supply Curve A supply schedule is a table, or chart, showing how much of a product firms will supply at different prices. A supply curve is a graph illustrating how much of a product a firm will supply at different prices. 36 Copyright 2002, Pearson Education Canada Clarence Brown’s Supply Schedule for Soybeans (Table 4.3) Price (per tonne) 75 85 115 150 200 250 37 Quantity Supplied (tonnes per year) 0 400 600 800 1200 1200 Copyright 2002, Pearson Education Canada Clarence Brown’s Soybean Supply Curve (Figure 4.6) 38 Copyright 2002, Pearson Education Canada Changes in Quantity Supplied vs. Changes in Supply: Changes in quantity supplied imply movement along a supply curve. Changes in supply imply a shift in the entire supply curve. 39 Copyright 2002, Pearson Education Canada A Change in the Quantity Supplied of Clarence Brown’s Soybeans (Figure 4.6) Change in quantity supplied from 600 to 800 tonnes per year due to an increase in price from $115 to $150 per tonne. Causes movement along supply curve. 40 Copyright 2002, Pearson Education Canada Shift Of Supply Curve for Soybeans Following Development of New Strain (Figure 4.7) 41 Copyright 2002, Pearson Education Canada Changes in Quantity Supplied vs. Changes in Supply: P S P S1 Q An increase in the quantity supplied 42 An increase in supply S2 Q Copyright 2002, Pearson Education Canada From Individual Firm to Market Supply The supply of a good or service can be defined for an individual firm, or for a group of firms that make up a market or an industry. 43 Copyright 2002, Pearson Education Canada Market Supply The sum of all the quantities of a good or service supplied per period by all the firms selling in the market for that good or service. As with market demand, market supply is the horizontal summation of the individual firms’ supply curves. 44 Copyright 2002, Pearson Education Canada From Individual Firm to Market Supply (Figure 4.8) 45 Copyright 2002, Pearson Education Canada Market Equilibrium The operation of the market depends on the interaction between suppliers and demanders. An equilibrium is the condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for the price to change. 46 Copyright 2002, Pearson Education Canada Market Equilibrium P PE S E D QE 47 Q Copyright 2002, Pearson Education Canada The market for soybeans in equilibrium: P S $ per tonne 125 D 0 48 3500 Tonnes of Soybeans Copyright 2002, Pearson Education Canada Excess Demand Excess Demand is the condition that exists when quantity demanded exceeds quantity supplied at the current price. 49 Copyright 2002, Pearson Education Canada Excess Demand (Figure 4.9c) At $85 per tonne quantity demanded exceeds quantity supplied by 2500 tonnes. Excess demand tends to lead to an increase in prices. 50 Copyright 2002, Pearson Education Canada Excess Supply Excess supply is the condition that exists when quantity supplied exceeds quantity demanded at the current price. 51 Copyright 2002, Pearson Education Canada Excess Supply (Figure 4.10) At $150, quantity supplied exceeds the quantity demanded by 2000 tonnes. This causes prices to fall 52 Copyright 2002, Pearson Education Canada Changes in Equilibrium Demand Shifts/Supply is Constant P P S P2 P1 P1 D2 D1 Q1 Q2 Increase in Demand 53 S Q P2 D1 D2 Q2 Q1 Q Decrease in Demand Copyright 2002, Pearson Education Canada Changes in Equilibrium Supply Shifts/Demand is Constant P S1 S2 P S2 P1 S1 P2 P2 D Q1 Q2 Increase in Supply 54 Q P1 D Q2 Q1 Q Decrease in Supply Copyright 2002, Pearson Education Canada Changes in Equilibrium Supply & Demand both Increase (or Decrease) P S1 P S2 S2 S1 P P=? ? D1 Q1 55 D1 D2 Q2 Q Increase in Demand & Supply D2 Q2 Q1 Q Decrease in Demand & Supply Copyright 2002, Pearson Education Canada Changes in Equilibrium Demand & Supply Move Opposite P S2 S1 S1 P P1 S2 P2 D2 P1 D1 P2 D2 D1 Q= ? Demand Increases & Supply Decreases 56 Q Q=? Q Demand Decreases & Supply Increases Copyright 2002, Pearson Education Canada Review Terms & Concepts capital Market complements, complementary Goods demand curve demand schedule entrepreneur equilibrium excess demand excess supply 57 factors of production firm households income inferior goods input or factor markets labour market land market Copyright 2002, Pearson Education Canada Review Terms & Concepts (continued) law of demand law of supply market demand market supply movement along a demand curve normal goods perfect substitutes product or output markets 58 profit quantity demanded quantity supplied shift of a demand curve substitutes supply curve supply schedule wealth or net worth Copyright 2002, Pearson Education Canada