ch 04 demand, supply, and markets micro econ 4
TRANSCRIPT
Chapter 4 ECON4 William A. McEachern
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Demand,
Supply,
and Markets
2
Demand
• Demand
– The quantity consumers are willing and
able to buy at each possible price during
a given time period, other things constant
– Amounts purchased per period
• at each possible price
– Willing and able
– Specific period
– Other things constant
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3
Law of Demand
• Law of demand
– Quantity demanded varies inversely with
price, other things constant
– Higher price: lower quantity demanded
• Consumer Demand
– Not ‘consumer wants’
– Not ‘consumer needs’
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4
Law of Demand
• Substitution effect of a price change
– When the price of a good falls
• That good becomes cheaper compared to
other goods
• Consumers tend to substitute that good for
other goods
– Relative price
• Price of a good relative to the prices of other
goods
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5
Law of Demand
• Income effect of a price change
– A fall in the price of a good increases
consumers’ real income
– Consumers more able to purchase goods
– Normal good: quantity demanded
increases
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6
Law of Demand
• Money income
– Number of dollars a person receives per
period
• Real income
– Measured in terms of what it can buy
– Purchasing power
– Changes when price changes
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7
Demand
• Demand schedule
– Possible prices
– Quantity demanded at each price
– Law of demand
• Demand curve
– Possible prices
– Quantity demanded at each price
– Downward slope
– Law of demand© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
8
Demand
• Demand
– Entire relationship between price and quantity demanded
• Quantity demanded
– Amount of a good consumers are willing
and able to buy
• Per period
• At a particular price
– A point on the demand curve
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9
Demand
• Movement along the demand curve
– Change in quantity demanded
– Due to a change in price
• Individual demand
– Relation between the price of a good and
the quantity purchased
– By an individual consumer
– Per period
– Other things constant
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 1
10
The Demand Schedule and Demand Curve for Pizza
D
a
b
c
d
e
Price
per
pizza
Quantity
Demanded
Per week
(millions)
a
b
c
d
e
$15
12
9
6
3
8
14
20
26
32
2620148
Millions of pizzas per week
320
9
6
3
12
Price
per
piz
za
$15
The market demand D shows the
quantity of pizza demanded, at various
prices, by all consumers. Price and
quantity demanded are inversely related.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
11
Demand
• Market demand
– Relation between the price of a good and
the quantity purchased
– By all consumers in the market
– During a given period
– Other things constant
– Sum of the individual demands in the
market
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
12
Shifts of the Demand Curve
1. Money income of consumers
2. Prices of other goods
3. Consumer expectations
4. The number or composition of
consumers in the market
5. Consumer tastes
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
13
Changes in Consumer Income
• Increase in consumer income
– Willing and able to buy more at each
price
– Increase in demand
– Demand curve shifts rightward
• Normal good
– Demand increases as income increases
• Inferior good
– Demand decreases as income increases© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 2
14
An Increase in the Market Demand for Pizza
D’
D
b f
2620148
Millions of pizzas per week
320
9
6
3
12
Price p
er
piz
za
$15An increase in the demand for
pizza is shown by a rightward
shift of the demand curve, so
the quantity demanded
increases at each price. For
example, the quantity of pizza
demanded at a price of $12
increases from 14 million (point
b) to 20 million (point f).
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15
Changes in Prices of Other Goods
• Substitutes
– An increase in the price of one good
• Increases the demand for the other
• Rightward shift
• Complements - used in combination
– An increase in the price of one
• Decreases the demand for the other
• Leftward shift
• Unrelated
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
16
Changes in Consumer Expectations
• Income expectations
– Future income increase
• Increase the current demand
• Price expectations
– Future price increases
• Increase current demand
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
17
Number or Composition of Consumers
• Increase in number of consumers
– Increases demand
– Right shift
• Composition of the population
– Shift the demand
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
18
Changes in Consumer Tastes
• Tastes
– Likes and dislikes in consumption
– Assumed to remain constant along a
given demand curve
• Change in tastes
– May shift the demand
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
19
Demand
• Quantity demanded
• Demand
• Movement along the demand curve
• Shift in the demand curve
– Movement of a demand curve right or left
– Resulting from a change in one of the
determinants of demand
• Other than the price of the good
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
20
Supply
• Supply
– How much producers are willing and able
to offer for sale per period at each
possible price, other things constant
– Willing and able
– Specific period
– Other things constant
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21
Law of Supply
• Law of supply
– Quantity supplied is directly related to its
price, other things constant
– Higher price: higher quantity supplied
• Higher reward, profit
– More willing to increase quantity supplied;
• Can afford to cover the marginal costs
– Increasing opportunity cost
– More able to increase quantity supplied
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
22
Supply
• Supply schedule
– Possible prices
– Quantity supplied at each price
– Law of supply
• Supply curve
– Possible prices
– Quantity supplied at each price
– Upward slope
– Law of supply© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 3
23
The Supply Schedule and Supply Curve for Pizza
SPrice
per
pizza
Quantity
Supplied
Per week
(millions)
$15
12
9
6
3
28
24
20
16
12
24201612
Millions of pizzas per week
280
9
6
3
12
Price p
er
piz
za
$15
Market supply curve S shows the
quantity of pizza supplied, at various
prices, by all pizza makers. Price
and quantity supplied are directly
related.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
24
Supply
• Supply
– Entire relationship between price and quantity supplied
• Quantity supplied
– Amount offered for sale
– Per period
– At a particular price
– A point on the supply curve
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
25
Supply
• Movement along the supply curve
– Change in quantity supplied
– Due to a change in price
• Individual supply
– Relation between the price of a good and
the quantity
– An individual producer is willing and able
to sell
– Per period, other things constant
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
26
Supply
• Market supply
– Relation between the price of a good and
the quantity
– All producers are willing and able to sell
– Per period
– Other things constant
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
27
Shifts of the Supply Curve
1. State of technology
2. Prices of relevant resources
3. Prices of alternative goods
4. Producer expectations
5. Number of producers in the market
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
28
Changes in Technology
• Better technology
– Production costs decrease
– Increase quantity supplied at each price
– Increase supply
– Rightward shift
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 4
29
An Increase in the Supply of Pizza
S’S
24201612
Millions of pizzas per week
280
9
6
3
12
Price p
er
piz
za
$15 An increase in the supply of
pizza is reflected by a rightward
shift of the supply curve, from S
to S’. Quantity supplied
increases at each price level.
For example, at a price of $12,
the quantity of pizza supplied
increases from 24 million pizzas
(point g) to 28 million pizzas
(point h).
g
h
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30
Prices of Relevant Resources
• Relevant resources
– Employed in the production
• Decrease in price of relevant resources
– Production costs decrease
– Increase supply
– Rightward shift
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
31
Prices of Alternative Goods
• Resources
– Alternative uses
• Alternative goods
– Use some resources employed to
produce the good
• Decrease in price of alternative goods
– Increase supply
– Rightward shift
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
32
Changes in Producer Expectations
• Higher prices in the future
– Future profits
– May increase the current supply
– Easily stored goods
• Reduce current supply
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
33
Changes in Number of Producers
• Market supply
– Amount supplied
– At each price
– By all producers
• Number of producers increase
– Increase supply
– Rightward shift
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
34
Supply
• Quantity supplied
• Supply
• Movement along the supply curve
• Shift in the supply curve
– Movement of a supply curve left or right
– Resulting from a change in one of the
determinants of supply
• Other than the price of the good
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
35
Demand & Supply Create a Market
• Markets
– Sort out differences between demanders
and suppliers
– Reduce transaction costs
• Transaction costs
– Costs of time and information required to
carry out market exchange
• Adam Smith
– The “invisible hand”© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
36
Market Equilibrium
• Surplus: excess quantity supplied
– Amount by which quantity supplied
exceeds quantity demanded
• At a given price
– Downward pressure on price
• Decrease quantity supplied
• Increase quantity demanded
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
37
Market Equilibrium
• Shortage: excess quantity demanded
– Amount by which quantity demanded
exceeds quantity supplied
• At a given price
– Upward pressure on price
• Increase quantity supplied
• Decrease quantity demanded
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
38
Market Equilibrium
• Quantity demanded = Quantity supplied
• Plans of buyers and sellers match
• Equilibrium point
• Equilibrium quantity
• Equilibrium price
• Market clears
• No pressure on price
• ‘X marks the spot’
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 5
39
Equilibrium in the Pizza Market (a)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 5
40
Equilibrium in the Pizza Market (b)
S
24201614
Millions of pizzas per week
260
9
6
3
12
Price p
er
piz
za
$15
D
c
Shortage
Surplus
Market equilibrium occurs at
the price where quantity
demanded equals quantity
supplied. This is shown at
point c.
Above the equilibrium price,
quantity supplied exceeds
quantity demanded. This
creates a surplus, which
puts downward pressure on
the price.
Below the equilibrium price,
quantity demanded exceeds
quantity supplied. The
resulting shortage puts
upward pressure on the
price.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
41
Shifts of the Demand Curve
Determinants of demand
1. Money income of consumers
2. Price of a substitute or a complement
3. Consumer expectations
4. Number of consumers
5. Consumer tastes
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
42
Shifts of the Demand Curve
• Increase in demand
– Rightward shift of D curve
– Shortage; Upward pressure on P
– QD decreases; QS increases
– New equilibrium: Increase in P and Q
• Decrease in demand
– Surplus; Downward pressure on P
– New equilibrium: Decrease in P and Q
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 6
43
Effects of an Increase in Demand
S
2420
Millions of pizzas per week
300
9
$12
Price p
er
piz
za
D
c
D’
g
An increase in demand is
shown by a shift of the
demand curve rightward
from D to D’. Quantity
demanded exceeds quantity
supplied at the original price
of $9 per pizza, putting
upward pressure on the
price. As the price rises,
quantity supplied increases
along supply curve S, and
quantity demanded
decreases along demand
curve D’. When the new
equilibrium price of $12 is
reached at point g, quantity
demanded once again
equals quantity supplied.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
44
Shifts in the Supply Curve
Determinants of supply
1. Technological change
2. Price of a relevant resource
3. Price of an alternative good
4. Producers expectations
5. Number of producers
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
45
Shifts in the Supply Curve
• Increase in supply
– Rightward shift of S curve
– Surplus; Downward pressure on P
– QD increases; QS decreases
– New equilibrium:
• P decreases; Q increases
• Decrease in supply
– New equilibrium:
• P increases; Q decreases
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 7
46
Effects of an Increase in Supply
S
2620
Millions of pizzas per week
300
$9
6
Price p
er
piz
za
D
c S’
d
An increase in supply is shown by a
shift of the supply curve rightward,
from S to S’. Quantity supplied
exceeds quantity demanded at the
original price of $9 per pizza, putting
downward pressure on the price. As
the price falls, quantity supplied
decreases along supply curve S’,
and quantity demanded increases
along demand curve D. When the
new equilibrium price of $6 is
reached at point d, quantity
demanded once again equals
quantity supplied
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
47
Simultaneous Shifts
• Both S and D increase:
– Q increases
– D shifts more: P increases
– S shifts more: P decreases
• Both S and D decrease:
– Q decreases
– D shifts more: P decreases
– S shifts more: P increases
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 8
48
Indeterminate effect of an increase in both demand and supply
S
p’
p
Price
D
S’
a
D’
b
Q’QUnits per
period0
S
p’’
p
Price
D
S’’
a
D’’
c
Q’’QUnits per
period0
When both demand and supply increase, the equilibrium quantity also increases. The effect
on price depends on which curve shifts more. In panel (a), the demand curve shifts more,
so the price rises. In panel (b), the supply curve shifts more, so the price falls.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Simultaneous Shifts
• S increases; D decreases
– P decreases
– D shifts more: Q decreases
– S shifts more: Q increases
• S decreases; D increases
– P increases
– D shifts more: Q increases
– S shifts more: Q decreases
49© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 9
50
Effects of Shifts of Both Demand and Supply
When the demand
and supply curves
shift in the same
direction, equilibrium
quantity also shifts in
that direction. The
effect on equilibrium
price depends on
which curve shifts
more. If the curves
shift in opposite
directions, equilibrium
price will move in the
same direction as
demand. The effect
on equilibrium
quantity depends on
which curve shifts
more.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Disequilibrium
• Disequilibrium
– Plans of buyers do not match those of
sellers
– Temporary mismatch between quantity
supplied and quantity demanded
• As the market seeks equilibrium
– Can last a while
• Result of government intervention
– Price floors
– Price ceilings
51© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Disequilibrium
• Price Floors
– Minimum legal price below which a
product cannot be sold
– To have an impact, it must be set above
the equilibrium price
– Surplus
– Distort markets
– Reduce economic welfare
52© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Disequilibrium
• Price Ceilings
– Maximum legal price above which a
product cannot be sold
– To have an impact, it must be set below
the equilibrium price
– Shortage
– Distort markets
– Reduce economic welfare
53© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 11
54
Price Floors and Price Ceilings
S
D
$2.50
1.90
Price p
er
gallo
n
1914
Millions of gallons per month0 24
S
D
$1,000
600
Mo
nth
ly r
enta
l price
5040
Thousands of rental units per month0 60
Surplus
Shortage
A price floor set above the equilibrium price results in a surplus, as shown in panel (a).
A price floor set at or below the equilibrium price has no effect.
A price ceiling set below the equilibrium price results in a shortage, as shown in panel
(b). A price ceiling set at or above the equilibrium price has no effect.© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.