chapter 4: the market forces of supply and demand 4: the market forces of supply and demand demand...

Chapter 4: The Market Forces of Supply and Demand

Ch. 4: The Market Forces of Supply and Demand


A market is a group of buyers and sellers of a particular product.(Trading places: 1:45-3:15)

A competitive market is one with many buyers and sellers, eachhas a negligible effect on price.

In a perfectly competitive market

• All goods are exactly the same

• Buyers and sellers are so numerous that no one can affectmarket price - each is a “price taker”.

https://www.youtube.com/watch?v=1tmI867fAYU


Quantity demanded: the total quantity of a good that buyers arewilling and able to purchase.

Law of demand: the claim that the quantity demanded of a goodfalls when the price of the good rises, other things equal.

Giffen good: a good that violates the law of demand.

A possible Giffen good: rice among poor Chinese consumers.

http://www.economist.com/blogs/freeexchange/2007/07/as_price_goes_up_so_does_deman


Demand schedule: a table that shows the relationship betweenthe price of a good and the quantity demanded.

Price for a movie ticket Number of movies seen per month

$0 6

$2 5

$4 4

$6 3

$8 2

$10 1

$12 0

Jake’s demand schedule for movies




$0 6

$2 5

$4 4

$6 3

$8 2

$10 1

$12 0


Price for a movie ticket

Jake’s number of movies seen per

month

$12

$10

$8

$6

$4

$2

$0

0 1 2 3 4 5 6

*Notice my demand

schedule, which obeys

the Law of Demand,

results in a downward

sloping demand curve.*

Jake’s demand curve for movies




$0 6

$2 5

$4 4

$6 3

$8 2

$10 1

$12 0



Jake’s number of movies seen per

month

$12

$10

$8

$6

$4

$2

$0

0 1 2 3 4 5 6

This solid line is Jake’s

demand curve… but

Jake’s preferences do

not represent market

preferences. Therefore,

this is not a market

demand curve.



Market demand versus individual demand

• The quantity demanded in the market is the sum of allquantities demanded by all buyers for each price.

• Suppose the market for movies includes this entire class. Themarket demand is the number of movies I would go see andthe number of movies each of you would go see.

Individual demand

Market demand


“Shifting” the demand curve: In the prior movie example, wetraced out our demand schedules based on the current state of theworld (all other things being equal).

Other factors, besides price, influence individuals’ (and market)quantity demanded...

Changes in these factors will “shift” the demand curve.


Factors that shift a demand curve.

• The number of buyers.

• Income.

• Price of related goods.

• Tastes.

• Expectations.


Factors that shift a demand curve: the number of buyers..


Factors that shift a demand curve: the number of buyers..More college students living at home...

Quantity of apartments

00

Demand for apartments in a college town

1000 2000 3000 4000

$300

$500

$700

$900

Apartment price

Apartment

rental demand

curve in 2011




00


1000 2000 3000 4000

$300

$500

$700

$900

Apartment price

Apartment

rental demand

curve in 2011

In 2012, we discovered

that more students were

living at home when

attending college.

Apartment

rental demand

curve in 2012




00


1000 2000 3000 4000

$300

$500

$700

$900

Apartment price

Apartment

rental demand

curve in 2011

In 2012, we discovered

that more students were

living at home when

attending college.

Apartment

rental demand

curve in 2012

Market demand for

apartments shifted left, it

decreased, in response to

fewer students in the

market for apartments.


Factors that shift a demand curve: income..Graduating from college and finding a full-time job...


Factors that shift a demand curve: income..Graduating college and finding a good job is a positiveincome shock...

Quantity of nutritious food demanded

00

Demand for nutritious food

10 20 30 40

$3

$5

$7

$9

Nutritious Food price

Nutritious food

demand curve

for a college

student


Factors that shift a demand curve: income..Graduating college and finding a good job is a positiveincome shock...

Quantity of nutritious food demanded

00

Demand for nutritious food

10 20 30 40

$3

$5

$7

$9

Nutritious Food price

When we graduate college,

we either find a better job

or receive a raise. This is

a positive income shock.

Nutritious food

demand curve

for a college

student

With a higher income, we

will likely purchase more

nutritious food.

Nutritious food

demand curve for a

college graduate

(with a better job)


Factors that shift a demand curve: income..Normal goods and inferior goods:

In the previous example, I assumed that increasing income wouldlead to an increase in demand for nutritious food. That is, Iassumed nutritious food is a normal good.

A good for which, other things equal, an increase in income leadsto a decrease in demand is an inferior good.

Inferior goods: Normal goods:

Recreational equipment

Electricity

Gas/fuel

Jewelry


Factors that shift a demand curve: the price of relatedgoods..

Quantity of train tickets sold

00

Demand for train tickets

100 200 300 400

$5

$10

$15

$20

Train ticket prices

Demand for train

tickets in 2008 – with

high gas prices.

In 2008, gas prices were

extremely high. Those prices

dropped in 2009, making

driving less expensive.



Quantity of train tickets sold

00

Demand for train tickets

100 200 300 400

$5

$10

$15

$20

Train ticket prices

Demand for

train tickets in

2009 – with

low gas prices.

Demand for train

tickets in 2008 – with

high gas prices.

In 2008, gas prices were

extremely high. Those prices

dropped in 2009, making

driving less expensive.



Quantity of Oreos sold

00

Demand for Oreos

100 200 300 400

$5

$10

$15

$20

Price of a package of Oreos

Demand for Oreos

when milk is cheap.

Rising milk prices will

decrease demand for

milk… what will happen to

the demand for Oreos?



Quantity of Oreos sold

00

Demand for Oreos

100 200 300 400

$5

$10

$15

$20

Price of a package of Oreos

Demand for Oreos

when milk is cheap.

Rising milk prices will

decrease demand for

milk… what will happen to

the demand for Oreos?

When milk becomes less

affordable, demand for

Oreos decreases!

Demand for Oreos

when milk is

expensive.



In the first example, lower gasoline prices decreased demand fortrain tickets.

In the second example, higher milk prices decreased demand forOreos.

This is because gasoline and train tickets are substitute goodswhile Oreos and milk are complementary goods; or complements.


Substitutes: two goods for which an increase in the price of oneleads to an increase in demand for the other (like gasoline andtrain tickets).

Complements: two goods for which an increase in the price ofone leads to a decrease in the demand for the other (like Oreosand milk).

Complements


Substitutes: two goods for which an increase in the price of oneleads to an increase in demand for the other (like gasoline andtrain tickets).

Complements: two goods for which an increase in the price ofone leads to a decrease in the demand for the other (like Oreosand milk).

Substitutes


Up to this point, we have only discussed demand, which is createdby consumers. Supply is created by firms that produce goods andservices.

The quantity supplied of any good is the amount that sellers arewilling and able to sell.

Law of supply: the claim that the quantity supplied of a goodrises when the price of that good rises, other things equal.



Price for a movie ticket Number of movies provided per month

$0 0

$2 1

$4 2

$6 3

$8 4

$10 5

$12 6

Movie theater’s supply schedule for movies



Price for a movie ticket Number of movies provided per month

$0 0

$2 1

$4 2

$6 3

$8 4

$10 5

$12 6

Movie theater’s supply schedule of movies


Number of movies provided per month

$12

$10

$8

$6

$4

$2

$0

0 1 2 3 4 5 6

This solid line is the

theater’s supply

curve… but the

theater’s supply

curve may not be

representative of the

entire market.

Therefore, this is not

a market supply

curve.



“Shifting the supply curve: many factors will shift the supply curveincrease or decreasing the quantity produced for a given price.

Gold jewelry?


Factors that shift a supply curve: price of inputs.

Supply of ElectricityPrice electricity

Quantity of electricity Q

Supply 1Supply 2


Supply and demand together: back to the movies example


WyoTheater

Fox Theater

Market Supply

$0 0 0 0

$2 2 1 3

$4 4 2 6

$6 6 3 9

$8 8 4 12

$10 10 5 15

$12 12 6 18

Movie theater’s supply schedules for movies


Barack George Market Demand

$0 9 9 18

$2 7 8 15

$4 6 6 12

$6 3 6 9

$8 2 4 6

$10 1 2 3

$12 0 0 0

Consumers’ demand schedules for movies

These are theaters’ individual supply curves

These are consumers’ individual demand curves

A market for movies with two firms and two consumers



Market supply and demand of movies

Quantity of movies

00 3

$2

$4

$6

$8

Price of movies

$10

$12

6 9 12 15 18

Recall: by the Law of

Demand, the demand curve

is always downward sloping.




Quantity of movies

00 3

$2

$4

$6

$8

Price of movies

$10

$12

6 9 12 15 18

Recall: by the Law of

Supply, the supply

curve is always

upward sloping.




Quantity of movies

00 3

$2

$4

$6

$8

Price of movies

$10

$12

6 9 12 15 18

Demand curve Supply curve


Equilibrium: a situation in which the market price has reached thelevel at which quantity supplied equals quantity demanded.

Equilibrium price: the price that balances quantity supplied andquantity demanded

Equilibrium quantity: the quantity supplied and the quantitydemanded at the equilibrium price.


Quantity of movies

00 3

$2

$4

$6

$8

Price of movies

$10

$12

6 9 12 15 18


Equilibrium

price

Equilibrium quantity

Equilibrium


Suppose the government imposes a price floor on movies: moviescannot be sold for any less than $8 per ticket.

How does this affect our market for movies?


Equilibrium Quantity

00 3

$2

$4

$6

$8

Price of movies

$10

$12

6 9 12 15 18


Equilibrium

price

Price floor

Quantity demanded

Quantity supplied

Quantity of movies

Surplus: quantity

supplied exceeds

quantity demanded


Suppose the government imposes a price ceiling on movies:movies cannot be sold for any more than $4 per ticket.

How does this affect our market for movies?



00 3

$2

$4

$6

$8

Price of movies

$10

$12

6 9 12 15 18


Equilibrium

price

Price ceiling

Quantity supplied

Quantity demanded

Quantity of movies

Shortage: quantity

demanded exceeds

quantity supplied.


The law of supply and demand: the claim that the price of anygood adjusts to bring the quantity supplied and the quantitydemanded for that good into equilibrium.

What happens if a new university opens in town doubling thenumber of students who go to the movie theater?


What happens to equilibrium price and equilibrium quantitydemanded if a new university opens in town, doubling the numberof students who go to the movie theater?

Market supply and demand of movies: a new university

opens and the number of students in-town doubles.


00 3

$2

$4

$6

$8

Price of movies

$10

$12

6 9 12 15 18


Equilibrium

price

Quantity of movies


Demand shifts to the right because there are more buyers in themarket. This increases the equilibrium price and the equilibriumquantity demanded.

Market supply and demand of movies: a new university

opens and the number of students in-town doubles.


00 3

$2

$4

$6

$8

Price of movies

$10

$12

6 9 12 15 18

Old demand

curveSupply curve

Equilibrium

price

Quantity of movies

New demand

curve

New

equilibrium

price

New equilibrium

quantity


What happens to equilibrium price and equilibrium quantitydemanded if legislation makes it cheaper for theater to purchasemovies for showing?

Market supply and demand of movies: a new legislation

makes it cheaper for theaters to purchase movies for showing

(decrease price of an input into production).


00 3

$2

$4

$6

$8

Price of movies

$10

$12

6 9 12 15 18

Demand

curveSupply curve

Equilibrium

price

Quantity of movies


Supply shifts to the right because an input price into productionhas decreased. This decreased the equilibrium price and increasesequilibrium quantity demanded.

Market supply and demand of movies: a new legislation

makes it cheaper for theaters to purchase movies for showing

(decrease price of an input into production).


00 3

$2

$4

$6

$8

Price of movies

$10

$12

6 9 12 15 18

Demand

curveOld supply curve

Equilibrium

price

Quantity of movies

New

equilibrium

price

New equilibrium

quantity

New supply

curve

chapter 4: the market forces of supply and demand 4: the market forces of supply and demand demand...

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