chp 3 keats 2013
TRANSCRIPT
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Chapter 3
Supply and Demand
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Chapter Outline
• Market demand
• Market supply
• Market equilibrium
• Comparative statics analysis
• Supply, demand, and price
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Learning Objectives
• Define supply, demand, and equilibrium price
• List and provide specific examples of the non-price determinants of supply and demand
• Distinguish between the short-run rationing function and long-run guiding function of price
• Illustrate how the concepts of supply and demand can be used in management decisions about price and allocations of resources.
• Use supply and demand diagrams to determine price in the short and long run
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Market Demand
• The demand for a good or service is defined as:
– Quantities of a good or service that people are ready, willing and able to buy at various prices within some given time period. (Other factors besides price held constant.)
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Market Demand
• “Ready” implies that consumers are prepared to buy a good or service both because they are:
– Willing: Consumers have a preference for it.
– Able: Consumers have the income to support this preference.
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Market Demand
Market demand is the sum of all the individual demands.
• Individuals may have distinct demand curves, and they sum to the overall demand in the market.
Example: demand for pizza
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Market Demand
There is an inverse relationship between price and the quantity demanded of a good or service.
This is called the Law of Demand.
Thus, the demand curve is downward sloping.
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Market Demand
• Graphical Representation of Demand
• Algebraic Representation of Demand
Qd=700-100P
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Market Demand
• Changes in price result in changes in the quantity demanded
– This is shown as movement along the demand curve.
• Changes in non-price factors result in changes in demand
– This is shown as a shift in the demand curve.
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Market Demand
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Market Demand
• Non-price determinants of demand-result is a shift in the demand curve.
– tastes and preferences
– income
– prices of related products
– future expectations
– number of buyers
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Market Supply
• The supply of a good or service is defined as quantities that people are ready to sell at various prices within some given time period
(Other factors besides price held constant)
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Market Supply
• Changes in price result in changes in the quantity supplied
– shown as movement along the supply curve
• Changes in non-price determinants result in changes in supply
– shown as a shift in the supply curve
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Market Supply
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Market Supply
• Non-price determinants of supply-results in a shift in the supply curve.
– costs and technology
– prices of other goods or services offered by the seller
– future expectations
– number of sellers
– weather conditions
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Market Equilibrium
• Equilibrium price: the price that equates the quantity demanded with the quantity supplied
• Equilibrium quantity: the amount that people are willing to buy and sellers are willing to offer at the equilibrium price level
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Market Equilibrium
• Shortage: a market situation in which the quantity demanded exceeds the quantity supplied
– shortage occurs at a price below the equilibrium level
• Surplus: a market situation in which the quantity supplied exceeds the quantity demanded
– surplus occurs at a price above the equilibrium level
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Market Equilibrium
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Comparative Statics Analysis
• Comparative statics is a form of sensitivity (or what-if) analysis
– Commonly used method in economic analysis
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Comparative Statics Analysis
• Process of comparative statics analysis:
– state all the assumptions needed to construct the model
– begin by assuming that the model is in equilibrium
– introduce a change in the model, so a condition of disequilibrium is created
– find the new point of equilibrium
– compare the new equilibrium point with the original one
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Comparative Statics Analysis
Step 1
• assume all factors except the price of pizza are constant
• buyers’ demand and sellers’ supply are represented by lines shown
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Comparative Statics Analysis
Step 2
• begin the analysis in equilibrium as shown by Q1 and P1
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Comparative Statics Analysis
Step 3
• assume that a new study shows pizza to be the most nutritious of all fast foods
• consumers increase their demand for pizza as a result
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Comparative Statics Analysis
Step 4
• the shift in demand results in a new equilibrium price (P2)
• and a new equilibrium quantity (Q2)
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Comparative Statics Analysis
Step 5
• comparing the new equilibrium point with the original one, we see that both equilibrium price and quantity have increased
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Comparative Statics Analysis
• The short run is the period of time in which:
– sellers already in the market respond to a change in equilibrium price by adjusting variable inputs
– buyers already in the market respond to changes in equilibrium price by adjusting the quantity demanded for the good or service
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Comparative Statics Analysis
• Short run changes show the rationing function of price
– The rationing function of price is the change in market price to eliminate the imbalance between quantities supplied and demanded.
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Comparative Static Analysis: Short-run
• an increase in demand causes equilibrium price and quantity to rise
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Comparative Static Analysis: Short-run
• a decrease in demand causes equilibrium price and quantity to fall
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Comparative Static Analysis: Short-run
• an increase in supply causes equilibrium price to fall and equilibrium quantity to rise
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Comparative Static Analysis: Short-run
• a decrease in supply causes equilibrium price to rise and equilibrium quantity to fall
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Comparative Static Analysis: Long-run
• The long run is the period of time in which:
– new sellers may enter a market
– existing sellers may exit from a market
– existing sellers may adjust fixed factors of production
– buyers may react to a change in equilibrium price by changing their tastes and preferences
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Comparative Static Analysis: Long-run
• Long run changes show the allocating function of price
• The guiding or allocating function of price is the movement of resources into or out of markets in response to a change in the equilibrium price.
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Comparative Static Analysis: Long-run
• initial change: decrease in demand from D1 to D2
• result: reduction in equilibrium price and quantity (to P2, Q2)
• follow-on adjustment:
– movement of resources out of the market
– leftward shift in the supply curve to S2
– equilibrium price and quantity (to P3, Q3)
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Long-run Analysis
• initial change: increase in demand from D1 to D2
• result: increase in equilibrium price and quantity (to P2, Q2)
• follow-on adjustment:
– movement of resources into the market
– rightward shift in the supply curve to S2
– equilibrium price and quantity (to P3, Q3)
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Summary: Short-Run and Long-Run Changes in the Market
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Supply, Demand, and Price
• In the extreme case, the forces of supply and demand are the sole determinants of the market price, not any single firm.
– this type of market is ‘perfect competition’
• In many cases, individual firms can exert market power over price because of their:
– dominant size
– ability to differentiate their product through advertising, brand name, features, or services
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Supply, Demand, and Price
• Discussion of changes in the computer industry
– Makers of PCs, notebooks and jump drives are facing slower growth in the demand for their products as technology is changing.
– What impact do you think cloud computing will have on the demand for stand-alone applications such as Microsoft Office or storage devices for computers?
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Global Application
What are the implications of rising demand for oil among developing counties?
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Global Application
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Global Application
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Summary
• The law of demand states that, other factors held constant, the quantity demanded is inversely related to price.
• The law of supply states that, other factors held constant, the quantity supplied is directly related to price.
• Non-price factors may shift the curves.
• Price serves a short-run rationing function and a long-run guiding function in the marketplace.