demand and supply © peter berck 2012. lecture outline goods people demand goods; –shift in demand...
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Demand and Supply
© Peter Berck 2012
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Lecture Outline
• Goods• People Demand Goods;
– Shift in demand
• Firms Supply Goods; • Keep Supply and Demand Separate• Demand and Supply intersect at the equilibrium price and
quantity– Shift and movement
• Horizontal Addition
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Goods
• A particular thing in a particular place at a particular time.– Coal today and coal tomorrow are not the same
good.– A rotten peach and a yummy peach are not the
same good.– Wheat in Minneapolis and wheat in Iowa are
not the same good.
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Demand Curve
• Quantity that will be purchased as a function of price.– Is a function: Q=D(P)
• To economists, Demand is synonymous with demand curve.
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Price-Demand or Inverse Demand Curve
• Diagram: P on vertical and Q on horizontal• D(p) is the demand curve. It associates a quantity with
every price.• D-1(Q) is the inverse- (or price-) demand curve. It
associates a price with every quantity.
Q
P
D-1(Q)
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D-1(Q)
• The price that consumers will pay if Q units of the good are available.
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Shifting the Demand Curve
• Qown = D(pown,pother,y)
• If the price of the other good goes up and the demand curve shifts in, the goods are complements.
• If it shifts out, they are substitutes. • Give examples.
P
Q
D-1
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Shifting the Demand Curve: y
• Qown = D(pown,pother,y)
• If income goes up and the demand curve shifts out, the good is a normal good.
• If it shifts in, it is an
inferior good.
P
Q
D-1
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Supply
• Q= S(pout , pin , x)– pout is the price of the product the firm makes
(an output).– pin are the prices of the inputs the firm uses to
make the output.– x are exogenous factors, like the weather.– slope up or flat (assumed for this course) in pout.
– shift in with increased price of input
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Inverse Supply curve diagram
• Price on input goes up, how does the inverse supply curve shift?
Q
Pout
S-1
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On Notation
• We blithely write and say D or S when we mean inverse demand or inverse supply.
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Equilibrium
• The equilibrium price and quantity are the coordinates of the point where the supply and demand curve intersect.
• The equilibrium price is the price where quantity supplied and quantity demanded are equal.
• Equilibrium quantity is the quantity supplied and demanded at the equilibrium price.
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One observes only this equilibrium price and quantity in
the market.
• We use supply and demand to find out how the equilibrium changes when other things change. E.g. what happens when income goes up? An input price goes down, etc.
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Example of equilibrium
0
0.5
1
1.5
2
2.5
3
0 2 4 6 8 10
Q
P
SD
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Algebraic Example
• Q = 3 p is S(p)• Q = 12 - 4p is D(p)• (graph using y = mx + b)
– ps = Q/3 slope 1/3 intercept zero– pd = 3 - Q/4 slope - ¼ intercept 3
• Equilibrium: p = ps=pd : Q/3=3-Q/4– Q= 36/7; p= 12/7
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Out of Equilibrium
• Excess supply: supply – demand• Price above equilibrium causes excess
supply.• How do you think the system would adjust
if there were excess supply? • Is it reasonable that we think economic
forces will drive us toward equilibrium?
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Excess S or D
Suppose P is 2.5. Suppose P is 1
Suppose Q = 2Suppose Q = 8
0
0.5
1
1.5
2
2.5
3
0 2 4 6 8 10
Q
P
SD
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Example:
• A fast food chain undercooks its burgers and makes people sick. What happens to price and quantity?
• http://www.nytimes.com/1993/02/06/business/company-news-jack-in-the-box-s-worst-nightmare.html?pagewanted=all&src=pm
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E Coli Burgers
Which curve shifted? Where was there a movement along a curve? What points are observed?
0
0.5
1
1.5
2
2.5
3
0 2 4 6 8 10
Q
P
SDD'
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Example:
• The United States offered to buy grain at above the equilibrium price.– The mechanics were that they loaned the farmer
money for his grain at a “loan rate”, a price above equilibrium. When it came time to repay, the former could give the government the grain instead of paying off the loan.
– Government either stored or gave away excess.
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Ag. Programs: Loan rate of PL • : How much does the gov’t buy and store?
Are consumers better off? producers better off?
0
0.5
1
1.5
2
2.5
3
0 2 4 6 8 10
Q
P
SD
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Rent Control
• Excess demand for housing– lines– bribes
• When rent control ends can students be worse off?
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Price is set as 1: excess demand
0
0.5
1
1.5
2
2.5
3
0 2 4 6 8 10
Q
P
SD
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Getting market demand as sum of demands of people or groups
• D1(p) is the first person’s demand
• D2(p) is the second person’s demand
• Dtotal = D1(p)+ D2(p)
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In a graph it is Horizontal Addition
P
Q
demand from developed world
from less developed world
Total Demand
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Pinhead’s View of Hunger
P
Q
demand from developed world
from less developed world
Total DemandSupply
QE
Supply*
$2.74
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Key Concepts
• Demand and inverse demand– Shifts: Complements, substitutes, normal,
inferior
• Supply and inverse supply– Shifts
• Equilibrium– Shift and movement. Excess supply/demand