demand, supply, and equilibrium• supply curve plots the quantity supplied at different prices. •...

Sep, 2016

Demand, Supply, and EquilibriumEconomic Department, Saint Louis University

Instructor: Xi Wang

What happens in a market? What is a Market?

• You walked into a farmers' market

• There stand a lot of buyers and sellers

• Trading happens, Cash only!

How do Buyer Behave?

• We assume that these buyers are price-takers: they treat the market price as a take-it-or-leave-it offer;

• No bargaining happens

• Why? Since there are a lot of buyers! You are not the only one:(


• Buyer are price taker!

• At a given price, the amount of the good or service that buyers are willing to purchase is called the quantity demanded.

• How is quantity demanded related to Goods Price?

• Positive? Negative?No relationship?

• Example: For example, if gas prices rise, I might bike to school instead of driving. Or I have an Upass, I can take the bus.


• So the amount of gas I will demand is negatively related to the price of gasoline.(holding all else equal)

• Since I will drive less if the price of gas is higher. Like this graph:


• Demand curve plots the relationship between prices and quantity demanded (holding all else equal)

Why do Buyer Behave in this way?

• Demand curve has an important property: Downward sloping (Law of Demand)

• Why is it downward sloping?

• Since here is St.louis, Not mexico, Mango here is not very good!

• I miss Mango icecream I onced had in Mexico city, Question! How much I would like to pay for one Mango icrecream now?

• OK, I am willing to pay $10!

How do Buyer Behave, Willing to Pay(Intro method)

• What if I have already had one, How much I am willing to pay one more?

• E.... $5?

• What if I have already had two, how much I am willing to pay one more?

• Gosh! You should pay me

• Willingness to pay is the highest price that a buyer is willing to pay for an extra unit of a good.

• Did you see? As you consume more of a good, your willingness to pay for an additional unit declines (diminishing marginal benefit)

• i.e you will get tired of pizza, when you just finish a whole piece of 12inch Pizza!

• When you get tired of something, the willingness to pay will decrease, right?

From Individual Demand Curves to Aggregate

From Individual Demand Curves to Aggregate, When we have more people

Note that (1)this demand curve is not a straight line

(2)Demand curves can exhibit this negative relationship without being straight lines

Demand Curve, another Example

# of People to hire

wage cost($10/person)

# of consumer can be served

Revenue$10/person

Net Benifit

Optimal ?

0 0 0 0 0

1 10 3 30 20

2 20 5 50 30

3 30 6.6 66 36

4 40 7.5 75 35

5 50 8 79 29

6 60 8.5 82 22

Demand Curve, another Example, what if wage changes?

# of People to hire



Revenue$10/person

Net Benifit

Optimal ?

0 0 0 0 0

1 6 3 30 24

2 12 5 50 38

3 18 6.6 66 48

4 24 7.5 75 51

5 30 8 79 49

6 36 8.5 82 46

Demand Curve, another Exercise

# of People to hire



Revenue$10/person

Net Benifit

Optimal ?

0 0

1 3

2 5

3 6.6

4 7.5

5 8

6 8.5


# of People to hire



Revenue$10/person

Net Benifit

Optimal ?

0 0 0 0 0

1 4 3 30 26

2 8 5 50 42

3 12 6.6 66 44

4 12 7.5 75 57

5 20 8 79 59

6 24 8.5 82 58


# of People to hire


Marginal Cost Revenue$10/person

Net Benifit Marginal

Benifit

0 0 --- 0 0 ---

1 4 4 30 26 30

2 8 4 50 42 20

3 12 4 66 44 16

4 12 4 75 57 9

5 20 4 79 59 4

6 24 4 82 58 3

Billiken way to think about Demand Curve

• Every one propose a maximum amount of money he/she is willing to pay

• Say A diamond

• There are 5 people, whose Propose are

• $1000, $900, $800, $1200, $1100

Billiken way to think about Demand Curve

• What if I ask $850 as price?

• $1000, $900, $800, $1200, $1100

• What if I ask $ 950?

• $1000, $900, $800, $1200, $1100

• What if I ask $ 1050?

• $1000, $900, $800, $1200, $1100

Downward Sloping!!!!!

Shifting Demand Curve: Several Factors

The demand curve shifts when these five major factors change;

• Tastes and preferences

• Income and wealth

• Availability and prices of related goods, iphone 6s v.s 6

• Number and scale of buyers, Immigriant;

• Buyers’ beliefs about the future:

Shifting Demand Curve

Shifting Demand Curve: Preference

The demand curve shifts when these five major factors change

• Tastes and preferences, you are a green fighter! Hate global warming!

• Or you like the diamond or not?

• Income and wealth: Let's set ourselves in such a setting:

If my annual income is $10000, then I will not go to bid the diamond. So put in another way, my propose would be pretty low.

Say I am only willing to pay $500 for this diamond. Why?

Shifting Demand Curve: Income

• Income and wealth: Let's set ourselves in such a setting:

If my annual income is $10000, then I will not go to bid the diamond. So put in another way, my propose would be pretty low.

Say I am only willing to pay $500 for this diamond. Why?

Since My annual living cost would be around $7000. other entertainment cost would be $2000, I do not have too much left. $ 500 means 50 meals for me. If I pay too much for this diamond, I may have to stay hungry for someday.

Does homeless buy diamond? Iphone 6S?

Shifting Demand Curve

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Shifting Demand Curve: Income

• Normal good, an increase in income causes the demand curve to shift to the right. Normal goods is the kind of good, you would like to have but cannot afford it now. For me, say Tesla

• If rising income shifts the demand curve for a good to the left, then the good is called an inferior good.

• For example, $1 burger. Homeless tends to have this as their main food. When he has more budge balance, he will switch to, say Big Mac ($3.5).

Shifting Demand Curve: Other Goods

• Availability and prices of related goods, Iphone 6 v.s Sumsung Galaxy 5, prices are pretty similar

• Think about it, if you are deciding which one you would choose, there comes a promotion deal on Sumsung note, say $100 less. Which one will you choose? I will choose Sumsung notes

• Two goods are said to be substitutes when the fall in the price of one leads to a left shift in the demand curve for the other.

• Two goods are said to be complement when the fall in the price of one leads to a right shift in the demand curve for the other. Say Coffee and Milk.


• In English: Substitues means you only need to have one of these two(i.e they have very similar function)

• Say iphone 6 and Samsung Galaxy 5

• Honda civic v.s Ford Focus

• Complementary pair means you must have them together

• Coffee and Milk

• Left shoe and Right Shoe

Shifting Demand Curve and Moving along the curve

Shifting Demand Curve: Number of People and Belief

• Number and scale of buyers, Immigriant; Or more people give me propose?

• Buyers’ beliefs about the future: What if you are expecting price is to increase?

How do sellers Behave?

• At a given price, the amount of the good or service that sellers are willing to supply is called the quantity supplied

• ExxonMobil, An oil campany

• Holds several Drilling points, Some oil is easy to get. But Some oil is in deep-water locations where the ocean depth is 2 miles and the oil is another 8 miles below the seafloor.

• Because of the enormous expense, such wells are only drilled when the price of oil is over $70 per barrel. We will see why.

• The higher the price of oil goes, the more drilling locations become profitable for ExxonMobil.


• Supply curve plots the quantity supplied at different prices.

• Property?

• Willingness to accept is the lowest price that a seller is willing to get paid to sell an extra unit of a good.

• Law of Supply: In almost all cases, the quantity supplied rises when the price rises (holding all else equal).

Why is Supply curve upward-sloping?

• As we have talked about, The only behavior of an economic agent is to choose.

• What is the Choice of Seller here?

• (1) to Choose a optimal supply amount given the the price---Level Optimization

• (2) Or given the price is he/she willing to supply one more unit of goods?---Marginal Optimization

Why is Supply curve upward-sloping

• For example, Oil company A has 8 Oil Well Drillings, and each one of them can produce one gallon of gasoline per day. And the daily operation cost of these oil well is 1, 2, 3, 4, 5,6,7,8; Why Shall I order in this way?

• How about their daily operation cost is 6 7 8 5 3 1 2 4

• Ok if I operate the one with daily cost 6, it will cost me $6 and I will get 1 unit of oil in return


• List of Drilling points: 6 7 8 5 3 1 2 4

• Given price of is $10 dollar

• And which one you would like to operate if I only allow you to operate one drilling point?

• 6 7 8 5 3 1 2 4

• What if you can operate two drilling point?

• 6 7 8 5 3 1 2 4

• Three piont?

• 6 7 8 5 3 1 2 4


Four pionts?

• 6 7 8 5 3 1 2 4

• Five pionts?

• 6 7 8 5 3 1 2 4

• Six piont?

• 6 7 8 5 3 1 2 4

• Seven piont?

• 6 7 8 5 3 1 2 4

• Eight piont?

• 6 7 8 5 3 1 2 4


# Of drilling

Points to OperateTotal Cost Benefit

（$5/ unit）Net Benefit Marginal Cost Marginal Benifit

0 0 0 0 --- ---

1 1 5 5-1=4 1 5

2 3 10 10-3=7 2 5

3 6 15 15-6=9 3 5

4 10 20 20-10=10 4 5

5 15 25 25-15=10 5 5

6 21 30 30-21=9 6 5

7 28 35 35-28=7 7 5

8 36 40 40-36=4 8 5


# Of drilling

Points to OperateTotal Cost Benefit

（$7/ unit）Net Benefit Marginal Cost Marginal Benifit

0 0 0 0 --- ---

1 1 7 1 7

2 3 14 2 7

3 6 21 3 7

4 10 28 4 7

5 15 35 5 7

6 21 42 6 7

7 28 49 7 7

8 36 56 8 7

Why is Supply curve upward-sloping, Marginal Cost is increasing

Why Marginal cost is 1 2 3 4 5 6 7 8?

• Since which one you will choose to be the first one to operate? The one with Cost $1

• Conditional on you have already operated one project. Then which one you will choose as the extra one if I give you a opportunity to choose another one? The one with cost $2

• Conditional on you have already operated two projects. Then which one you will choose as the extra one if I give you a opportunity to choose another one? The one with cost $3

• Conditional on you have already operated three projects. Then which one you will choose as the extra one if I give you a opportunity to choose another one? The one with cost $4

Marginal Cost is increasing: Another Example• What will be your new sequence of Marginal Cost if your project have daily cost 2 4.5 5 3.2 6.1 0.8 1.4?

• Since which one you will choose to be the first one to operate? The one with Cost $0.8

• Conditional on you have already operated one project. Then which one you will choose as the extra one if I give you a opportunity to choose another one? The one with cost $1.4

• Conditional on you have already operated two projects. Then which one you will choose as the extra one if I give you a opportunity to choose another one? The one with cost $2

• Conditional on you have already operated three projects. Then which one you will choose as the extra one if I give you a opportunity to choose another one? The one with cost $3.2

• Since We always use our favorate first.

Marginal Cost is increasing v.s Diminishing Utility

• Since We always use our favorate first.• Think in another way, Think about it, Now your favorite Fruit are (Cherry) >(Avacado) >(Watermelon)

>(Orange) >(Apple) >(Grape)

• Ok say, we have 6 cups of Juice, with corresponding favor.

• Which one you are going to have if I tell you that you can only have one?

• Cherry

• Conditional on you have already had Cherry Juice, which one you are to have if I tell you that you can have an extra one?

• Acacado......

• Watermelon.....

• See- Your next one is always worse than current one

Why is Supply curve upward-sloping, Marginal Cost

• As we have talked about, in last example.

• What is the shape of Supply curve?

• Extend it:(Practice Quiz:)

• For example, Oil company A has 12 Oil Well Drillings, and each one of them can produce one gallon of gasoline per day. And the daily operation cost of these oil well is 1, 2, 3, ...,12; Why Shall I order in this way?

• How about their daily operation cost is 6 12 8 9 10 1 3 4.....

• Say Now Market Price is 10, what is the optimal supply amount?

From Individual Supply to Aggregate Supply

Supply Shift

The supply curve shifts when these variables change:

• Prices of inputs used to produce the good

• Technology used to produce the good

• Number and scale of sellers

• Sellers’ beliefs about the future

Supply Shift

Supply Shift: Shift factors

The supply curve shifts when these variables change:

• Prices of inputs used to produce the good(If operating cost decrease)

• Technology used to produce the good: Why? Since these will change seller's Marginal Cost(operating cost decrease)

• Number and scale of sellers, Of couse! It changes the amount of individual supply curve to add up!

• Sellers’ beliefs about the future. For example, Groupon will expire tomorrow

Supply and Demand in Equilibrium

• How do buyers and sellers interact?

• What determines the market price at which they trade?

• What determines the quantity of goods bought by buyers and sold by sellers?

• Demand And Supply Analysis!

Supply and Demand in Equilibrium， Some concepts

• This crossing point is defined to be the competitive equilibrium

• The price at the crossing point is referred to as the competitive equilibrium price

• The quantity at the crossing point is referred to as the competitive equilibrium quantity.

• Why do we name them to be “equilibrium XX”?

• Imagin what happen if the price or quantity is not at equilibrium price or quantity


Excess Supply

Is it optimal to supply more than demand?

Supply > Demand

• Is the situation at Eq?

• Say price is at P

• Supply > Demand means what?

• Some of the firm cannot sell their product!

• Cannot sell product= Zero Revenue but positive cost!------Negative Profit!!

But you can always Earn 0 profit if you do nothing

Everyone stays at their Optimum; In another word, they do not want to change their decision.


Excess Demand

Is it optimal to supply less than demand?

Supply < Demand

• Is the situation at Eq?

• Say price is at P

• Supply < Demand means what?

• Means you can sell it when you set a higher price!

• Everyone knows it! Then every one is going to ask for a higher price!

What Would Happen If Price is fixed then?


what would happen if a major oil exporter suddenly stopped production, as Libya did in 2011? This causes a left shift of the supply curve.Then?Equilibrium Changes


what would happen if a Huge amount electric cars are adopted? This causes a left shift of the Demand curve of Oil.Then?Equilibrium Changes

How to model Price Control?

• What Would Happen If the Government Tried to Dictate the Price of Gasoline?

• Market will also work, but by another way

Reading Assignment and Practice Question

Read Ch3-4

Recommended Question: Ch3-Problem 3, 4 Ch4-Problem 1, 5

demand, supply, and equilibrium• supply curve plots the quantity supplied at different prices. •...

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