demand, supply, and equilibrium · supply and demand in equilibrium，some concepts •this...

Summer 2016, Washington University

Demand, Supply, and Equilibrium

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:(


• So 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)

How do Buyer Behave, Willing to Pay

• 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

• 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)

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

Shifting Demand Curve

The demand curve shifts when these five major factors change;

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

• Income and wealth

• Availability and prices of related goods, Iphone 5 v.s 6

• Number and scale of buyers, Immigriant

• Buyers’beliefs about the future


The demand curve shifts when these five major factors change

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

• Income and wealth: you recently got your first full-time job and went from a student

budget to a $40,000 annual salary.


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• 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).


The demand curve shifts when these five major factors change

• Availability and prices of related goods, Iphone 5 v.s Sumsung note, 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.

Shifting Demand Curve and Moving along the curve

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 serverl 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.

• 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

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

Why is Supply curve upward-sloping, Marginal Cost

• As we have talked about, in last example.

• For example, Oil company A has 18 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, ...,18; 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

The supply curve shifts when these variables change:

• Prices of inputs used to produce the good

• Technology used to produce the good: Why? Since these will change seller's Marginal Cost

• 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?


Excess Demand

Is it optimal to

supply less than

demand?


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

What Would Happen If Price Control?

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

• Market will also work, but by another way, Such like:

What Would Happen If Price Control?

demand, supply, and equilibrium · supply and demand in equilibrium，some concepts •this...

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