econ 102 sy 2008 2009 lecture 2 supply and demand june 12 and 17, 2008
TRANSCRIPT
Econ 102 SY 2008 2009
Lecture 2
Supply and Demand
June 12 and 17, 2008
Econ 102 SY 2008 2009
Key concepts
Supply and demand Market equilibrium Market equilibrium
Shifts in Demand Shifts in Supply Shifts in both Supply and Demand
Income and price elasticities Policy analysis
Econ 102 SY 2008 2009
Petroleum PricesWorld Prices of Crude Petroleum, Jan 1994 to July 2007
0
10
20
30
40
50
60
70
80
90
100
1/7/
1994
7/7/
1994
1/7/
1995
7/7/
1995
1/7/
1996
7/7/
1996
1/7/
1997
7/7/
1997
1/7/
1998
7/7/
1998
1/7/
1999
7/7/
1999
1/7/
2000
7/7/
2000
1/7/
2001
7/7/
2001
1/7/
2002
7/7/
2002
1/7/
2003
7/7/
2003
1/7/
2004
7/7/
2004
1/7/
2005
7/7/
2005
1/7/
2006
7/7/
2006
1/7/
2007
7/7/
2007
Week
Dol
lars
per
bar
rel
WTOTWORLD Poly. (WTOTWORLD)
Econ 102 SY 2008 2009
Crude Oil Prices 1947-2007
Factors Affecting Oil Prices
Econ 102 SY 2008 2009
Oil Supply and Prices
Econ 102 SY 2008 2009
Iran’s Oil Production
Econ 102 SY 2008 2009
Iraq’s Oil Production
Econ 102 SY 2008 2009
Iran and Iraq Influence The combination of the Iranian revolution and the Iraq-Iran War
cause crude oil prices to more than double increasing from $14 in 1978 to $35 per barrel in 1981.
Twenty-six years later Iran's production is only two-thirds of the level reached under the government of Reza Pahlavi, the former Shah of Iran.
Iraq's production remains about 1.5 million barrels below its peak before the Iraq-Iran War.
Econ 102 SY 2008 2009
OPEC and Oil Prices
Econ 102 SY 2008 2009
Current price increases
Econ 102 SY 2008 2009
Non-OPEC Production and Prices
Econ 102 SY 2008 2009
Low inventories
Econ 102 SY 2008 2009
Venezuela production
Econ 102 SY 2008 2009
Factors affecting
Asian demand Low inventories Venezuela oil supply problems
Econ 102 SY 2008 2009
Summary
Prices move because of shifts in demands and supply
Price
Quantity
SupplyDemand
Econ 102 SY 2008 2009
Describing Demand
Price Demand
(pesos)
(in million messages p.a.)
1.8 3.001.6 5.001.4 7.001.2 9.00
1 11.000.95 11.500.8 13.000.6 15.000.4 17.000.2 19.000.1 20.00
Text Messaging Market in the Philippines
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0.2
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0.6
0.8
1
1.2
1.4
1.6
1.8
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0.00 5.00 10.00 15.00 20.00 25.00
Quantity in million text messages
Pri
ce
Demand
Econ 102 SY 2008 2009
Describing Supply: Text Messaging Market
Price Supply
(pesos)
(in million messages p.a.)
1.8 19.001.6 17.001.4 15.001.2 13.00
1 11.000.95 10.500.8 9.000.6 7.000.4 5.000.2 3.000.1 2.00
Text Messaging Market in the Philippines
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0.2
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0.6
0.8
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1.2
1.4
1.6
1.8
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0.00 5.00 10.00 15.00 20.00
Quantity in million text messages
Pri
ce
Supply
Econ 102 SY 2008 2009
How the Market May Look Like
Text Messaging Market in the Philippines
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0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
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0.00 5.00 10.00 15.00 20.00 25.00
Quantity in million text messages
Pri
ce
Supply Demand
Econ 102 SY 2008 2009
Excess Demand
Excess demand is demand less supply Positive, demand
exceeds supply Negative, supply exceeds
demand (excess supply) Between prices 10 and 8,
excess demand changes sign
PriceMarket Demand
Market Supply
Excess Demand
18 9.00 43.00 -34.0016 13.00 39.00 -26.0014 17.00 35.00 -18.0012 21.00 31.00 -10.0010 25.00 27.00 -2.008 29.00 23.00 6.006 33.00 19.00 14.004 37.00 15.00 22.002 41.00 11.00 30.001 43.00 9.00 34.00
Econ 102 SY 2008 2009
Excess Demand: Effect on Buyers and Sellers
Positive excess demand buyers bid prices up to secure their purchases producers sell more because of higher profits
Negative excess demand (or excess supply) Producers bid prices down to unload their supplies As prices go down, buyers buy more
Econ 102 SY 2008 2009
When there’s Excess DemandExcess Demands and Behavior of Producers
and Buyers
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- 10 20 30 40 50
Quantity
Pri
ce
Supply Demand
Buyers bid up prices
SellersIncrease amountsproduced
Econ 102 SY 2008 2009
When there’s Excess Supply
Excess Demands and Agents Behavior
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- 10 20 30 40 50
Quantity
Pri
ce
Supply Demand
Suppliers bid down prices
And buyers Increase amountspurchased
Econ 102 SY 2008 2009
Market Equilibrium Excess Demand is Zero No incentive to change prices Equilibrium price: 9.5 and quantity: 26
P rice Demand SupplyExcess Demand
18 9 43 -3416 13 39 -2614 17 35 -1812 21 31 -1010 25 27 -2
9.5 26 26 08 29 23 66 33 19 144 37 15 222 41 11 301 43 9 34
Market Equilibrium
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Quantity
Pri
ce
Supply Demand
26
9.5
Econ 102 SY 2008 2009
Rise in Demand and Market Equilibrium
Suppose income per capita goes up and demand increases Price goes up (9.5 to 12), quantity increases (26 to 31)
P rice DemandNew Demand Supply
Excess Demand
18 9 19 43 -2416 13 23 39 -1614 17 27 35 -812 21 31 31 010 25 35 27 8
9.5 26 36 26 108 29 39 23 166 33 43 19 244 37 47 15 322 41 51 11 401 43 53 9 44
Upward Shift in Demand and Market Equilibrium
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5
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15
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0 10 20 30 40 50 60
Quantity
Pri
ce
Supply Demand New Demand
Econ 102 SY 2008 2009
Fall in Demand and Market Equilibrium
Suppose demand goes down Price goes down (9.5 to 8), quantity falls (26 to 23)
P rice DemandNew Demand Supply
Excess Demand
18 9 3 43 -4016 13 7 39 -3214 17 11 35 -2412 21 15 31 -1610 25 19 27 -8
9.5 26 20 26 -68 29 23 23 06 33 27 19 84 37 31 15 162 41 35 11 241 43 37 9 28
Downward Shift in Demand and Market Equilibrium
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24
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810
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1618
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Quantity
Pri
ce
Supply Demand New Demand
Econ 102 SY 2008 2009
Increase in Supply and Market Equilibrium
Suppose technology improves, and supply rise Price goes down (9.5 to 8), quantity rises (26 to 29)
P rice Demand SupplyNew Supply
Excess Demand
18 9 43 49 -4016 13 39 45 -3214 17 35 41 -2412 21 31 37 -1610 25 27 33 -8
9.5 26 26 32 -68 29 23 29 06 33 19 25 84 37 15 21 162 41 11 17 241 43 9 15 28
Upward Shift in Supply and Market Equilibrium
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2
46
8
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1416
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0 10 20 30 40 50 60
Quantity
Pri
ce
Supply Demand New Supply
Econ 102 SY 2008 2009
Fall in Supply and Market Equilibrium
Suppose production cost increases, and supply falls. Price goes down (9.5 to 10), quantity falls (26 to 25)
P rice Demand SupplyNew Supply
Excess Demand
18 9 43 41 -3216 13 39 37 -2414 17 35 33 -1612 21 31 29 -810 25 27 25 0
9.5 26 26 24 28 29 23 21 86 33 19 17 164 37 15 13 242 41 11 9 321 43 9 7 36
Upward Shift in Supply and Market Equilibrium
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1012
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Quantity
Pri
ce
Supply Demand New Supply
Econ 102 SY 2008 2009
Supply and demand applications
Econ 102 SY 2008 2009
Outline of Presentation
Effect of a tax on text messaging Earmarking revenues for technology improvement
Effect of imported vegetables on vegetable prices Restricting imports of vegetables
Increase in world rice prices Virtual equilibrium Subsidizing rice consumption
Consumer surplus, producer surplus and deadweight loss
Econ 102 SY 2008 2009
Taxing Text
Product: text messaging services Producers: mobile phone companies Buyers: mobile phone users
Econ 102 SY 2008 2009
How the Market May Look Like
Price Demand SupplyExcess Demand
(pesos)1.8 3.00 19.00 -16.001.6 5.00 17.00 -12.001.4 7.00 15.00 -8.001.2 9.00 13.00 -4.00
1 11.00 11.00 0.000.95 11.50 10.50 1.000.8 13.00 9.00 4.000.6 15.00 7.00 8.000.4 17.00 5.00 12.000.2 19.00 3.00 16.000.1 20.00 2.00 18.00
(in million messages p.a.)
Econ 102 SY 2008 2009
Text Messaging Market
Text Messaging Market in the Philippines
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Quantity
Pri
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Supply Demand
Econ 102 SY 2008 2009
Tax on Text Supply curve: Q=1+10*P Suppose the tax is: 66.67 percent New Supply curve: Q=1+6.6667*P If before we bought 11 million SMS for a price of
one peso Now that will cost buyers 1.67 pesos
Result: Buyers react by reducing texting Producers in turn react by reducing supply
Eventually market settles at 1.2 pesos per text
Econ 102 SY 2008 2009
How the Market Looks Like
Price Demand SupplyNew Supply
Excess Demand
(pesos)1.8 3.00 19.00 13.00 -10.001.6 5.00 17.00 11.67 -6.671.4 7.00 15.00 10.33 -3.331.2 9.00 13.00 9.00 0.00
1 11.00 11.00 7.67 3.330.95 11.50 10.50 7.33 4.170.8 13.00 9.00 6.33 6.670.6 15.00 7.00 5.00 10.000.4 17.00 5.00 3.67 13.330.2 19.00 3.00 2.33 16.670.1 20.00 2.00 1.67 18.33
(in million messages p.a.)
Econ 102 SY 2008 2009
Graphically….
Taxing Text
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0.5
1
1.5
2
0.00 5.00 10.00 15.00 20.00 25.00
Quantity
Pri
ce
Supply Demand New Supply
Tax Collection = 3.6 billion pesos
New supplyafter tax
Econ 102 SY 2008 2009
Who pays for the tax on text and deadweight loss of the tax
Incidence and Welfare Implications of the Tax on Text
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Quantity
Pric
e
Supply Demand New Supply
Tax Collection = 3.6 billion pesos
New supplyafter tax
Deadw eightLoss of the tax0.4 billion pesos
Consumer surplus
Producersurplus
Econ 102 SY 2008 2009
Earmarking revenues
Let the 3.6 billion pesos, or part thereof, be spent for technological improvement of mobile phone industry
Let the R&D result in increase productivity
Econ 102 SY 2008 2009
Effect on the Market
Price Demand
Supply (old technology)
Supply with old technology with Tax
Supply (new technology)
Supply with nes technology and Tax
Excess Demand
(pesos)1.8 3.00 19.00 13.00 37.00 25.0012 -22.001.6 5.00 17.00 11.67 33.00 22.3344 -17.331.4 7.00 15.00 10.33 29.00 19.6676 -12.671.2 9.00 13.00 9.00 25.00 17.0008 -8.00
1 11.00 11.00 7.67 21.00 14.334 -3.330.8572 12.43 9.57 6.71 18.14 12.4299 0.00
0.8 13.00 9.00 6.33 17.00 11.6672 1.330.6 15.00 7.00 5.00 13.00 9.0004 6.000.4 17.00 5.00 3.67 9.00 6.3336 10.670.2 19.00 3.00 2.33 5.00 3.6668 15.330.1 20.00 2.00 1.67 3.00 2.3334 17.67
(in billlion messages p.a.)
Econ 102 SY 2008 2009
Effects
Price goes down from 1.2 to .857 Quantity goes up from 9 to 12.43 million Revenue roughly is unaffected: 3.6 before to
3.55 billion pesos after technology improvement
Econ 102 SY 2008 2009
Vegetable Market
Price DemandLocal Supply
Excess Demand
(pesos/kg)
180 1200 2080 -880160 1300 1960 -660140 1400 1840 -440120 1500 1720 -220100 1600 1600 095 1625 1570 5580 1700 1480 22060 1800 1360 44040 1900 1240 66020 2000 1120 88010 2050 1060 990
(in thousand tons p.a.)
Vegetable MarketVegetable Market with Imported Vegetables
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Quantity in thousand tons
Pri
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es
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Supply Demand
Econ 102 SY 2008 2009
Imported Vegetables
Two sources of supply Local vegetables Imported vegetables
Assume that the country is small relative to the world Price taker in the world market The world can provide any amount the country
needs at a the world price
Econ 102 SY 2008 2009
The Vegetable Market with Imports
Price DemandLocal Supply
World supply
Total Supply
Excess Demand
(thousand pesos/ton
180 1200 2080160 1300 1960140 1400 1840120 1500 1720100 1600 160095 1625 1570
80 1700 1480Any amount
Any amount (such as 1700) 0
60 1800 1360 1360 44040 1900 1240 1240 66020 2000 1120 1120 88010 2050 1060 1060 990
(in thousand tons p.a.)
Vegetable Market
Econ 102 SY 2008 2009
Graphically…
Vegetable Market with Imported Vegetables
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Quantity in thousand tons
Pri
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Supply Demand Total Supply
Econ 102 SY 2008 2009
Taxing Imported Vegetables
Political objective: to appease local producers Economic: to encourage local production,
employment Suppose the tax is 12.5 percent on the price
Econ 102 SY 2008 2009
Vegetable Market with Import tax
Price DemandLocal Supply
World supply
World suply w tax Total Supply
Excess Demand
(thousand pesos/ton)
180 1200 2080160 1300 1960140 1400 1840120 1500 1720100 1600 160095 1625 1570
90 1650 1540
Any amount
Any Amount (such as 1650) 0.00
80 1700 1480
Any amount 1480 220
60 1800 1360 1360 44040 1900 1240 1240 66020 2000 1120 1120 88010 2050 1060 1060 990
(in thousand tons p.a.)
Vegetable Market
Econ 102 SY 2008 2009
Graphically…
Vegetable Market with Imported Vegetables and Imports are Taxed
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Quantity in thousand tons
Pri
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es
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pe
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n
Supply Demand Total Supply
Tax revenues = 16.5 billion
Econ 102 SY 2008 2009
Welfare analysis…
Vegetable Market with Imported Vegetables and Imports are Taxed
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0 500 1000 1500 2000 2500
Quantity in thousand tons
Pri
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Supply Demand Total Supply
Tax revenues = 16.5 billion
Econ 102 SY 2008 2009
Welfare effects of an import tax
SupplyDemandP
Q0
Consumersurplus
Producersurplus
Tax revenues
Deadweight Loss
Econ 102 SY 2008 2009
Effects of the Tax on Imported Vegetables
Consumers pay a higher price Price goes up by 10 pesos per kilo Revenues to the government: 16.5 billion
pesos Local producers increase supply by 170
thousand tons
Econ 102 SY 2008 2009
Rice Market
LocalSupply
Demand 1 Demand 2 TotalDemand
ImportSupply
Price
QuantityQsQd
Qs’Qd’
Exports
Imports
P
P’
ExportDemand
KinkedTotalDemand
KinkedTotalSupply
Econ 102 SY 2008 2009
Observations
With the unanticipated increase in the world price of rice, we get
Country shifts from being importer to exporter of rice
Local rice prices go up to P’ With that problems:
Poorer income class unable to meet daily rice requirement
Situation that we feed the world but cannot feed all of our people
Econ 102 SY 2008 2009
Government’s options
Ban rice exports Control the domestic price of rice Subsidize the domestic price of rice
General subsidy Targeted subsidy
Import rice and targeted subsidy
Econ 102 SY 2008 2009
Ban Rice Exports
LocalSupply
Demand 1 Demand 2 Total LocalDemand
Price
QuantityQs’Qd’
Exports
Imports
P
P’ExportDemand
Qd’’Qs’’
P’’
KinkedTotalDemand(Local and Export)
DeadweightLoss
Econ 102 SY 2008 2009
Observations
Assuming that the export ban policy is perfectly enforced, these are the effects Local rice prices go down Daily rice requirement of the poor may or may not
be met Local farmers lose Local consumers gain Consumers’ gain less than farmers’ loss, i.e. there
is deadweight loss
Econ 102 SY 2008 2009
Control Rice Prices
LocalSupply
Demand 1 Demand 2 TotalDemand
ImportSupply
Price
QuantityQs
Qd’QdQd’
Exports
Imports
P
P’
ExportDemand
KinkedTotalDemand(Local and Export)
KinkedTotalSupply
P’’
Econ 102 SY 2008 2009
End of Lecture 2
Supply and Demand