supply and demand: an introduction supply and demand: an introduction principles of macroeconomics...

Supply and Demand:An Introduction

Supply and Demand:An Introduction

Principles of Macroeconomics

Dr. Gabriel X. Martinez

Ave Maria University

Chapter 3 - Supply and Demand: Chapter 3 - Supply and Demand: An IntroductionAn Introduction

22Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved.

Supply and Demand: Supply and Demand: An IntroductionAn Introduction

How do consumers get the goods and How do consumers get the goods and services they want in the right quantities and services they want in the right quantities and qualities?qualities?– Some goods and services are allocated by the Some goods and services are allocated by the

market forces of supply and demand.market forces of supply and demand.

Economic forces are necessary reactions to Economic forces are necessary reactions to scarcity and opportunity costs.scarcity and opportunity costs.Market forces are economic forces acting Market forces are economic forces acting through the market.through the market.



Buyers and Sellers in Buyers and Sellers in MarketsMarkets

A MarketA Market– Consists of all buyers and sellers of a good or Consists of all buyers and sellers of a good or

serviceservice

What do you think?What do you think?– What determines the price of pizza, gasoline, a What determines the price of pizza, gasoline, a

car wash, or other goods and services?car wash, or other goods and services?



Buyers and Sellers in the Buyers and Sellers in the MarketMarket

The Price of a good is determined byThe Price of a good is determined by– the the interactioninteraction between between– the the valuevalue that consumers give to the good that consumers give to the good– and the and the costcost of producing it. of producing it.

– ValueValue is studied with the demand curve. is studied with the demand curve.– CostCost is studied with the supply curve is studied with the supply curve– Market EquilibriumMarket Equilibrium happens when value equals happens when value equals

cost.cost.




The Demand CurveThe Demand Curve– A schedule or graph that tells us the A schedule or graph that tells us the quantityquantity of of

a good that buyers wish to buy at each a good that buyers wish to buy at each priceprice..

Demand reflects people’sDemand reflects people’swillingness to paywillingness to pay

a given pricea given pricefor a given quantityfor a given quantity

of a good or service.of a good or service.




A Property of DemandA Property of Demand– As price of a good or service goes downAs price of a good or service goes down

the quantity consumers wish to buy will the quantity consumers wish to buy will increase.increase.

P P ↓↓ Q QDD ↑↑

– Therefore, the demand curve is downward-Therefore, the demand curve is downward-sloping.sloping.



The Yearly DemandThe Yearly DemandCurve for Cell phones Curve for Cell phones

Price($ per phone)

Quantity(million of phones per year)

4

2

3

8 12 16

Demand




The Supply CurveThe Supply Curve– A curve or schedule showing the quantity of a A curve or schedule showing the quantity of a

good that sellers wish to sell at each price.good that sellers wish to sell at each price.

QuestionQuestion–Will the opportunity cost of producing Will the opportunity cost of producing additional cell phones increase or decrease additional cell phones increase or decrease as you produce more cell phones?as you produce more cell phones?




The Supply CurveThe Supply Curve– Sellers must receive a higher price to produce Sellers must receive a higher price to produce

additional units of a product to cover the higher additional units of a product to cover the higher opportunity costs of each additional unit.opportunity costs of each additional unit.

P P ↓↓ Q QSS ↓↓




Supply reflectsSupply reflectsthe the cost of producingcost of producing

a given quantitya given quantityof a good or service.of a good or service.

Price must be equal to (or higher than)Price must be equal to (or higher than)costcost

for the seller to supply the good or service.for the seller to supply the good or service.



The Yearly SupplyThe Yearly SupplyCurve of Cell phones Curve of Cell phones

Price($ per phone)

Quantity(million of phones per year)

4

2

3

8 12 16

Supply



Market EquilibriumMarket Equilibrium

EquilibriumEquilibrium– A system is in equilibrium when there is no A system is in equilibrium when there is no

tendency for it to change.tendency for it to change. The forces in the system are balanced.The forces in the system are balanced.

Market EquilibriumMarket Equilibrium– Occurs in a market when all buyers and sellers Occurs in a market when all buyers and sellers

are satisfied with their respective quantities at are satisfied with their respective quantities at the market price.the market price. The economic forces are balanced.The economic forces are balanced.



The Equilibrium Price and The Equilibrium Price and Quantity of Cell phones Quantity of Cell phones

Price($ per phone)

Quantity(millions of phones per year)

4

2

3

8 12 16

Supply

Demand

Equilibrium at $3

Quantity Demanded =

Quantity Supplied




Equilibrium Price and Equilibrium QuantityEquilibrium Price and Equilibrium Quantity– The values of price and quantity for whichThe values of price and quantity for which

quantity supplied quantity supplied and and

quantity demanded quantity demanded

are equalare equal



What Do You Think?What Do You Think?– Would buyers prefer a lower price than the Would buyers prefer a lower price than the

equilibrium price?equilibrium price?

– Would sellers prefer a higher price than the Would sellers prefer a higher price than the equilibrium price?equilibrium price?




What Do You Think?What Do You Think?– If prices are lower than the equilibrium price, If prices are lower than the equilibrium price,

there will be excess demand.there will be excess demand.

– If prices are higher than the equilibrium price, If prices are higher than the equilibrium price, there will be excess supply.there will be excess supply.




Excess Supply Excess Supply

Price($ per phone)

Quantity(millions of phones per year)

4

2

3

8 12 16

Supply

Demand

Excess supply = 8 millionphones per year

Excess supply causes prices to fall



Excess Demand Excess Demand

Price($ per phone)

Quantity(million phones per year)

4

2

3

6 18

Excess demand = 12 million phones per year

Supply

Demand

Excess demand causes prices to rise




What Do You Think?What Do You Think?– Is the market equilibrium always an ideal Is the market equilibrium always an ideal

outcome for all market participants?outcome for all market participants?



Predicting and Explaining Predicting and Explaining Changes in Prices and Changes in Prices and

QuantitiesQuantities

Distinguishing BetweenDistinguishing Between– A A change in the quantity demandedchange in the quantity demanded……

A A movement alongmovement along the demand curve the demand curvethat occurs in response to a change in that occurs in response to a change in priceprice

We often see this when the supply curve shifts and the market We often see this when the supply curve shifts and the market equilibrium changes.equilibrium changes.





… … AndAnd

– A A change in demandchange in demand A A shiftshift of the entire demand curve of the entire demand curve

– Caused by anything besides price, for exampleCaused by anything besides price, for example Changes in people’s preferences,Changes in people’s preferences, Changes in incomes or population,Changes in incomes or population, Changes in prices of other goods.Changes in prices of other goods.



An Increase in Quantity An Increase in Quantity Demanded vs. an Increase in Demanded vs. an Increase in

DemandDemandPrice

($/can)

Quantity(1000s of cans/day)

5

2

3

4

1

4

122

6

0

D

D Increase in quantity

demanded

86



An Increase in Quantity An Increase in Quantity Demanded vs. an Increase in Demanded vs. an Increase in

DemandDemandPrice

($/can)


5

2

3

1

4

12

6

0

D

D

Increase in demand

D’

D’

14





Change in the quantity suppliedChange in the quantity supplied– A movement along the supply curve that occurs A movement along the supply curve that occurs

in response to a change in price.in response to a change in price.





Change in supplyChange in supply– A shift of the entire supply curve.A shift of the entire supply curve.

Caused by anything besides price, for exampleCaused by anything besides price, for example– Changes in the cost of labor (wages),Changes in the cost of labor (wages),– Changes in the cost of other factors of production,Changes in the cost of other factors of production,– Changes in the technology of production.Changes in the technology of production.



An Increase in Quantity An Increase in Quantity Supplied vs. an Increase in Supplied vs. an Increase in

SupplySupplyPrice

($/can)


5

2

3

4

1

4

102

6

0 6 8

S

S

Increase in quantity supplied



An Increase in Quantity An Increase in Quantity Supplied vs. an Increase in Supplied vs. an Increase in

SupplySupplyPrice

($/can)


5

2

3

4

1

4

102

6 S

0 6 8

S

S’

S’

Increase in supply



Demand, Supply, and Market Demand, Supply, and Market EquilibriumEquilibrium

Four Rules for Figuring out the Effects of Four Rules for Figuring out the Effects of Shifts of Demand and SupplyShifts of Demand and Supply– If Quantity Rises,If Quantity Rises,

And Prices Rise, Demand has increased.And Prices Rise, Demand has increased.– That is, demand has shifted out.That is, demand has shifted out.

And Prices Fall, Supply has increased.And Prices Fall, Supply has increased.

– If Quantity Falls,If Quantity Falls, And Prices Fall, Demand has shifted in.And Prices Fall, Demand has shifted in.

– That is, demand has decreased.That is, demand has decreased. And Prices Rise, Supply has shifted in.And Prices Rise, Supply has shifted in.



Price

Quantity

P

P’

Q Q’

S

D’D

An increase in demand will lead to an increase in both the equilibrium price and quantity

Four Rules Governing the Effects Four Rules Governing the Effects of Supply and Demand Shifts: Iof Supply and Demand Shifts: I

Increase in DemandIncrease in DemandD ↑ D ↑ P P ↑↑ Q QDD ↑↑

Movement along Movement along Supply curveSupply curve

P P ↑↑ Q QSS ↑↑



Price

Quantity

P’

P

Q’ Q

S

DD’

A decrease in demand will lead to a decrease in both the equilibrium price and quantity

Four Rules Governing the Effects Four Rules Governing the Effects of Supply and Demand Shifts: IIof Supply and Demand Shifts: II

Decrease in DemandDecrease in DemandD ↓ D ↓ P P ↓↓ Q QDD ↓↓

Movement along Movement along Supply curveSupply curve

P P ↓↓ Q QSS ↓↓



P’

P

Q Q’

S’

D

SPrice

Quantity

An increase in supply will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity

Four Rules Governing the Effects Four Rules Governing the Effects of Supply and Demand Shifts: IIIof Supply and Demand Shifts: III

Increase in Increase in SupplySupply

S ↑ S ↑ P P ↓↓ Q QSS ↑↑

Movement Movement along Demand along Demand

curvecurveP P ↓↓ Q QDD ↑↑



P

P’

Q’ Q

S

D

S’Price

Quantity

An decrease in supply will lead toan increase in the equilibrium price and a decrease in the equilibrium quantity

Four Rules Governing the Effects Four Rules Governing the Effects of Supply and Demand Shifts: IVof Supply and Demand Shifts: IV

Decrease in Decrease in SupplySupply

S ↓ S ↓ P P ↑↑ Q QSS ↓↓

Movement Movement along Demand along Demand

curvecurveP P ↑↑ Q QD D ↓↓



Reasons for changes in QReasons for changes in Q

Price($/ticket)

1000s of tickets

S

DS

DW

QW QS

PW

PS

High Quantity due to High Demand



Reasons for changes in QReasons for changes in Q

Price($/bushel)

Millions of bushels

SW

D

QW QS

PW

PS

SS

High Quantity due to High Supply



The Effects of Simultaneous The Effects of Simultaneous Shifts in Supply and DemandShifts in Supply and Demand

Price($/bag)

Millions of bags per month

P

Q

S

D

P’

Q’

D’

S’S’ after reduction in cost of production

D’ after fall in willingness to buy

Q falls because D shifts more than S.



The Effects of Simultaneous The Effects of Simultaneous Shifts in Supply and DemandShifts in Supply and Demand

Price($/bag)

Millions of bags per month

P

Q

S

D

P’

Q’

D’

S’

D’ after fall in willingness to buy

S’ after reduction in cost of production

Q rises because D shifts less than S.

supply and demand: an introduction supply and demand: an introduction principles of macroeconomics...

Documents