Download Demand and Supply

Demand and Supply
© Peter Berck 2012
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
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.
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.
Price-Demand or Inverse
Demand Curve
• Diagram: P on vertical
and Q on horizontal
P
• 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.
D-1(Q)
Q
-1
D (Q)
• The price that consumers will pay if Q units
of the good are available.
Shifting the Demand Curve
• Qown = D(pown,pother,y)
• If the price of the
P
other good goes up
and the demand curve
shifts in, the goods are
complements.
• If it shifts out, they are
substitutes.
• Give examples.
D-1
Q
Shifting the Demand Curve: y
• Qown = D(pown,pother,y)
• If income goes up and P
the demand curve
shifts out, the good is
a normal good.
• If it shifts in, it is an
inferior good.
D-1
Q
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
Inverse Supply curve diagram
• Price on input
goes up, how
does the
inverse supply
curve shift?
S-1
Pout
Q
On Notation
• We blithely write and say D or S when we
mean inverse demand or inverse supply.
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.
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.
Example of equilibrium
3
2.5
P
2
S
D
1.5
1
0.5
0
0
2
4
6
Q
8
10
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
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?
Excess S or D
3
2.5
P
2
S
D
1.5
1
0.5
0
0
2
4
Suppose P is 2.5.
Suppose P is 1
6
8
10
Q
Suppose Q = 2
Suppose Q = 8
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/busine
ss/company-news-jack-in-the-box-s-worstnightmare.html?pagewanted=all&src=pm
E Coli Burgers
3
2.5
P
2
S
D
D'
1.5
1
0.5
0
0
2
4
6
8
10
Q
Which curve shifted? Where was there a movement along
a curve? What points are observed?
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.
Ag. Programs: Loan rate of PL
• : How much does the gov’t buy and store?
Are consumers
better off? producers better
3
off? 2.5
P
2
S
D
1.5
1
0.5
0
0
2
4
6
Q
8
10
Rent Control
• Excess demand for housing
– lines
– bribes
• When rent control ends can students be
worse off?
Price is set as 1: excess demand
3
2.5
P
2
S
D
1.5
1
0.5
0
0
2
4
6
Q
8
10
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)
In a graph it is Horizontal
Addition
P
demand from developed world
from less developed world
Total Demand
Q
Pinhead’s View of Hunger
P
demand from developed world
from less developed world
Supply*
$2.74
Supply
Total Demand
QE
Q
Key Concepts
• Demand and inverse demand
– Shifts: Complements, substitutes, normal,
inferior
• Supply and inverse supply
– Shifts
• Equilibrium
– Shift and movement. Excess supply/demand