Download Review of Supply and Demand

Review of Supply and Demand
A. When Can the Supply and Demand Model be Used?
Supply and demand analysis is applicable for markets in which the individual purchasers and sellers
of the good are price-takers and in which the goods produced by different firms are identical, or close to
identical. (An individual consumer believes that the market price is unaffected by the amount of the good
he or she purchases. An individual firm believes that the market price is unaffected by the amount of the
good it sells.)
What types of markets are likely to have these characteristics?
B. Demand
Demand curves are defined only for markets in which the purchasers are price takers. By
definition, the market demand curve shows the market quantity demanded (the amount that purchasers want
to purchase) at each price holding all factors other than the price of the good constant (ceteris paribus).
In addition to the price of a good, factors that may affect the demand for a good are:
P Prices of other goods (substitute and complement goods)
I Income
N Number of consumers
T Tastes and preferences
E Et cetera (or expectations of future prices)
Example:
Market Demand Curve
Price
Quantity Demanded
Average Income=$20,000/yr
Quantity Demanded
Average Income=$40,000/yr
1
2
3
4
5
10
6
3
1
0
17
12
8
5
3
$/unit
6
D: Avg. I=$20,000/year
5
D: Avg. I=$45,000/year
4
3
2
1
0
0
2
4
6
8
10
12
14
16
18
units per week
0
1. Movement along the demand curve
2. Slope of the demand curve
3. Shifts in the demand curve
C. Supply
Supply curves are defined only for markets in which the sellers are price takers. By definition, the
market supply curve shows the market quantity supplied (the amount that sellers of the good want to sell) at
each price holding all factors other than the price of the good constant (ceteris paribus).
In addition to the price of a good, factors that may affect the supply for a good are:
P Prices of other goods that firms could produce
I Input prices
N Number of firms
T Technology
E Et cetera (or expectations of future prices)
D. Equilibrium
An equilibrium price is a price at which quantity demanded equals quantity supplied.
Example: Shifts in Demand and Supply in Market for Pepperoni Pizza
(which we assume is a competitive market)
Change
(ceteris paribus)
Price of chicken falls
New findings about health
benefits of a low fat diet
Wages of restaurant workers
increase
Low-cost, high-quality
automated pizza roller invented
Effect on the Demand Curve
for Pepperoni Pizza
Shifts to left (since fried chicken is a substitute in
consumption)
Effect on the Supply Curve
for Pepperoni Pizza
None (Assuming that chicken farmers do
not enter the pepperoni pizza or related
markets)
Change in Eq.
P&Q