Download Demand and supply

DEMAND AND
SUPPLY
MARKETS ARE MADE OF BUYERS (DEMANDERS) AND SELLERS (SUPPLIERS)
DEMAND IS A CURVE THAT SHOWS VARIOUS AMOUNT
(QUANTITY) OF A PRODUCT THAT CONSUMERS ARE
WILLING AND ABLE TO BUY AT A SPECIFIC POINT OF TIME
• (1) ALWAYS WILLING, NOT ALWAYS ABLE
• (2) PERIOD OF TIME MUST BE SPECIFIC BECAUSE IT PROVIDES
CONTEXT
• IMMEDIATE SHORT RUN, SHORT RUN, LONG RUN – DEPENDS ON
VARIABLE INPUTS
* SLOPE IS NOT CONSTANT(DEPENDENT ON DATA)
* AS PRICE DROPS, DEMAND GOES WAY UP
• DRAW THE GRAPH… MR. D
LAW OF DEMAND – THERE IS A NEGATIVE OR
INVERSE RELATIONSHIP BETWEEN PRICE AND
QUANTITY DEMANDED
• AS PRICE FALLS, QUANTITY DEMANDED RISES
• ASSUMPTIONS – OTHER THINGS BEING EQUAL AND WE IGNORE SUBSTITUTES
(1)CONSISTENT WITH COMMON SENSE – EX.) SALES
(2)BUYERS DERIVE LESS BENEFIT FOR EACH UNIT CONSUMED.
DIMINISHING MARGINAL UTILITY ADDITIONAL UTILITY ONLY IF
PRICE IS LOWER.
EX.) BURRITOS
(3) INCOME EFFECT AND SUBSTITUTION EFFECT
• LOWER PRICE INCREASES
PURCHASING POWER OF
BUYERS’ MONEY
• CAN BUY MORE
• LOWER PRICE MAKES
OTHER PRODUCTS MORE
EXPENSIVE
THERE ARE TWO TYPES OF MOVEMENT WITH DEMAND
CURVES
CAN MOVE ALONG THE CURVE OR CAN SHIFT THE
WHOLE CURVE
TO MOVE ALONG THE CURVE, THERE REQUIRES A
CHANGE IN PRICE
∆P
TO SHIFT THE WHOLE CURVE, YOU HAVE TO LOOK TO
DETERMINANTS OF DEMAND
DETERMINANTS OF DEMAND
• PREFERENCES
• # OF BUYERS IN MARKET
• CONSUMER INCOMES
• PRICES OF RELATED GOODS
• CONSUMER EXPECTATIONS
TASTES / PREFERENCES
FAVORABLE CHANGE IN CONSUMER TASTES
SHIFTS THE CURVE RIGHT OR LEFT DEPENDING
ON THE REACTION
# OF BUYERS / SIZE OF MARKET
• WITH AN INCREASE OR DECREASE IN MARKET SIZE
OR # OF BUYERS…
• DEMAND WILL SHIFT TO THE RIGHT OR LEFT
• MORE BUYERS, MORE DEMAND
• LESS BUYERS, LESS DEMAND
INCOME
• USUALLY AS INCOME INCREASES, DEMAND INCREASES
• NORMAL GOODS – DEMAND VARIES DIRECTLY (POSITIVE
RELATIONSHIP) WITH INCOME
• INFERIOR GOODS – DEMAND VARIES INVERSELY (NEGATIVE
RELATIONSHIP) WITH INCOME
• SO DEPENDING ON THE GOOD AND MY SITUATION,
DEMAND WILL EITHER INCREASE OR DECREASE
PRICES OF RELATED GOODS
• DEMAND WILL SHIFT DEPENDING ON PRICES OF RELATED GOODS
• SUBSTITUTE GOOD – SUBSTITUTE IN PLACE FOR ANOTHER
EX.) BREAD FOR HOT DOG BUN
• GOOD 1
GOOD 2
• PRICE ꜛ
DEMAND ꜛ
• PRICE ꜜ
DEMAND ꜜ
COMPLEMENTARY GOOD – USED TOGETHER
EX.) ICE CREAM AND CONE
GOOD 1
GOOD 2
PRICE ꜛ
DEMAND ꜜ
PRICE ꜜ
DEMAND ꜛ
CONSUMER EXPECTATIONS
• WHAT PEOPLE EXPECT TO HAPPEN INFLUENCES BEHAVIOR
TODAY
• IF YOU EXPECT THAT THE PRICE OF GAS IS GOING TO
DOUBLE AT THE END OF THE WEEK…
• WHAT WOULD YOU DO TODAY?
REMEMBER…
•CHANGE IN DEMAND SHIFTS THE WHOLE
CURVE
•CHANGE IN QUANTITY DEMAND MOVES
ALONG THE CURVE
SUPPLY
• A CURVE SHOWING VARIOUS AMOUNTS OF A
PRODUCT THAT PRODUCERS ARE WILLING AND ABLE
TO MAKE AVAILABLE FOR SALE DURING A PERIOD
(1) always willing, not always able
(2) period of time must be specific because it provides context
Immediate short run, short run, long run – depends on variable inputs
LAW OF SUPPLY (MOVES)
• AS PRICE RISES, THE QUANTITY SUPPLIED RISES
• AS PRICE FALLS, THE QUANTITY SUPPLIED FALLS
• REMEMBER, FROM THE VIEWPOINT OF PRODUCERS
• DRAW THE GRAPH, MR. D
• MARKET SUPPLY IS DERIVED FROM INDIVIDUAL SUPPLY
• SUPPLY CURVE IS UPWARD (POSITIVE RELATIONSHIP)
• REFLECTS LAW OF SUPPLY
•DETERMINANTS (SHIFTS)
• RESOURCE PRICES
TECHNOLOGY
• TAXES + SUBSIDIES
PRICES OF OTHER GOODS
• PRODUCER EXPECTATIONS
# OF SELLERS
RESOURCE PRICES
• HIGHER RESOURCE PRICES RAISE PRODUCTION COSTS
• PRICES OF RESOURCES
SUPPLY
• PRICES OF RESOURCES
SUPPLY
TECHNOLOGY
• ALLOWS PRODUCTION AT A LOWER COST OF INPUTS
• PRICE DROPS
SUPPLY RISES
TAXES AND SUBSIDIES
• TAX = COSTS
• PRICE RISES
SUPPLY DROPS
• SUBSIDIES = BENEFITS
• PRICE DROPS
SUPPLY RISES
PRICES OF OTHER GOODS
•SUBSTITUTION IN PRODUCTION
•SIMILAR GOODS AND HIGHER PRICES COULD
ENTICE OR TURN OFF CONSUMERS
•OTHER GOODS •PRICES INCREASE
SUPPLY INCREASE
PRODUCER EXPECTATIONS
• MUCH TRICKIER THAN CONSUMER EXPECTATIONS
• HARDER BECAUSE YOU ACTUALLY HAVE TO MAKE THE
STUFF
• THINK ABOUT FARMERS AND MANUFACTURING
# OF SELLERS
• LIKE THE DEMAND DETERMINANT
• IF THE MARKET INCREASES
• THE SUPPLY INCREASES
EQUILIBRIUM Q = Q
D
S
• EQUILIBRIUM PRICE – THE PRICE WHERE THE INTENTION OF
BUYERS AND SELLERS MATCH
• EQUILIBRIUM QUANTITY – THE QUANTITY DEMAND AND
QUANTITY SUPPLY AT EQUILIBRIUM PRICE
• IT’S THE INTERSECTION OF DEMAND AND SUPPLY CURVES
• DRAW THE GRAPH MR. D
SURPLUS - EXCESS SUPPLY, NOT ENOUGH DEMAND
,PRICE STARTS HIGH AND WILL BE DRIVEN DOWN
SHORTAGE – EXCESS DEMAND, NOT ENOUGH
SUPPLY, PRICE STARTS LOW AND WILL BE DRIVEN UP
COMPETITION DRIVE…
PRODUCTIVE EFFICIENCY
- PRODUCTION AT LEAST COST
- ALLOWS INPUTS TO BE FREED UP FOR OTHER THINGS
ALLOCATIVE EFFICIENCY
- LOOKING FOR THE MIX OF G/S MOST VALUED BY A SOCIETY
DEMAND REFLECTS MARGINAL BENEFITS
SUPPLY REFLECTS MARGINAL COSTS