Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Lecture 1: Demand and Supply The Use of Models Any sensible discussion about economics starts with the concepts of demand and supply. Economists take it as given that, the greater the price of any commodity, the less of it consumers will want to purchase, and the more of it other people will be willing to supply. - While simplistic in nature -- people continue to deny their validity ex.: the demand for water Economic Laws and Economic Models Law of Supply and Demand was first stated in 1776 – Adam Smith’s The Wealth of Nations. Economic Theory or Laws – generalizations about the working of an abstract economy - rules that economists use to predict actual market behavior - Price up – quantity demanded down Demand Curve - A demand curve, or demand function shows the quantity of a particular product that people demand as a function of price. Law of Demand - The lower the price, the greater the quantity demanded. A Graphical Interpretation A possible demand curve for apples as a function of the price of apples. The Demand Curve for Apples The demand curve shows combinations of apples consumers want to purchase at different prices. At Po, the quantity demanded is Qo. At P1, Q1. Demand is downward sloping, indicating that the lower the price, the higher the quantity demanded. The movement from A to B is a change in quantity demanded not a change in demand. Demand Function - the relation between price and quantity demanded is more properly stated as a demand function, - representing a demand function as a demand schedule Demand Schedule Price of Apples Quantity Demanded $0.40 100 $0.50 80 $0.60 75 - representing a demand function mathematically or equational demand Q = 100- 2P or P = 50 – (1/2) Q Determinants of Demand – shift factors of demand Household Income Normal good – as income increases, demand increases (other things constant) Inferior good – as income increases, demand decreases (other things constant) Prices of Related Goods in Consumption Substitutes in Consumption – as Psub rises, demand for own good rises Complements in Consumption – as Pcomp rises, demand for own good falls The demand function gives the quantity demanded as a function of price. But the demand function also has determinants such as income and the price of complements and substitutes. Thus we can write the demand curve as D = D(p, I, pc, ps) where p = price I = income pc = price of a complement ps = price of a substitute Other Determinants of Demand Expected Future Prices Population Preferences Impact of a Change in a Determinant of Demand While a change in price leads to a movement along a demand curve, a demand shifter causes the demand curve to increase from D to D'. The quantity demanded at the price Po increases from Qo to Q1. This shifter could be an increase in income (if the good is a normal good), an increase in the price of a substitute, or a decrease in the price of a complement. Supply Quantity Supplied – the amount of a commodity a firm plans to sell given the time period and prices Law of Supply – as the price increases, quantity supplied increase, other things constant - a supply curve can be represented as a supply schedule Supply Schedule Price of Apples Quantity Supplied $0.40 75 $0.50 80 $0.60 100 - a supply curve can be represented as a mathematical or equational supply Q = 10 + 2P or P = -5 + (1/10) Q A Supply Curve The supply curve gives the quantity supplied to the market at different prices. In general, the higher the price, the greater the quantity supplied. Determinants of Supply – supply shifters Price of the Factors of Production - changes in production technology Price of Related Goods in Production Substitutes in Production – if the Psub rises, production of the own good decreases Complements in Production – if the Pcomp rises, production of the own good rises Other Determinants of Supply Number of Firms on the Market Expected future Prices Production Taxes / Subsidies Disasters Market Equilibrium - market price at which quantity supplied and quantity demanded are equal (true, whether the equilibrium is determined graphically, by a schedules, or mathematically) Price and Quantity Determined by the Intersection of the Demand and Supply Curves While supplies and demands usually take prices as given, it is the intersection of the demand and supply curves that determine the equilibrium market price. When the price equals po, both the quantity demanded and the quantity supplied equal q o. Must the Quantities Demanded and Supplied be equal? It is not uncommon to hear or read of - demand outstripping supply - a need to assure the consumer of an adequate supply of _______ Surplus – if P > PE then the Qs > Qd Shortage - if P < PE then the Qd > Qs It is possible for Supply and Demand to not intercept at all. The process of adjustment can take time - in macro it is common to distinguish between short term and long-term supply and demand curves. Example of freshly cut flowers An Illustration of Long Run and Short Run Supply Curves The initial adjustment to a shift in the demand curve is a movement along the short run supply curve so that the price drops from P e to Ps. Over time, the price rises part way back to P' as the quantity falls to Q' Two Extreme Cases - vertical supply curve indicate a fixed quantity supplied - horizontal supply curve indicate that supply is as much as one might wants at one price. A Vertical Supply Curve A Horizontal Supply Curve This figure illustrates a vertical supply curve. No matter what the price, only a fixed quantity is available. The supply curve for land, for instance, is vertical. The other special case is that of a horizontal supply curve, where there is an infinite amount available at a given price.