Download Lecture : Supply and Demand

Rob Godby
University of Wyoming
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Recall that the PPF model describes
the tradeoff between efficient
production choices.
The model indicated that trade
among agents specializing in what
they do best can make everyone
better off than they could be
otherwise (outside the PPF).
The model did not explain how much
is produced or at what price.
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Many methods are possible for distribution and
allocation of goods and services in the economy
most often, the type of distribution used depends
on how property rights in the economy are
owned.
command economies (publicly owned)
◆ market economies (privately owned)
◆ mixed economies (both)
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Our economy is really a mixed economy, but
most allocation decisions are made in markets.
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Intervention
Socialism
Guided Markets
Efficiency
Equity
Market Capitalism
Communism
Laissez-faire
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Supply and Demand are the two
words that economists use most
often.
They refer to the behaviour of
people as they interact in Markets
Modern microeconomics is about
supply, demand, and market
equilibrium.
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A market is where a group of
buyers and sellers of a particular
good or service interact.
◆ Buyers determine demand...
◆ Sellers determine supply…
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Markets are the institution used in
our society to determine who gets
what and how much.
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Markets may be classified by the
competitive conditions within them.
The four main types of market are
perfectly competitive
◆ monopoly
◆ oligopoly
◆ monopolistically competitive
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Are markets with:
many buyers and sellers
◆ who sell homogeneous goods
◆ who are “price-takers”
◆ with
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This results in a narrow range of
prices being established that
buyers and sellers act upon.
Example: retail gas stations
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There is only one seller in the
market who sets price and controls
the quantity sold.
Example: The television cable
company in Laramie (TCI).
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There are only a Few Sellers in the
market, who may not be aggressively
competitive
Example: Supermarkets in Laramie
(Safeway, Smith’s and Albertson’s)
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often their prices differ little on most
goods
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These are markets with
◆ many sellers,
◆ each sells a differentiated product
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they set the price of their product.
This causes many markets with a
number of very similar goods and
possibly a wide range of prices.
Example: Markets for Cola (Coke,
Pepsi, RC, Private Brands, etc.)
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Demand refers to the amount (quantity) of a good
that buyers in a market are willing and able to
purchase at alternative prices for a given point in
time.
Quantity Demanded refers to the amount they are
willing to purchase at a given price
These concepts can be described
diagrammatically by a “demand curve”
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➀Market Price
➁Consumer Income
➂Prices of Related Goods
➃Tastes
➄Expectations
➅Number of Consumers
Price of Beer
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Demand Curve
for Beer
(*note it slopes down)
Quantity of Beer
$
Market Price
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Law of Demand:
There exists an
inverse
relationship
between Price
and Quantity
Demanded.
Example: As
price increases,
you buy less
beer.
P
P1
P2
Q1
Q2
Q
$
Income
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As income increases,
P
the demand for a
normal good will
increase.
Example: if your
income rises, you will
buy more beer at all
prices because you
can afford it.
This shifts the demand
curve outward
D2
D1
Q
$
Income
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As income increases the
demand for an inferior
good decreases.
This shifts the demand
curve inward (to the left).
Examples of inferior
goods: Raman noodles,
Kraft dinner, Pabst Blue
Ribbon Beer.
P
D1
D2
Q
$
Prices of Related Goods
When the fall in price of one
good reduces the demand
for another good, the two
goods are substitutes.
■ Example: if the price of
liquor fell, you might buy
less beer at all prices.
■ This would shift the
demand curve for beer
inward.
P
D1
D2
Q
$
Prices of Related Goods
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When the fall in price of P
one good increases the
demand for another
good, the two goods are
complements.
Example: if the price of
pizza fell, you might buy
more beer at all prices.
This shifts the demand
curve for beer outward.
D2
D1
Q
$#
"( How would the demand curve for beer in
Laramie be changed for the following?
■ You decide you don’t like beer as much
anymore…
■ You decide that drinking beer every night is
making you more likely to get fired…
■ The population of Laramie doubles...
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Demand Schedule:
A table that shows the
relationship between the price
of the good and the quantity
demanded. (Table 4-1)
Demand Curve:
The downward-sloping line
relating price and quantity
demanded. (Figure 4-1)
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...implies that all the relevant
variables (e.g. determinants
of demand) are held
constant, except the one(s)
being studied at the time.
■ Example: when considering
the effect of an increase in
the price of beer we don’t
also consider an increase in
the price of wine at the same
time.
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Change in Quantity Demanded
Movement along the demand
curve. Caused by a change in
the market price of the product.
(Table 4-3)
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Change in Demand
A shift in the demand curve,
either to the left or right. (Figure 4-3)
Price
&!,
$2.00
D
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Quantity
Price
&!,
$2.00
$1.00
D
7
13
Quantity
Price
&!
$2.00
D1
7
Quantity
&!
Price
$2.00
D2
D1
7
10
Quantity
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Quantity Supplied
refers to the amount
(quantity) of a good
that sellers are
willing and able to
supply for sale at
alternative prices for
a given point in
time.
P
S
Q
"(
$+
Price
S
Supply curve
for Beer (*note
it slopes up)
Quantity
$
➀Market Price
➁Input Prices
➂Technology
➃Expectations
➄Number of Producers
$
Market Price
Law of Supply
There exists an
direct (positive)
relationship
between Price and
Quantity Supplied.
P
S
Why?
Q
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Supply Schedule
A table that shows the
relationship between the price
of the good and the quantity
supplied. (Table 4-4)
Supply Curve
The upward-sloping line relating
price and quantity supplied.
(Figure 4-4)
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Change in Quantity Supplied
Movement along the supply
curve. Caused by a change in
the market price of the product.
(Table 4-6)
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Change in Supply
A shift in the supply curve, either
to the left or right. (Figure 4-7)
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Supply
Price
$2.00
Quantity
7
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Supply
Price
$2.00
$1.00
Quantity
1
7
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Supply
Price
$2.00
Quantity
7
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S1
Price
S2
$2.00
Quantity
7
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Equilibrium Price
The price at which the supply and
demand curve intersect. Quantity
Supplied and Quantity Demanded
are equal.
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Equilibrium Quantity
The quantity at which the supply
and demand curve intersect.
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Price
D
Quantity
$
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Price
S
D
Quantity
$
Price
S
$2.00
D
7
Quantity
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Excess Supply (surplus)
Price is above equilibrium price,
therefore producers are unable to
sell all they want at the going price.
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Excess Demand (shortage)
Price is below equilibrium price,
therefore consumers are unable to
buy all they want at the going
price.
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Price
Supply
Demand
Quantity
$
-%
Price
Excess Supply
Supply
Demand
Quantity
$
-%
Price
Supply
Demand
Quantity
$
-%
Price
S
Excess
Demand
D
Quantity
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Determine if event shifts supply
curve, the demand curve, or both.
Determine direction of shift: if
curve(s) shift to left or right.
Determine effects of shift(s) on
equilibrium price and quantity.
Example: Demand for beer in hot
weather.
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Price
Pe
Equilibrium
D
Qe
Quantity
&!
S
Price
Pe1
D2
D1
Qe1
Quantity
&!
Price
Pe
Pe
Quantity
Qe
&!
S
Price
New
Equilibrium
Pe
Pe
D2
D1
Qe
Qe
Quantity
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Sometimes markets don’t allocate
certain goods efficiently
often this is because there are
poorly defined property rights or
responsibility for the good in
question
in such cases, government
regulation or direct provision may
occur to ensure the good is
allocated in adequate amounts.
(Examples?)
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Markets can be classified by their competitive
conditions
Market economies harness the forces of supply and
demand. . .
Demand is determined by price, income, prices of
related goods, tastes, expectations and population.
◆ Supply is determined by price, input prices,
technology, expectations and number of producers.
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Supply and Demand together determine the prices
of the economy’s different goods and services. . .
Prices in turn are the signals that guide the
allocation of resources.