Download Chapter 4: Supply and Demand

Demand
Chapter 4:
Supply and
Demand
n
Demand means the willingness and capacity
to pay.
n
Prices are the tools by which the market
coordinates individual desires.
Prepared by:
Kevin Richter, Douglas College
Charlene Richter,
British Columbia Institute of Technology
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rights reserved.
Law of Demand
n
q
q
As price falls, quantity demanded rises, other
things constant.
As price rises, quantity demanded falls, other
things constant.
Why? People tend to substitute away from goods
whose price has increased.
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rights reserved.
n
As the price goes up, the quantity demanded
goes down.
The demand curve is the graphic
representation of the law of demand.
n
It represents the maximum price consumers
will pay for an additional unit of the good.
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4
Sample Demand Curve
Price (per unit)
The demand curve slopes downward and to
the right.
n
3
Demand Curve
n
2
Demand Curve
Law of demand – there is an inverse
relationship between price and quantity
demanded.
q
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1
PA
A
D
0
QA
Quantity demanded (per unit of time)
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5
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6
Other Things Constant
Other things constant means that all other
factors that affect quantity demanded are
assumed to remain constant, whether they
actually remain constant or not.
n
Tastes, prices of other goods, even the
weather, may affect demand.
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n
Demand refers to a schedule of quantities of
a good that will be bought per unit of time at
various prices, other things constant.
n
Graphically, it refers to the entire demand
curve.
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7
8
Change in Demand versus Change in
Quantity Demanded
Change in Demand versus Change in
Quantity Demanded
n
Quantity demanded refers to a specific
amount that will be demanded per unit of time
at a specific price.
n
Graphically, it refers to a specific point on
the demand curve.
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rights reserved.
n
A movement along a demand curve
happens when there is a change in price.
n
We move from one point to another point
on the demand curve.
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9
Change in Demand versus Change in
Quantity Demanded
10
Change in Quantity Demanded
Changes in price
cause changes in quantity demanded
represented by a movement along a demand
curve.
Price (per unit)
n
Change in Demand versus Change in
Quantity Demanded
$2
B
Change in quantity demanded
(a movement along the curve)
$1
A
D1
0
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11
100
200
Quantity demanded (per unit of time)
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12
n
A shift in demand happens when anything
other than price changes.
n
The entire demand curve moves to the left or
right.
Price (per unit)
Change in Demand
Change in Demand versus Change in
Quantity Demanded
Change in demand
(a shift of the curve)
$2
$1
B
A
D0
D1
100
200
250
Quantity demanded (per unit of time)
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Shift Factors of Demand
n
q
q
q
q
Society's income.
The prices of other goods.
Tastes.
Expectations.
Population.
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When the price of a substitute good falls,
demand falls for the good whose price has
not changed.
n
When the price of a complement good falls,
demand rises for the good whose price has
not changed.
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rights reserved.
n
An increase in income will increase demand
for normal goods.
n
An increase in income will decrease demand
for inferior goods.
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15
Price of Other Goods
n
14
Income
Shift factors of demand are factors that cause
shifts in the demand curve:
q
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13
16
Tastes
n
17
A change in taste will change demand with
no change in price.
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18
Expectations
Population
n
If you expect your income to rise, you may
consume more now.
n
If you expect prices to fall in the future, you
may delay purchases today.
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n
20
From Demand Table to Demand Curve
The demand table assumes:
The Law of Demand (as price rises, quantity
demanded declines).
q
A specific time dimension.
q
Products are identical in shape, size, quality, etc.
q
Everything else is held constant.
n
You plot each point in the demand table on a
graph and connect the points to create the
demand curve.
n
The demand curve graphically conveys the
same information that is on the demand
table.
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21
From Demand Table to Demand Curve
22
From Demand Table to Demand Curve
The curve represents the maximum price that
you will pay for various quantities of a good –
you will happily pay less.
A Demand Table
Price per Cassette rentals
cassette demanded per
week
A
B
C
D
E
$0.50
1.00
2.00
3.00
4.00
9
8
6
4
2
A Demand Curve
$6.00
Price per cassettes (in dollars)
q
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n
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19
Demand Table
n
An increase in population will increase
demand at every price.
5.00
4.00
3.50
3.00
E
2.00
1.00
.50
0
D
Demand for
cassettes
C
B
A
1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of cassettes demanded (per week)
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23
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24
n
From Individual Demands
to a Market Demand Curve
A market demand curve is the horizontal sum
of all individual demand curves.
q
(1)
(2)
Price per Marie’s
cassette demand
A $.0.50
B
1.00
C
1.50
D
2.00
E
2.50
F
3.00
G
3.50
H
4.00
This is determined by adding the individual
demand curves of all the demanders.
9
8
7
6
5
4
3
2
(3)
Pierre’s
demand
6
5
4
3
2
1
0
0
(2)
Cathy’s
demand
1
1
0
0
0
0
0
0
(3)
Market
demand
16
14
11
9
7
5
3
2
$4.00
3.50
Price per cassette (in dollars)
Individual and Market Demand
Curves
G
F
3.00
E
2.50
D
2.00
C
1.50
B
1.00
0.50
0
Market demand
A
Cathy
Pierre Marie
2 4 6
8 10 12 14 16
Quantity of cassettes demanded per week
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25
Law of Demand
n
q
At lower prices, existing demanders buy more.
q
At lower prices, new demanders enter the market.
q
The market demand curve is flatter than the
individual demand curves.
q
Individuals control the factors of production –
inputs necessary to produce goods.
n
Factors of production are the resources or
inputs necessary to produce goods or
services.
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28
Law of Supply
The supply of produced goods involves:
q
n
27
Supply
n
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Supply
Regarding the market demand curve,
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McGraw -Hill/Irwin
n
An analysis of the supply of the factors of
production by households to firms.
q
An analysis of how firms transform those factors
of production into usable goods and services.
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There is a direct relationship between price
and quantity supplied.
q
29
As price rises, quantity supplied rises, other things
constant.
As price falls, quantity supplied falls, other things
constant.
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30
n
The supply curve is the graphic
representation of the law of supply.
n
It shows the minimum price the producer
requires to produce one more unit of output.
n
Sample Supply Curve
Price (per unit)
Supply Curve
The supply curve slopes upward to the right,
and tells us that the quantity supplied varies
directly with the price.
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rights reserved.
S
PA
0
QA
Quantity supplied (per unit of time)
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31
Change in Supply Versus Change in
Quantity Supplied
A
Change in Supply Versus Change in
Quantity Supplied
n
Supply refers to a schedule of quantities a
seller is willing to sell per unit of time at
various prices, other things constant.
n
Quantity supplied refers to a specific
amount that will be supplied at a specific
price.
n
Graphically, it refers to the entire supply
curve.
n
Graphically, it refers to a specific point on
the supply curve.
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33
34
Change in Supply Versus Change in
Quantity Supplied
Change in Supply Versus Change in
Quantity Supplied
Changes in price
cause changes in quantity supplied
represented by a movement along a supply
curve.
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32
n
35
A movement along a supply curve –
happens when there is a change in price.
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36
Change in Quantity Supplied
Change in Supply Versus Change in
Quantity Supplied
Price (per unit)
S0
B
$25
Change in quantity
supplied (a movement
along the curve)
A
$15
n
A shift in supply happens when anything
other than price changes.
n
The entire supply curve moves to the left or
right.
1,250
1,500
Quantity supplied (per unit of time)
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37
Shift in Supply
Shift Factors of Supply
S0
n
Price (per unit)
S1
$15
38
A
Other factors besides price affect how much
will be supplied:
q
Prices of inputs used in the production of a good.
q
Technology.
q
Suppliers’ expectations.
q
Taxes and subsidies.
B
Shift in Supply
(a shift of the curve)
1,250
1,500
Quantity supplied (per unit of time)
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Price of Inputs
40
Technology
n
When costs rise, profits decrease, so there is
less incentive to supply.
n
If costs rise substantially, the firm may even
shut down.
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39
41
n
Advances in technology reduce the cost of
production, and there is a greater incentive to
supply.
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42
Expectations
Taxes and Subsidies
n
If suppliers expect prices to rise in the future,
they may store today's supply to reap higher
profits later.
n
If they expect prices to fall in the future,
suppliers may sell off more of their
inventories today.
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n
When taxes go up, costs increase, and profits
fall, reducing the incentive to produce.
n
When government subsidies go up, costs fall,
and profits rise, giving suppliers the incentive
to increase output.
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43
Supply Table
44
From Supply Table to Supply Curve
n
Each supplier follows the law of supply.
n
When price rises, each supplies more, or at
least as much as they did at a lower price.
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n
n
The supply curve represents the set of
minimum prices an individual seller will
accept for various quantities of a good.
n
Competing suppliers’ entry into the market
places a limit on the price any supplier can
charge.
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45
From Supply Table to Supply Curve
To derive a supply curve from a supply table,
you plot each point in the supply table on a
graph and connect the points.
46
Individual and Market Supply Curves
n
47
The market supply curve is derived by
horizontally adding the individual supply
curves of each supplier.
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48
From Individual Supplies to a Market
Supply
(per cassette)
A
B
C
D
E
F
G
H
I
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
$4.00
(2)
(3)
(4)
(5)
Ann's Barry's Charlie's Market
Supply Supply Supply Supply
0
1
2
3
4
5
6
7
8
0
0
1
2
3
4
5
5
5
0
0
0
0
0
0
0
2
2
0
1
3
5
7
9
11
14
15
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Charlie
Barry
Ann
Market Supply
3.50
Price per cassette
(1)
Price
Quantities
Supplied
From Individual Supplies to a Market
Supply
3.00
2.50
G
F
2.00
E
1.50
1.00
0.50
0 A
I
H
D
B
C
CA
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quantity of cassettes supplied (per week)
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49
Equilibrium
50
Equilibrium
n
Equilibrium is a concept in which opposing
dynamic forces cancel each other out so
there is no reason for anything to change.
n
In a free market, the forces of supply and
demand interact to determine equilibrium
quantity and equilibrium price.
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n
Equilibrium price – the price toward which
the invisible hand drives the market.
n
Equilibrium quantity – the amount bought
and sold at the equilibrium price.
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51
What Equilibrium Isn’t
Excess Supply
n
Equilibrium isn’t inherently good or bad, it is
simply a state in which dynamic pressures
offset each other.
n
Excess supply or a surplus is a situation
where the quantity supplied is greater than
quantity demanded.
n
When the market is not in equilibrium, you
get either excess supply or excess demand,
and a tendency for price to change.
n
Prices tend to fall.
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52
53
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54
Excess Demand
n
Excess demand or a shortage is a situation
where the quantity demanded is greater than
quantity supplied
Price per cassette (in dollars)
n
Marriage of Supply and Demand
Prices tend to rise.
$5.00
S
Excess supply
4.00
3.50
A
3.00
E
2.50
2.00
B
1.50
Excess demand
1.00
1
2
3
4
5
6
7
D
8
9
10 11 12
Quantity of cassettes supplied and demanded (per week)
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55
Interaction of Supply and Demand
Interaction of Supply and Demand
n
When price is $3.50 each, quantity supplied
equals 7 and quantity demanded equals 3.
n
When price is $1.50 each, quantity supplied
equals 3 and quantity demanded equals 7.
n
The excess supply of 4 pushes price down.
n
The excess demand of 4 pushes price up.
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When price is $2.50 each, quantity supplied
equals 5 and quantity demanded equals 5.
n
There is no excess supply or excess
demand, so price will not rise or fall.
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57
Interaction of Supply and Demand
n
56
58
Price Adjusts
59
n
The greater the difference between quantity
supplied and quantity demanded, the more
pressure there is for prices to rise or fall.
n
When quantity demanded equals quantity
supplied, prices have no tendency to change
– we have a market equilibrium
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60
Power of Supply and Demand
n
Six Real World Examples
n
Changes in either supply or demand will
change equilibrium price and quantity.
Supply and demand can shed light on a
variety of real-world events:
q
q
q
q
q
q
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n
Shift in Supply
The crop-damaging freeze shifted the supply
curve to the left.
S1
S0
P0
Price rose until the quantity demanded
equaled the quantity supplied.
Excess demand
A
B
D0
0
QS
Qe
QD
Quantity
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63
Baby Boomers and Financial Assets
n
C
P1
At the original price, quantity demanded
exceeded quantity supplied.
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62
Price
n
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61
Sugar Shock in Brazil
n
Brazil freeze.
Financial assets and the baby boomers.
Twenty percent excise tax.
Rice in Indonesia.
Farm labourers.
Christmas toys.
64
Baby Boomers and Financial Assets
Demographic changes among baby boomers
moved the demand curve for financial assets
to the right.
Price
S
Excess
demand
P1
n
At the original price, quantity demanded
exceeded quantity supplied.
P0
D1
n
Price rose until the quantity demanded
equaled the quantity supplied.
D0
(f)
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65
Q0
Qe
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QD
Quantity
66
Baby Boomers and the Housing Market
n
The same phenomenon occurred in the
surging demand for housing among this
group during the 1980s.
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Excise Tax
n
Korean Government imposed a 20 percent
luxury tax on imported golf clubs.
n
A 20 percent tax levied on suppliers shifts the
supply curve to the left.
n
After the tax is imposed, the quantity of
imported clubs demanded drops.
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67
Excise Tax
68
Rice in Indonesia
Price
n
Drought, pestilence, and the financial crisis
shift the supply curve to the left.
n
The steep demand curve means that the
quantity demanded does not change much
with changes in price.
S1
S0
P1
P0
D0
Q1
(e)
Q0
Quantity
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Rice in Indonesia
n
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69
70
Rice in Indonesia
Responding to high prices, the government
imports rice and distributed it to the market,
causing the supply curve to shift to the right.
Price
S1
S2
S0
P1
P2
P0
Demand
Q1 Q2 Q0
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71
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Quantity
72
Farm Labourers in the U.S.
n
n
Farm Labourers
The compressed harvesting season
increased the demand and increased border
patrols decreased supply of labour.
n
At the original price, the quantity of workers
demanded exceeded the quantity supplied.
n
Price rises until the quantity demanded
equals the quantity supplied.
n
The effect on the number of labourers hired
depended on the relative size of the supply
shift.
Demand shifted to the right and supply
shifted to the left.
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73
Farm Labourers
74
Christmas Toys
Price
n
A Christmas craze for Furbies shifts demand
to the right.
n
A shortage ensued along with a black market.
S1
S0
P1
P0
D1
D0
Qe
Quantity
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Christmas Toys
n
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75
76
Christmas Toys
Finally the supplier produced more, shifting
the supply curve to the right, causing the
price to drop.
Price
S0
S1
P1
P0
D1
D0
QS0
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77
QD0
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rights reserved.
QD1
Quantity
78
Effects of Shifts of Demand and Supply
on Price and Quantity
No change in
supply
No change
in demand
No change.
Demand
shifts out
Price rises;
Quantity rises.
Demand
shifts in
Price falls.
Quantity falls.
Supply shifts out
Supply shifts in
Price falls;
Price rises;
Quantity falls.
Quantity rises.
Quantity rises;
Price could be
higher or lower.
Price falls;
Quantity could rise
or fall.
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Supply and Demand
Price rises;
Quantity could
rise or fall.
Quantity falls;
Price could rise
or fall.
End of Chapter 4
79
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80