Download Lecture 6: Market Equilibrium, Demand and Supply Shifts

Lecture 6: Market Equilibrium,
Demand and Supply Shifts
Session ID: DDEE
EC101 DD & EE / Manove Supply & Demand
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EC101 DD & EE / Manove Clicker Question
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Market Equilibrium
A competitive market is in equilibrium if
the quantity supplied equals the quantity
demanded at the market price.
At the market equilibrium, the price is called
the equilibrium price, …
…and the quantities supplied and demanded
are called the equilibrium quantity.
In equilibrium, the price and quantity have no
tendency to change (more later).
In general, a system is in equilibrium
when there is no tendency for change.
EC101 DD & EE / Manove Supply & Demand>Market Equilibrium
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Example: The Market for Milk
In the market for milk described previously,
market supply and demand are as follows.
Price
($)
0.20
0.40
0.60
0.80
1.00
1.20
Market
Market
Supply Demand
(Qts/day) (Qts/day)
300
600
1200
1800
2400
3600
3200
2000
1200
600
200
100
The market equilibrium is described by a $.60
price and a traded quantity of 1200 quarts.
EC101 DD & EE / Manove Supply & Demand>Market for Milk>Equilibrium
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Equilibrium in the Market for Milk
on a Graph
Market Supply & Demand for Milk
P
QS
1.40
QD
300
3200
1.20
0.40
600
2000
1.00
0.60
1200
1200
0.80
1800
600
1.00
2400
200
1.20
3600
100
Price
0.20
0.80
0.60
0.40
0.20
0.00
0
1000
2000
Quantity
3000
EC101 DD & EE / Manove Supply & Demand>Market for Milk>Graph>Equilibrium
4000
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Movement towards Market Equilibrium
If the price is above the equilibrium price,
 quantity supplied > quantity demanded,
  excess supply.
 Sellers cannot sell as much as they want,
 so they will tend to offer buyers a lower price.
Therefore, the price will tend to move downwards
towards the equilibrium price.
EC101 DD & EE / Manove Supply & Demand>Excess Supply
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If the price is below the equilibrium price,
quantity demanded > quantity supplied
 excess demand,
buyers will not be able to buy all they want to buy,
so they will tend to offer sellers a higher price.
Therefore, the price will tend to move upwards
towards the equilibrium price.
EC101 DD & EE / Manove Supply & Demand>Excess Demand
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EC101 DD & EE / Manove Clicker Question
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Movement Towards Equilibrium in
the Market for Milk
Market Supply & Demand for Milk
1.40
P
QS
QD
300
3200
1.20
0.40
600
2000
1.00
0.60
1200
1200
0.80
1800
600
1.00
2400
200
1.20
3600
100
Price
0.20
Excess Supply
0.80
0.60
0.40
0.20
Excess Demand
0.00
0
1000
2000
Quantity
3000
4000
EC101 DD & EE / Manove Supply & Demand>Movement Towards Equilibrium
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The Effect of Price Changes
Price ($)
6
If Price changes,
a buyer will MOVE ALONG his
original demand curve, …
D
5
Price
4
A
…because the same
demand curve yields the
quantity demanded at
B
3
2
1
0
Quantity
40
60
D
120
every reasonable price.
Quantity
Likewise, if price changes, a seller will MOVE ALONG her original
supply curve, because the same supply curve yields the quantity
supplied at every reasonable price.
EC101 DD & EE / Manove Supply & Demand>Price Changes
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Demand-Curve Shifts
Changes in some demand-related factors affect
the quantities demanded at every price:
Consumer preferences
Income
Prices of other goods
Expectations about the future
Such changes can affect demand in general,…
…and they can change the position of the
entire demand curve.
EC101 DD & EE / Manove Supply & Demand>Demand-Curve Changes
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Changes in Consumer Preferences
 Consumer preferences change for many reasons.
New information
Fashion
Experience
 These changes can shift demand.
EC101 DD & EE / Manove Supply & Demand>Demand-Curve Changes
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Example: Preference for Milk
New evidence emerges that
milk…
Price
_____ milk demanded
at every price.
8
6
S
D’
D
B
4
New market equilibrium:
A
2
0
10
20
30
40
Quarts of Milk
EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Baldness
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Example 2: Preference for Milk
New evidence shows that milk…
Price
8
D
D’
6
4
2
0
Slope
increases
because
of narrow
range of
desirable
quantities
10
S
D’
Another
possibility
A
In new equilibrium:
???
B
20
(but that depends on
where the curves cross)
30
40
Quantity
EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Complexion
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EC101 DD & EE / Manove Clicker Question
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Income and Demand
Demand is affected by a person’s income.
Normal goods: demand increases as income rises.
Inferior goods: demand increases as income falls.
EC101 DD & EE / Manove Elasticity of Demand>Income
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Example: Apartments and Income
in Washington DC
Government salaries increase.
Price
8
S
6
D’
D
Apartments are
normal goods,…
but the supply curve
is almost vertical,…
B
because it takes a long time
to build more apartments.
4
A
2
0
10
20
In new equilibrium:
30
40
Apartments
EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Apartments
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Substitutes
Two goods are substitutes if you can use one
of them instead of the other.
Demand for a good (chicken) increases when
the price of a substitute (hamburger) rises,…
because consumers want to buy less of the
substitute,…
and consume more of the first good instead
—at every price.
Supply DD
& Demand>Demand-Curve
Shifts>Substitutes
EC101
& EE / Manove
p 18
Example: Car rentals and Airfares
Airfares are rising sharply.
(And the quality of air travel is falling.)
Price
8
6
Road travel is a substitute for
air travel, so demand for rental
cars will increase.
D’
D
S
B
In new equilibrium:
4
A
2
0
10
20
30
40
Car Rentals
EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Car Rentals
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Complements
 Two goods are complements if you normally
use both of them together.
Demand for a good decreases when the
price of a complement rises,…
because if the complement is too
expensive, the first good is less useful.
EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Complements
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Example: Motel Rooms
and Gasoline Prices
Price
Gasoline prices increase.
80
S
D
60
D’
A
Motel rooms and
gasoline are
complements.
In new equilibrium:
40
B
20
0
100
200
300
400
Rooms rented
EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Motel Rooms
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Supply-Curve Changes
 Changes in some supply-related factors will
affect the quantities supplied at every price:
Prices of Inputs
Technology
Economic Environment
 Changes in these factors affect supply in
general,…
 …and they can shift the entire supply curve.
EC101 DD & EE / Manove Supply & Demand>Supply-Curve Changes
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Example: Supply of Milk
and Mad Cows
Mad-cow disease kills
many cows.
Price
8
D
S’
S
In new equilibrium:
6
B
A
4
2
0
100
200
300
400
Quarts of Milk
EC101 DD & EE / Manove Supply & Demand>Supply-Curve Shifts>Cows
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Example: Supply of Milk
and Hormones
BST is discovered.
Price
8
D
S
6
S’
Causes each cow to
give much more milk.
A
In new equilibrium:
B
4
2
0
100
200
300
400
Quarts of Milk
EC101 DD & EE / Manove Supply & Demand>Supply-Curve Shifts>Hormones
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Example: Opium
and the Taliban
Price
80
D
60
S
S’
restrictions on
opium production
were relaxed.
A
B
40
In 2001, after the
Afghan Taliban
regime fell,...
In new equilibrium:
20
0
100
200
300
400
Opium Output
EC101 DD & EE / Manove Supply & Demand>Supply-Curve Shifts>Opium
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EC101 DD & EE / Manove Clicker Question
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End of File
EC101 DD & EE / Manove End of File
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