Download Supply and Demand

Supply and Demand
The Market -- Basic Model
A1. Buyers are price takers.
A2. An increase in the price will reduce quantity
demanded by consumers
A3. Sellers are price takers
A4. An increase in the price will increase quantity supplied
by producers
A5. Buyers and sellers have perfect information
Market Equilibrium
Market Equilibrium
Qd
Qd  D(P) where as P increases Q d decreases, [
 0].
P
Qs
Qs  S(P) where as P increases Q s increases, [
 0].
P
Market equilibrium is price and quantity such that
Qd  Qs
•Market Equilibrium
• If price above the equilibrium, quantity
supplied will be greater than quantity
demanded. Gains from trade are possible
at lower price.
• If price is below the equilibrium, quantity
supplied will be less than quantity
demanded. Gains from trade are possible
at a higher price.
Market Equilibrium
How Do P & Q Change?
• A Shift in Demand
• A shift up to the right (an increase) will increase P & Q.
• A shift down to the left (a decrease) will decrease P&Q
• A Shift in Supply
• A shift out to the right (an increase) will decrease P and increase
Q
• A shift in to the left (a decrease) will increase P and decrease Q.
Increase in Demand
What Factors Shift Demand ?
• TASTES
• INCOME
• Normal good
• Inferior good
• PRICE OF SUBSTITUTE
• PRICE OF COMPLEMENT
• EXPECTATIONS
Increase in Supply
What Factors Shift Supply?
•
•
•
•
Input Prices
Technological Change
Acts of God/Weather
Change in Number of Suppliers
Movement Along vs. Shift
• A shift of the supply curve leads to an
increase in quantity demanded. This is a
movement along the demand curve
• A shift of the demand curve leads to an
increase in quantity supplied. This is a
movement along the supply curve.
Examples
• “Crude Oil, Petroleum Products Rise after
Explosion at Large Shell Refinery.”
• “Digital Camera Prices Fall As More
People Buy, Contradicting the Laws of
Supply and Demand.”
• “Demand is increasing moderately, but
with yields per acre rising, farmers have
seen little change in prices.”
“Crude Oil, Petroleum Products Rise after Explosion at
Large Shell Refinery.”
“Digital Camera Prices Fall As More People Buy,
Contradicting the Laws of Supply and Demand.”
“Demand is increasing moderately, but with yields per
acre rising, farmers have seen little change in prices.”
Shifts in Both Supply and Demand
• An increase in both supply and demand will increase Q
but effects on P are ambiguous.
• An increase in supply with a decrease in demand will
reduce P, but effects on Q are ambiguous.
• A decrease in both supply and demand will decrease Q
but effects on P are ambiguous.
• A decrease in supply with an increase in demand will
increase P, effects on Q are ambiguous.
What’s Next?
If price increases by 10%,
will total revenue increase
or decrease?