Download Demand and supply

Markets, Demand and Supply
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Market
• A group of buyers and sellers for a good or
service
– Buyers demand goods and services
– Sellers supply goods and services
• Demand and supply interact on the market
to determine the price
• Market equilibrium: a state where demand
and supply are balance
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The Concept of Demand
• The Law of Demand
– Other things equal, the quantity demanded
of a goods falls when the price of the goods
rises.
• The Quantity Demanded
– The amount of the good that buyers are
willing and able to purchase.
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Demand Curve
• Illustrates how much would be demanded
at each price
• An individual demand curve shows the
relationship between a buyer’s quantity
demanded and the price of the good
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Demand Curve
(Monthly)
(1)
Price
(pence per kg)
(2)
Tracey's
demand
(3)
Darren's
demand
(4)
Total market
demand
(kg)
(kg)
(tonnes: 000s)
A
20
28
16
700
B
40
15
11
500
C
60
5
9
350
D
80
1
7
200
E
100
0
6
100
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Market demand for potatoes (monthly)
100
Price (pence per kg)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
E
D
80
C
60
A
20
700
B
C
D
E
40
60
80
100
500
350
200
100
B
40
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
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Demand Curve
• Change in quantity demanded
– Movement along the demand curve
– Caused by a change in the price of the
product
• Change in demand
– A shift in the curve, either to the left or right
– Caused by a change in factors other than the
price of the product
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Other Determinants of
Demand
• Preferences and Tastes
• Income
– Normal goods (Income , demand )
– Inferior goods (Income , demand )
• Price of related goods
– Prices of substitutes (MP3 players and CD
players)
– Prices of complements (Car and gasoline)
• Expectations about the future (e.g. prices)
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An increase in demand
Possible causes of a rise in demand
•
•
•
•
•
Price
P
Tastes shift towards this product
Rise in price of substitute goods
Fall in price of complementary goods
Rise in income
Expectations of a rise in price
D0
O
Q0
Q1
Quantity
D1
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The Concept of
Supply
• The Law of Supply
– Other things equal, the quantity supplied of
a good rises when the price of the good rises
• The Quantity Supplied
– The amount of the good that the sellers are
willing and able to sell
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Supply Curve
• Illustrates how much would be supplied at
each price
• An individual supply curves relates a
seller’s quantity supplied to the price of
a good.
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Supply Curve
(Monthly)
Price of
potatoes
Farmer X's
supply
Total Market
supply
(pence per kg)
(tonnes)
(tonnes: 000s)
a
20
50
100
b
40
70
200
c
60
100
350
d
80
120
530
e
100
130
700
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Market supply of potatoes (monthly)
100
e
d
Price (pence per kg)
80
c
60
Supply
P
a 20
b 40
c 60
d 80
e 100
Q
100
200
350
530
700
b
40
a
20
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
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Supply Curve
• Change in quantity supplied
– Movement along the supply curve
– Caused by a change in the price of the
product
• Change in supply
– A shift in the supply curve, either to the left or
right
– Caused by a change in factors other than the
price of the product
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Other Determinants of
Supply
• Costs of production
– Input prices
– Technology
– organizational changes
– government policy
• Profitability of alternative products & goods
in joint supply
• Nature and other random shocks
• Expectations about the future
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Shifts in the supply curve
P
Possible causes of a rise in supply
• Fall in costs of production
S0
S1
• Reduced profitability of alternative
products that could be supplied
• Increased profitability of goods in
joint supply
• Expectations of a fall in price
Increase
O
Q
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E
Price (pence per kg)
100
Demand & Supply
Together
Equilibrium
Price
60
Cc
Equilibrium
b
40
B
a
20
A
Equilibrium
Quantity
0
0
100
Supply
d
D
80
e
200
300
400
500
Quantity (tonnes: 000s)
Demand
600
700
800
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Surplus
• Excess supply
– Suppliers are unable to sell all they want at
the going price.
• Market price is above equilibrium price.
• Quantity supplied is above quantity
demanded.
• Suppliers will lower the price to increase
sales, thereby moving toward equilibrium.
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E
e
100
Price (pence per kg)
Supply
D
80
SURPLUS
d
(330 000)
Cc
60
b
40
B
a
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
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Shortage
• Excess shortage
– Buyers are unable to buy all they want at the
going price.
• Market price is below equilibrium price.
• Quantity demanded is above quantity
supplied.
• Suppliers will raise the price due to too
many buyers chasing too few goods,
thereby moving toward equilibrium.
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E
e
100
Price (pence per kg)
Supply
d
D
80
Cc
60
b
40
SHORTAGE
B
(300 000)
a
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
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Changes in Equilibrium
• Three steps to analyze changes in
equilibrium
– Decide whether the event shifts the supply or
demand curve (or both).
– Decide whether the curve(s) shift(s) to the left
or to the right.
– Use the supply-and-demand diagram to see
how the shift affects equilibrium price and
quantity.
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Changes in Equilibrium
• Effects of shifts in the demand curve
– Movement along S curve and new D curve
• Rise in demand (rightward shift)  P rises
• Fall in demand (leftward shift)  P falls
• Effects of shifts in the supply curve
– Movement along D curve and new S curve
• Rise in supply (rightward shift)  P falls
• Fall in supply (leftward shift)  P rises
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Scenario 1
Market of ice cream in hot weather
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Effect of a shift in the demand curve
P
S
i
New equilibrium at
point i
Pe2
g
h
Pe1
D2
D1
O
Q e1
Q e2
Q
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Scenario 2
• Hurricane destroys part of the sugarcane
crop and drives up the price of sugar
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Effect of a shift in the supply curve
P
S2
S1
k
Pe3
j
g
Pe1
New equilibrium at
point k
D
O
Q e3
Q e1
Q
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Scenario 3
•
Hot weather and hurricane occur during
the same summer
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Price Rises, Quantity Rises
P
S2
S1
Large increase
in demand
e2
Small decrease
in supply
Pe2
Pe1
e1
D2
D1
O
Q e1
Q e2
Q
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Price Rises, Quantity Falls
P
S2
Small increase
in demand
e2
Pe2
S1
Large decrease
in supply
e1
Pe1
D2
D1
O
Q e2
Q e1
Q
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