Download Chapter 4: The Market Forces of Supply and Demand

Chapter 4: The Market Forces of Supply and Demand
Ch. 4: The Market Forces of Supply and Demand
Chapter 4: The Market Forces of Supply and Demand
A market is a group of buyers and sellers of a particular product.
(Trading places: 1:45-3:15)
A competitive market is one with many buyers and sellers, each
has a negligible effect on price.
In a perfectly competitive market
• All goods are exactly the same
• Buyers and sellers are so numerous that no one can affect
market price - each is a “price taker”.
Chapter 4: The Market Forces of Supply and Demand
Quantity demanded: the total quantity of a good that buyers are
willing and able to purchase.
Law of demand: the claim that the quantity demanded of a good
falls when the price of the good rises, other things equal.
Giffen good: a good that violates the law of demand.
A possible Giffen good: rice among poor Chinese consumers.
Chapter 4: The Market Forces of Supply and Demand
Demand schedule: a table that shows the relationship between
the price of a good and the quantity demanded.
Jake’s demand schedule for movies
Price for a movie ticket
Number of movies
seen per month
$0
6
$2
5
$4
4
$6
3
$8
2
$10
1
$12
0
Chapter 4: The Market Forces of Supply and Demand
Demand schedule: a table that shows the relationship between
the price of a good and the quantity demanded.
Jake’s demand schedule for movies
Jake’s demand curve for movies
Price for a
movie ticket
Price for a movie ticket
Number of movies
seen per month
$0
6
$12
$2
5
$10
$4
4
$8
$6
3
$8
2
$10
1
$12
0
*Notice my demand
schedule, which obeys
the Law of Demand,
results in a downward
sloping demand curve.*
$6
$4
$2
$0
0
1
2
3
4
5
Jake’s number of
movies seen per
month
6
Chapter 4: The Market Forces of Supply and Demand
Demand schedule: a table that shows the relationship between
the price of a good and the quantity demanded.
Jake’s demand schedule for movies
Jake’s demand curve for movies
Price for a
movie ticket
Price for a movie ticket
Number of movies
seen per month
$0
6
$12
$2
5
$10
$4
4
$8
$6
3
$8
2
$10
1
$12
0
This solid line is Jake’s
demand curve… but
Jake’s preferences do
not represent market
preferences. Therefore,
this is not a market
demand curve.
$6
$4
$2
$0
0
1
2
3
4
5
Jake’s number of
movies seen per
month
6
Chapter 4: The Market Forces of Supply and Demand
Market demand versus individual demand
• The quantity demanded in the market is the sum of all
quantities demanded by all buyers for each price.
• Suppose the market for movies includes this entire class. The
market demand is the number of movies I would go see and
the number of movies each of you would go see.
Individual demand
Market demand
Chapter 4: The Market Forces of Supply and Demand
“Shifting” the demand curve: In the prior movie example, we
traced out our demand schedules based on the current state of the
world (all other things being equal).
Other factors, besides price, influence individuals’ (and market)
quantity demanded...
Changes in these factors will “shift” the demand curve.
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve.
• The number of buyers.
• Income.
• Price of related goods.
• Tastes.
• Expectations.
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the number of buyers..
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the number of buyers..
More college students living at home...
Apartment
price $900
Demand for apartments in a college town
Apartment
rental demand
curve in 2011
$700
$500
$300
0
0
1000
2000
3000
Quantity of apartments
4000
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the number of buyers..
More college students living at home...
Apartment
price $900
Demand for apartments in a college town
Apartment
rental demand
curve in 2011
$700
$500
In 2012, we discovered
that more students were
living at home when
attending college.
Apartment
rental demand
curve in 2012
$300
0
0
1000
2000
3000
Quantity of apartments
4000
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the number of buyers..
More college students living at home...
Apartment
price $900
Demand for apartments in a college town
Apartment
rental demand
curve in 2011
$700
Market demand for
apartments shifted left, it
decreased, in response to
fewer students in the
market for apartments.
$500
In 2012, we discovered
that more students were
living at home when
attending college.
Apartment
rental demand
curve in 2012
$300
0
0
1000
2000
3000
Quantity of apartments
4000
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the number of buyers..
More college students living at home...
Apartment
price $900
Demand for apartments in a college town
Apartment
rental demand
curve in 2011
$700
Market demand for
apartments shifted left, it
decreased, in response to
fewer students in the
market for apartments.
$500
In 2012, we discovered
that more students were
living at home when
attending college.
Apartment
rental demand
curve in 2012
$300
0
0
1000
2000
3000
Quantity of apartments
4000
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: income..
Graduating from college and finding a full-time job...
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: income..
Graduating college and finding a good job is a positive
income shock...
Nutritious
Food price $9
Demand for nutritious food
$7
$5
$3
0
Nutritious food
demand curve
for a college
student
0
10
30
20
Quantity of nutritious
food demanded
40
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: income..
Graduating college and finding a good job is a positive
income shock...
Nutritious
Food price $9
Demand for nutritious food
Nutritious food
demand curve for a
college graduate
(with a better job)
$7
With a higher income, we
will likely purchase more
nutritious food.
$5
When we graduate college,
we either find a better job
or receive a raise. This is
a positive income shock.
$3
0
Nutritious food
demand curve
for a college
student
0
10
30
20
Quantity of nutritious
food demanded
40
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: income..
Normal goods and inferior goods:
In the previous example, I assumed that increasing income would
lead to an increase in demand for nutritious food. That is, I
assumed nutritious food is a normal good.
A good for which, other things equal, an increase in income leads
to a decrease in demand is an inferior good.
Inferior goods:
Normal goods:
Recreational equipment
Electricity
Gas/fuel
Jewelry
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the price of related
goods..
Train
ticket
$20
prices
Demand for train tickets
Demand for train
tickets in 2008 – with
high gas prices.
$15
$10
In 2008, gas prices were
extremely high. Those prices
dropped in 2009, making
driving less expensive.
$5
0
0
100
200
Quantity of train
tickets sold
300
400
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the price of related
goods..
Train
ticket
$20
prices
Demand for train tickets
Demand for train
tickets in 2008 – with
high gas prices.
$15
$10
In 2008, gas prices were
extremely high. Those prices
dropped in 2009, making
driving less expensive.
$5
0
Demand for
train tickets in
2009 – with
low gas prices.
0
100
200
Quantity of train
tickets sold
300
400
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the price of related
goods..
Price of a
package
$20
of Oreos
Demand for Oreos
Demand for Oreos
when milk is cheap.
$15
Rising milk prices will
decrease demand for
milk… what will happen to
the demand for Oreos?
$10
$5
0
0
100
200
Quantity of Oreos sold
300
400
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the price of related
goods..
Price of a
package
$20
of Oreos
Demand for Oreos
Demand for Oreos
when milk is cheap.
$15
$10
Rising milk prices will
decrease demand for
milk… what will happen to
the demand for Oreos?
Demand for Oreos
when milk is
expensive.
$5
0
When milk becomes less
affordable, demand for
Oreos decreases!
0
100
200
Quantity of Oreos sold
300
400
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the price of related
goods..
In the first example, lower gasoline prices decreased demand for
train tickets.
In the second example, higher milk prices decreased demand for
Oreos.
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a demand curve: the price of related
goods..
In the first example, lower gasoline prices decreased demand for
train tickets.
In the second example, higher milk prices decreased demand for
Oreos.
This is because gasoline and train tickets are substitute goods
while Oreos and milk are complementary goods; or complements.
Chapter 4: The Market Forces of Supply and Demand
Substitutes: two goods for which an increase in the price of one
leads to an increase in demand for the other (like gasoline and
train tickets).
Complements: two goods for which an increase in the price of
one leads to a decrease in the demand for the other (like Oreos
and milk).
Complements
Chapter 4: The Market Forces of Supply and Demand
Substitutes: two goods for which an increase in the price of one
leads to an increase in demand for the other (like gasoline and
train tickets).
Complements: two goods for which an increase in the price of
one leads to a decrease in the demand for the other (like Oreos
and milk).
Substitutes
Chapter 4: The Market Forces of Supply and Demand
Up to this point, we have only discussed demand, which is created
by consumers. Supply is created by firms that produce goods and
services.
The quantity supplied of any good is the amount that sellers are
willing and able to sell.
Law of supply: the claim that the quantity supplied of a good
rises when the price of that good rises, other things equal.
Chapter 4: The Market Forces of Supply and Demand
Law of supply: the claim that the quantity supplied of a good
rises when the price of that good rises, other things equal.
Movie theater’s supply schedule for movies
Price for a movie ticket
Number of movies
provided per month
$0
0
$2
1
$4
2
$6
3
$8
4
$10
5
$12
6
Chapter 4: The Market Forces of Supply and Demand
Law of supply: the claim that the quantity supplied of a good
rises when the price of that good rises, other things equal.
Jake’s demand curve for movies
Movie theater’s supply schedule of movies
Price for a
movie ticket
Price for a movie ticket
Number of movies
provided per month
$0
0
$12
$2
1
$10
$4
2
$6
3
$8
4
$10
5
$12
6
This solid line is the
theater’s supply
curve… but the
theater’s supply
curve may not be
representative of the
entire market.
Therefore, this is not
a market supply
curve.
$8
$6
$4
$2
$0
0
1
2
3
4
5
Number of movies provided
per month
6
Chapter 4: The Market Forces of Supply and Demand
“Shifting the supply curve: many factors will shift the supply curve
increase or decreasing the quantity produced for a given price.
Gold
jewelry?
Chapter 4: The Market Forces of Supply and Demand
Factors that shift a supply curve: price of inputs.
Price electricity
Supply of Electricity
Supply 1
Quantity of electricity
Supply 2
Q
Chapter 4: The Market Forces of Supply and Demand
Supply and demand together: back to the movies example
A market for movies with two firms and two consumers
Movie theater’s supply schedules for movies
Consumers’ demand schedules for movies
Price for a
movie
ticket
Wyo
Theater
Fox
Theater
Market
Supply
Price for a
movie
ticket
Barack
George
Market
Demand
$0
0
0
0
$0
9
9
18
$2
2
1
3
$2
7
8
15
$4
4
2
6
$4
6
6
12
$6
6
3
9
$6
3
6
9
$8
8
4
12
$8
2
4
6
$10
10
5
15
$10
1
2
3
12
6
18
$12
0
0
0
$12
These are theaters’
individual supply curves
These are consumers’
individual demand curves
Chapter 4: The Market Forces of Supply and Demand
Supply and demand together: back to the movies example
Price of
movies
Market supply and demand of movies
$12
$10
Recall: by the Law of
Demand, the demand curve
is always downward sloping.
$8
$6
$4
$2
0
0
3
6
9
12
Quantity of movies
15
18
Chapter 4: The Market Forces of Supply and Demand
Supply and demand together: back to the movies example
Price of
movies
Market supply and demand of movies
$12
$10
Recall: by the Law of
Supply, the supply
curve is always
upward sloping.
$8
$6
$4
$2
0
0
3
6
9
12
Quantity of movies
15
18
Chapter 4: The Market Forces of Supply and Demand
Supply and demand together: back to the movies example
Price of
movies
Market supply and demand of movies
$12
Supply curve
Demand curve
$10
$8
$6
$4
$2
0
0
3
6
9
12
Quantity of movies
15
18
Chapter 4: The Market Forces of Supply and Demand
Equilibrium: a situation in which the market price has reached the
level at which quantity supplied equals quantity demanded.
Equilibrium price: the price that balances quantity supplied and
quantity demanded
Equilibrium quantity: the quantity supplied and the quantity
demanded at the equilibrium price.
Price of
movies
Market supply and demand of movies
$12
Supply curve
Demand curve
$10
$8
Equilibrium
Equilibrium
$6
price
$4
$2
0
0
3
6
9
12
Equilibrium quantity
Quantity of movies
15
18
Chapter 4: The Market Forces of Supply and Demand
Suppose the government imposes a price floor on movies: movies
cannot be sold for any less than $8 per ticket.
How does this affect our market for movies?
Chapter 4: The Market Forces of Supply and Demand
Suppose the government imposes a price floor on movies: movies
cannot be sold for any less than $8 per ticket.
How does this affect our market for movies?
Price of
movies
Market supply and demand of movies
$12
Demand curve
$10
Surplus: quantity
supplied exceeds
quantity demanded
Supply curve
Price floor $8
Equilibrium
$6
price
$4
$2
0
0
3
6
Quantity
demanded
9
Equilibrium
Quantity
12
Quantity
supplied
15
18
Quantity of movies
Chapter 4: The Market Forces of Supply and Demand
Suppose the government imposes a price ceiling on movies:
movies cannot be sold for any more than $4 per ticket.
How does this affect our market for movies?
Chapter 4: The Market Forces of Supply and Demand
Suppose the government imposes a price ceiling on movies:
movies cannot be sold for any more than $4 per ticket.
How does this affect our market for movies?
Price of
movies
Market supply and demand of movies
$12
Supply curve
Demand curve
$10
$8
Equilibrium
$6
price
Price ceiling $4
Shortage: quantity
demanded exceeds
quantity supplied.
$2
0
0
3
6
Quantity
supplied
9
Equilibrium
Quantity
12
Quantity
demanded
15
18
Quantity of movies
Chapter 4: The Market Forces of Supply and Demand
The law of supply and demand: the claim that the price of any
good adjusts to bring the quantity supplied and the quantity
demanded for that good into equilibrium.
What happens if a new university opens in town doubling the
number of students who go to the movie theater?
Chapter 4: The Market Forces of Supply and Demand
What happens to equilibrium price and equilibrium quantity
demanded if a new university opens in town, doubling the number
of students who go to the movie theater?
Price of
movies
Market supply and demand of movies: a new university
opens and the number of students in-town doubles.
$12
Supply curve
Demand curve
$10
$8
Equilibrium
$6
price
$4
$2
0
0
3
6
9
Equilibrium
Quantity
12
15
18
Quantity of movies
Chapter 4: The Market Forces of Supply and Demand
Demand shifts to the right because there are more buyers in the
market. This increases the equilibrium price and the equilibrium
quantity demanded.
Price of
movies
Market supply and demand of movies: a new university
opens and the number of students in-town doubles.
$12
New demand
curve
Old demand
curve
Supply curve
$10
New
equilibrium $8
price
Equilibrium
$6
price
$4
$2
0
0
3
6
9
15
12
Equilibrium New equilibrium
Quantity
quantity
18
Quantity of movies
Chapter 4: The Market Forces of Supply and Demand
What happens to equilibrium price and equilibrium quantity
demanded if legislation makes it cheaper for theater to purchase
movies for showing?
Price of
movies
Market supply and demand of movies: a new legislation
makes it cheaper for theaters to purchase movies for showing
(decrease price of an input into production).
$12
Demand
curve
Supply curve
$10
$8
Equilibrium
$6
price
$4
$2
0
0
3
6
9
Equilibrium
Quantity
12
15
18
Quantity of movies
Chapter 4: The Market Forces of Supply and Demand
Supply shifts to the right because an input price into production
has decreased. This decreased the equilibrium price and increases
equilibrium quantity demanded.
Price of
movies
Market supply and demand of movies: a new legislation
makes it cheaper for theaters to purchase movies for showing
(decrease price of an input into production).
$12
Demand
curve
Old supply curve
$10
$8
New supply
curve
Equilibrium
$6
price
New
equilibrium $4
price
$2
0
0
3
6
9
15
12
Equilibrium New equilibrium
Quantity
quantity
18
Quantity of movies