Download Domanda, offerta, equilibrio di mercato

Demand and Supply:
How Markets Work
Lecture 1 – academic year 2014/15
Introduction to Economics
Fabio Landini
Today’s Plan:
• The market: what is it?
• Demand: what changes the quantities
demanded?
• Supply: what changes the quantities
supplied?
• How do we explain changes in prices as
a result of shifts in demand and supply?
2
Market
Definition: “A market consists of a group of
buyers and sellers of a given good or service”
– Buyers determine the demand.
– Sellers determine the supply.
During the first part of the course we will focus
mainly on markets for goods. However, the
same reasoning hold also for factors of
production (e.g. labour, capital).
3
Typologies of Markets
Perfect competition
• Many sellers and many buyers, each of them with
no influence on market prices
• Goods are perfect substitute
Fruits market in Panajii - India
4
Typologies of Markets
Monopoly
• Only one seller that fix the price
5
Typologies of Markets
Oligopoly
• Few sellers, not always in competition with each
other (cartels)
6
Typologies of Markets
Monopolistic competition
• Many sellers, tough competition, and product
differentiation
…
7
The Demand
The quantity demanded is the quantity that
buyers want and can buy
8
Demand Table and Curve
The demand table contains information on
the relationship between the price of a good
and the quantity demanded.
The demand curve is a graph that shows the
relationship between the price of a good and
the quantity demanded.
9
Example: Demand of Ice-cream
Price
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
12
10
8
6
4
2
0
Price of
ice-cream
3.00
2.50
2.00
1.50
1.00
0.50
0
1
2
3
4
5
6
7
8
9 10 11 12 Quantity
of ice-cream
10
Example: Demand of Ice-cream
Price
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
12
10
8
6
4
2
0
Price of
ice-cream
3.00
2.50
2.00
1.50
1.00
0.50
0
1
2
3
4
5
6
7
8
9 10 11 12 Quantity
of ice-cream
11
Example: Demand of Ice-cream
Price
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
12
10
8
6
4
2
0
Price of
ice-cream
3.00
2.50
2.00
1.50
1.00
0.50
0
1
2
3
4
5
6
7
8
9 10 11 12 Quantity
of ice-cream
12
Law of the Demand
Price of
ice-cream
3.00
Law of the Demand
There exist an inverse
relationship between
price and quantity
demanded
2.50
2.00
1.50
1.00
0.50
0
1
2
3
4
5
6
7
8
9 10 11 12 Quantity
of ice-cream
13
The Determinants of Demand
What determines the quantity of ice-cream
that is demanded ?
•
•
•
•
•
Market price.
Consumer’s income.
Price of other goods.
Consumer’s preferences.
Consumer’s expectations.
14
Why does the quantity demanded vary?
The quantity demanded can vary for two
reasons
• Movements along the demand curve: caused
by a Δ in market prices;
• Shifts of the demand curve: caused by a Δ of
the other determinants of demand (income,
price of other goods, preferences, expectations).
15
Why does the quantity demanded vary?
Variables that affect
the quantity
demanded
A change of this variable induces…
Price
Movement along the demand curve
Income
Shift of the demand curve
Price of other goods
Shift of the demand curve
Preferences
Shift of the demand curve
Expectations
Shift of the demand curve
Number of consumers
Shift of the demand curve
16
Changes of the quantity demanded
17
Changes of the quantity demanded
Price of
cigarettes
(a packet
in euro)
4.00
2.00
D1
0
12
20
Number of cigarettes
smoked in a day
18
Changes of the quantity demanded
A tax on the production of
tobacco increases the price
of cigarettes. Therefore, it
induces a movement along
the demand curve.
Price of
cigarettes
(a packet
in euro)
4.00
2.00
D1
0
12
20
Number of cigarettes
smoked in a day
19
Changes of the quantity demanded
Price of
cigarettes
(a packet
in euro)
C
4.00
A tax on the production of
tobacco increases the price
of cigarettes. Therefore, it
induces a movement along
the demand curve.
A
2.00
D1
0
12
20
Number of cigarettes
smoked in a day
20
Changes of the quantity demanded
Price of
cigarettes
(a packet
in euro)
C
4.00
A tax on the production of
tobacco increases the price
of cigarettes. Therefore, it
induces a movement along
the demand curve.
A
2.00
D1
0
12
20
Number of cigarettes
smoked in a day
21
Shift of the Demand Curve
22
Shift of the Demand Curve
Price of
cigarettes
(a packet
in euro)
4.00
2.00
D1
0
10
20
Number of cigarettes
smoked in a day
23
Shift of the Demand Curve
Price of
cigarettes
(a packet
in euro)
A public provision aimed at
discouraging smoking
induces a leftward shift in the
demand curve.
4.00
2.00
D1
0
10
20
Number of cigarettes
smoked in a day
24
Shift of the Demand Curve
Price of
cigarettes
(a packet
in euro)
A public provision aimed at
discouraging smoking
induces a leftward shift in the
demand curve.
4.00
2.00
D2
0
10
20
D1
Number of cigarettes
smoked in a day
25
Shift of the Demand Curve
Price of
cigarettes
(a packet
in euro)
A public provision aimed at
discouraging smoking
induces a leftward shift in the
demand curve.
4.00
B
2.00
A
D2
0
10
20
D1
Number of cigarettes
smoked in a day
26
What about a change in income?
Price of
cigarettes
(a packet
in euro)
4.00
2.00
D1
0
10
20
30 Number of cigarettes
smoked in a day
27
What about a change in income?
Price of
cigarettes
(a packet
in euro)
4.00
2.00
D1
0
10
20
D2
30 Number of cigarettes
smoked in a day
28
What about a change in income?
Price of
cigarettes
(a packet
in euro)
4.00
2.00
D1
0
10
20
D2
30 Number of cigarettes
smoked in a day
29
What about a change in income?
Price of
Ice-ream
(a cone
in euro)
4.00
2.00
D2
D1
0
1
2
3
Number of cigarettes
smoked in a day
30
What about a change in income?
Price of
Ice-ream
(a cone
in euro)
For a normal good, an
increase in income
increases the quantity
demanded
4.00
2.00
D2
D1
0
1
2
3
Number of cigarettes
smoked in a day
31
Price of other goods
When a decrease in the price of one good
causes a decrease in the quantity demanded
of another good, the two goods are called
substitute (e.g. tea and coffee).
32
Price of other goods
When a decrease in the price of one good
causes an increase in the quantity demanded
of another good, the two goods are called
complementary(e.g. PCs and High-speed
Internet access).
33
Example: what shifts the demand of
a Toshiba PC?
How does the demand of a Toshiba personal
computer (PC) shift if:
• Consumers’ income decrease;
• The price of a Compaq PC decreases;
• The price of high-speed Internet connection
reduces;
• The use of Internet across households increases;
34
From Individual Demand…
Caterina’s demand
Nicola’s Demand
Price of
Price of
ice-cream
ice-cream
3.00
3.00
2.50
2.50
2.00
2.00
1.50
1.50
1.00
1.00
0.50
0.50
0 1 2 3 4 5 6 7 8 9 10 1112
Quantity of
Ice-cream
0 1 2 3 4 5 6 7 8 9 10 1112
Quantity of
Ice-cream
35
…. To Market Demand
Price of
ice-cream
3.00
2.50
2.00
1.50
1.00
0.50
0
1
2
3
4
5
6
(
7
=
8
9 10 11 12 13 14 15 16 17 18 19
4
+
3)
Quantity of
Ice-cream
36
Supply
The quantity supplied is the quantity
that sellers want and can sell
37
The Determinants of Supply
•
•
•
•
Market prices
Cost of factors of production
Technology
Expectations
38
Law of the Supply
Law of the Supply: the quantity supplied of a
given good increases with the price.
Why? Because, for given costs of production
and commercialization, an increase in price
generates greater revenues (all costs being
equal) and thus it induces sellers to increase
production.
39
Supply Table and Curve
The supply table is a table that contains
information on the relationship between the
price of a good and the quantity supplied
The supply curve is a graph that shows the
relationship between the price of a good and
the quantity supplied
40
Supply Curve
Price of
ice-cream
Price
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
0
0
1
2
3
4
5
3.00
2.50
2.00
1.50
1.00
0.50
0
1
2
3
4
5
6
Quantity
41
of ice-cream
Supply Curve
Price of
ice-cream
Price
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
0
0
1
2
3
4
5
3.00
2.50
2.00
1.50
1.00
0.50
0
1
2
3
4
5
6
Quantity
42
of ice-cream
Supply Curve
Price of
ice-cream
Price
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
0
0
1
2
3
4
5
3.00
2.50
2.00
1.50
1.00
0.50
0
1
2
3
4
5
6
Quantity
43
of ice-cream
Why does the quantity supplied vary?
The quantity supplied can vary for two reasons:
• Movements along the supply curve, caused by a
Δ in market prices;
• Shifts of the supply curve, caused by a Δ of the
other determinants of supply (technology, cost of
factors of production, expectations)
44
Why does the quantity supplied vary?
Variables that affect the
quantity supplied
A change of this variable induces…
Market price
Movements along the supply curve
Price of the factors of
production
Shifts of the supply curve
Technology
Shifts of the supply curve
Expectations
Shifts of the supply curve
Number of sellers
Shifts of the supply curve
45
Increase of Supply
46
Increase of Supply
Price of
ice-cream
S1
0
Quantity
47
of ice-cream
Increase of Supply
Price of
ice-cream
S1
S2
Increase
of supply
0
Quantity
48
of ice-cream
Increase of Supply
Price of
ice-cream
S1
0
Quantity
49
of ice-cream
Increase of Supply
Price of
ice-cream
S3
S1
Decrease
of supply
0
Quantity
50
of ice-cream
Example: what shifts the supply of a
Toshiba PC
How does the supply of a Toshiba personal computer
(PC) shift if:
• The price of semi-conductors increases;
• Toshiba re-organize her production lines to improve
efficiency;
• Toshiba’s managers expects a decrease in the
price of semi-conductors in the future;
51
Summary Until Now
• Every market has two sides: demand and
supply
• The main determinants of demand are the
price of the good, consumer’s income, the
price of other goods, consumer’s
preferences and expectations
• The main determinants of supply are the
price of the good, costs of production,
technology and expectations
52
Equilibrium of Demand and Supply
Equilibrium Price
Is the price for which demand equals supply.
Graphically, it is the price for which the
demand curve and the supply curve intersect.
53
Equilibrium of Demand and Supply
Equilibrium Quantity
Is the quantity for which demand equals supply.
Graphically, it is the quantity for which the
demand curve and the supply curve intersect.
54
Equilibrium of Demand and Supply
Price of
ice-cream
Supply
2.00
Demand
0
1
2
3
4
5
6
7
8
9 10 11 12 13
Quantity of
Ice-cream 55
Equilibrium of Demand and Supply
Price of
ice-cream
Supply
Equilibrium
2.00
Demand
0
1
2
3
4
5
6
7
8
9 10 11 12 13
Quantity of
Ice-cream 56
Equilibrium of Demand and Supply
Price of
ice-cream
Supply
Equilibrium
Equilibrium price
2.00
Demand
Equilibrium quantity
0
1
2
3
4
5
6
7
8
9 10 11 12 13
Quantity of
Ice-cream 57
Market out of equilibrium
Excess supply
• Price is greater then its equilibrium level
• Sellers cannot sell the quantity they want at that
price
Excess demand
• Price is lower then its equilibrium level
• Buyers cannot buy the quantity they want at that
price
58
Excess Supply
Price of
ice-cream
Excess Supply
Supply
2.50
2.00
Demand
0
4
Quantity
demanded
7
10
Quantity
supplied
Quantity of
Ice-cream
59
Excess Supply
Price of
ice-cream
Supply
2.00
1.50
Excess Demand
0
4
Quantity
supplied
7
10
Quantity
demanded
Demand
Quantity of
Ice-cream
60
What happens if…
External events alter the market equilibrium.
How do we study the determination of the new
equilibrium?
We have three things to do:
• To understand if the external event causes shifts in
the demand curve and/or the supply curve
• To understand in which direction the demand shift.
• To understand if the shift affects the equilibrium
prices and quantities, and how the new equilibrium
is achieved.
61
Equilibrium effects of an increase in demand
Price of
ice-cream
S1
2.00
Initial
Equilibrium
D1
0
7
Quantity of
Ice-cream
62
Equilibrium effects of an increase in demand
Price of
ice-cream
1. Nice weather causes an
increase in the demand of
ice-cream
S1
2.00
Initial
Equilibrium
D1
0
7
Quantity of
Ice-cream
63
Equilibrium effects of an increase in demand
Price of
ice-cream
1. Nice weather causes an
increase in the demand of
ice-cream
S1
New Equilibrium
2.50
2.00
Initial
Equilibrium
D2
D1
0
7
10
Quantity of
Ice-cream
64
Equilibrium effects of an increase in demand
Price of
ice-cream
1. Nice weather causes an
increase in the demand of
ice-cream
S1
New Equilibrium
2.50
2.00
Initial
Equilibrium
2….that
causes an
increase in
prices…
D2
D1
0
7
10
3….and an increase in the quantity that is sold…
Quantity of
Ice-cream
65
How do we move from the old
to the new equilibrium?
We saw that nice weather causes a shift in the
equilibrium. We haven’t yet explained how this
happens.
To do so, we use the concept of excess demand.
If the demand increases, the quantity demanded
is greater than the quantity supplied at the initial
price.
Market prices will tend to increase.
66
How do we move from the old
to the new equilibrium?
When the price increases, two things happen:
• The quantity supplied increases (Law of the
Supply)
• The quantity demanded reduces (Law of
Demand)
Results: the initial excess demand reduces
gradually, until in the new equilibrium it is equal
zero.
67
Conclusion
The combination of demand and supply
determines the price of the goods (and
services) available in the market.
Prices are the signals (information) that
address the allocation of (scarce) resources
and ensure the achievement of the market
equilibrium.
68
Next week
We will start to look at some properties of
demand and supply…. In particular,
elasticity…
69