Download DD and SS Powerpoint

Demand, Supply & Equilibrium
• Demand & its Determinants
 Wants Vs. Demand
A general example: The demand for Soda
 Demand Schedule & Demand Curve
 Quantity Demanded Vs. Demand
 The Law of Demand
 Reasoning behind the law of Demand
 Substitution Effect
 Income effect
 Movement along Vs. a shift of the Demand
Curve
 Demand Shifters
1
Demand & its Determinants
• Wants Vs. Demand
 Wants are the unlimited desires or wishes
people have for goods and services.
EX: I want a Volvo
 Demand is a want backed by an ability an a
willingness to pay.
EX: I can demand a Pepsi
2
The Demand for Soda
Demand Curve for Soda
Price
Quantity
Price
(Millions per Week) ($ per can)
0
2
2
1.8
4
1.6
6
1.4
8
1.2
10
1
12
0.8
14
0.6
$2.20
$2.00
$1.80
$1.60
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Demand Curve
0
2
4
6
8 10 12 14 16
Quantity
3
Demand Schedule & Demand
Curve
Demand Schedule :
A demand schedule lists the quantities
demanded at each price ceteris paribus
Demand Curve:
A demand curve shows the relationship
between the quantity demanded of a good and
its price, ceteris paribus.
4
Quantity Demanded Vs. Demand
• Quantity Demanded
The quantity demanded of a good or service is
the amount that consumers plan to buy during a
given time period at a particular price.
• Demand
The entire demand schedule or demand curve.
The list of prices & their corresponding
quantities.
5
The Law of Demand
A basic economic hypothesis is that the
price of a commodity and the quantity that
will be demanded are related negatively,
ceteris paribus. In other words, other things
remaining the same, the lower the price the
higher the quantity demanded and the
higher the price the lower the quantity
demanded.
6
Reasoning Behind the Law of Demand
 Substitution Effect
Price   Opportunity cost 
 Substitute away from the good
 As Price  then quantity 
 Income Effect
As Price increases given that income is
fixed the number of units purchased
decreases because real income has
decreased
7
Movement Along Vs. Shift
The change in price is the change in an
exogenous variable that is represented on
the graph thus it amounts to a movement
along the demand curve and not a shift of
the curve. A change in any other exogenous
variable besides price results in a shift of
the demand curve.
8
Increase in Demand
• Increase in Demand
More (quantity) is demanded at the same
price or the same quantity is demanded at a
higher price. (Demand curve shifts North
East)
9
Decrease in Demand
• Decrease in Demand
Less (quantity) is demanded at the same
price or the same quantity is demanded at a
lower price (Demand curve shifts South
West)
10
Demand Shifters
 Prices of related goods
Substitutes
As the price of a substitute decreases, the
demand for the good decreases (the demand
curve shifts to the southwest). As the price
of a substitute increases, the demand for the
good increases (the demand curve shifts to
the northeast).
11
Demand Shifters
 Prices of related goods
Complements
As the price of a complement decreases, the
demand for the good increases (the demand
curve shifts to the northeast). As the price
of a complement increases, the demand for
the good decreases (the demand curve shifts
to the southwest).
12
Demand Shifters
 Expected Future Prices
If future prices are expected to rise people
will stock up on the good now thus leading
to a rise in demand (the demand curve shifts
to the northeast). If future prices are
expected to fall, people will wait to
purchase the good, thus leading to a fall in
demand (the demand curve shifts to the
southwest).
13
Demand Shifters
 Population
A rise in population leads to more potential
buyers and thus an increase in demand (the
demand curve shifts to the northeast).
14
Demand Shifters
• Income
As income rises people buy more of most goods
Normal Goods:
These are goods that people buy more of as
income rises
EX: Steak.
Inferior Goods:
These are goods that people buy less of as income
rises.
EX: Hot dogs
15
Supply Schedule & Supply Curve
Price
$/Can
$0.60
$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
Price
Quantity
Millions/Week
2
4
6
8
10
12
14
16
Supply Curve For Soda
$2.20
$2.00
$1.80
$1.60
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Supply Curve
0 2 4 6 8 10 12 14 16 18
Quantity
16
Supply & Its Determinants
Supply Schedule:
A supply schedule lists the quantities
supplied at each price, ceteris paribus.
Supply Curve:
A supply curve shows the relationship
between the quantity supplied and the price
of a good ceteris paribus.
17
Quantity Supplied & Supply
• Quantity Supplied
The quantity supplied is the amount of a
good that producers plan to sell during a
given period at a given price
• Supply
Supply refers to the entire supply schedule
or supply curve.
18
Law of Supply
Ceteris paribus, the price of the commodity
and the quantity supplied are related
positively. Other things remaining the same,
the higher the commodity’s price, the more
its producers will supply. The lower its
price, the less they will supply.
19
Reasoning Behind the Supply Curve
The supply curve shows the least amount of
money that a supplier will accept for a
given unit. The supply curve slopes upward
because the per unit cost of production
(marginal cost) of the firm rises with the
quantity produced.
20
Increase in Supply
• Increase in Supply
More (quantity) is supplied at the same
price or the same quantity is supplied at a
lower price. (Supply curve shifts South
East)
21
Decrease in Supply
• Decrease in Supply
Less (quantity) is supplied at the same price
or the same quantity is supplied at a higher
price. (Supply curve shifts North West)
22
Supply Shifters
• Cost of Production
As cost of production increases supply
shifts NW otherwise producers will make a
loss.
As cost of production decreases supply
shifts SE.
23
Supply Shifters
• Prices of Other Goods Produced
Substitutes in production
Two goods are said to be substitutes in
production when by producing more of one
good you produce less of the other.
As the price of a substitute in production
rises the supply curve of the good in question
shifts NW. As the price of a substitute in
production falls the supply curve of the good
24
in question shifts SE.
Supply Shifters
• Prices of Other Goods Produced
Complements in production
Two goods are said to be complements in
production when producing one good
automatically yields the other as a by
product.
As the price of a complement rises supply
shifts SE. As the price of a complement
falls supply shifts NW
25
Supply Shifters
• Expected Future Prices
If prices in the future are expected to rise
suppliers hoard quantities to sell at the
higher price thus resulting in a decline in
supply. If prices in the future are expected
to fall suppliers sell all they can now before
prices drop resulting in an increase in
supply.
26
Supply Shifters
• Number of Suppliers
In general supply increases with the number
of suppliers and decreases with a decline in
the number of suppliers.
• Technology
New and improved technology reduces the
cost of production thereby increasing supply
at a given price.
27
Price Quantity Supplied Quantity Demanded Shortage/Surplus
$0.60
2
14
-12
$0.80
4
12
-8
$1.00
6
10
-4
$1.20
8
8
0
$1.40
10
6
4
$1.60
12
4
8
$1.80
14
2
12
$2.00
16
0
16
Price
Demand & Supply of Soda
$2.00
$1.80
$1.60
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Supply
Demand
0
2
4
6
8
10
Quantity
12
14
16
28
18
Market Equilibrium
Price QuantitySupplied QuantityDemanded Shortage/Surplus
$0.60
2
14
-12
$0.80
4
12
-8
$1.00
6
10
-4
$1.20
8
8
0
$1.40
10
6
4
$1.60
12
4
8
$1.80
14
2
12
$2.00
16
0
16
29
Market Equilibrium
Price
Demand&Supplyof Soda
$2.00
$1.80
$1.60
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Supply
Demand
0
2
4
6
8
10
12 14
16
18
Quantity
30
Market Equilibrium
• Surplus:
At any given price when the quantity
supplied exceeds the quantity demanded at
that price, there is said to be a surplus. A
surplus usually results in sellers cutting
prices in an effort to sell their product. The
impact of a surplus in a market is to drive
prices down and to increase the quantity
traded.
31
Market Equilibrium
• Shortage:
At any given price if the quantity demanded
exceeds the quantity supplied at that price
there is said to be a shortage. A shortage
usually results in buyers trying to outbid
each other for the few scarce remaining
units. The impact of a shortage in a market
is to drive prices up and to increase the
quantity traded.
32
• Equilibrium Price:
It is the price at which the quantity
demanded equals the quantity supplied.
There is no shortage or surplus at this price.
• Equilibrium Quantity:
It is the quantity bought & sold at the
equilibrium price.
33