Download FIGURE 2-1 The Demand Curve for Lobsters in Shediac, NB, July

Chapter 2
Supply and
Demand
Slide 1
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-1
The Demand Curve for
Lobsters in Shediac,
N.B., July 20, 2010
The demand curve tells the
quantities buyers will wish
to purchase at various
prices. Its key property is
its downward slope; when
price falls, the quantity
demanded increases. This
property is called the law
of
demand.
Slide 2
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-2
A Supply Schedule for
Lobsters in Shediac,
N.B., July 20, 2010
The upward slope of the
supply schedule reflects
the fact that costs tend to
rise when producers
expand production in the
short run.
Slide 3
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-3
Equilibrium in the
Lobster Market
The intersection of the
supply and demand curves
represents the pricequantity pair at which all
participants in the market
are “satisfied”: buyers are
buying the amount they
want to buy at that price,
and sellers are selling the
amount they want to sell.
Slide 4
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-4
Excess Supply and
Excess Demand
When price exceeds the
equilibrium level, there is
excess supply, or surplus.
When price is below the
equilibrium level, there is
excess demand, or
shortage.
Slide 5
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-5
An Opportunity for
Improvement in the
Lobster Market
When the quantity traded
in the market is below the
equilibrium quantity, it is
always possible to
reallocate resources in such
a way that some people are
made better off without
harming others. Here, a
dissatisfied buyer can pay a
seller $5 for an additional
lobster, thus making both
parties better off.
Slide 6
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-6
Rent Controls
With the rent control level
set at $400 a month, there
is an
excess demand of
40,000 apartments a
month.
Slide 7
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-7
A Price Support in
the Butter Market
For a price support to have
any impact, it
must be set above the
market-clearing price.
Its effect is to create excess
supply, which
the government then
purchases.
Slide 8
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-8
Factors that Shift
Demand Curves
Prices of substitutes
and complements,
incomes, population,
expectation of future price
and income changes, and
tastes all influence the
position
of the current demand
curve for a product.
Slide 9
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-9
Factors That Shift
Supply Schedules
Technology, input
prices, the number
of firms, expectations
about future prices,
and the weather all
affect the position of
the supply schedule
for a given product.
Slide 10
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-10
Two Sources of
Seasonal Variation
Apple consumption is
highest in the fall, while
cottage rentals are
highest in summer. (The
subscripts h and l stand
for high and low
consumption,
respectively.)
(a) Apple prices are
lowest in fall, because
the quantity increase
results from increased
supply.
(b) Cottage prices are
highest in summer,
because the quantity
increase results from
increased demand.
Slide 11
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-11
The Effect of Grain
Price Supports on
the Equilibrium Price
and Quantity of Beef
By raising the price of
grain, an input used in
beef production, the
price supports produce a
leftward shift in the
supply curve of beef. The
result is an increase in
the equilibrium price and
a reduction in the
equilibrium quantity.
Slide 12
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-12
Analyzing Supply-Demand
Changes Using Market Data
Figure 2-12(a) shows that if
equilibrium P and Q increase,
demand must have increased but
supply may have remained
constant, decreased, or increased.
Figure 2-12(b) shows what must
have happened in each of zones I
to IV relative to an initial
equilibrium E0. For the oddnumbered equilibria, we know
only how one function (supply or
demand) must have changed. For
even-numbered equilibria on the
border between two zones, we
know how both supply and
demand must have changed.
Slide 13
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-13
Graphs of Equations
2.1 and 2.2
The algebraic and
geometric approaches lead
to exactly the same
equilibrium prices and
quantities. The advantage
of the algebraic approach is
that exact numerical
solutions can be achieved
more easily. The geometric
approach is useful because
it gives a more intuitively
clear description of the
supply and demand curves.
Slide 14
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-14
A Tax of T =
$10/Unit Levied on
the Seller Shifts the
Supply Schedule
Upward by
T Units
The original supply
schedule tells us what price
suppliers must charge in
order to cover their costs at
any given level of output.
From the seller’s
perspective, a tax of T =
$10/unit is the same as a
unit-cost increase of $10.
The new supply curve thus
lies $10/unit above the old
one.
Slide 15
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-15
Equilibrium Prices and
Quantities When a Tax
of T = $10/Unit Is
Levied on the Seller
The tax causes a reduction
in equilibrium quantity
from Q* to Q . The new*1
price paid by the buyer
rises from P* to P . The
new *1price received by the
seller falls from P* to P –
*1
10.
Slide 16
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-16
The Effect of a Tax of
T = $10/Unit Levied on
the Buyer
Before the tax, buyers
would buy Q1 units at a
price of P1. After the tax, a
price of P1 becomes
P1 + 10, which means
buyers will buy only Q2.
The effect of the tax is to
shift the demand curve
downward by $10/unit.
Slide 17
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-17
Equilibrium Prices
and Quantities After
Imposition of a Tax
of T = $10/Unit Paid
by the Buyer
The tax causes a reduction
in equilibrium quantity
from Q* to Q . The new*2
price paid by the buyer
rises from P* to P + 10.
The *new
price received by
2
the seller falls from P* to P
*2
.
Slide 18
Copyright © 2004 McGraw-Hill Ryerson Limited
FIGURE 2-18
A Tax on the
Buyer Leads to
the Same
Outcome as a Tax
on the Seller
The price received
by sellers (net of the
tax), the price paid
by buyers (including
tax), and the
equilibrium quantity
will all be the same
when the tax is
collected from sellers
(panel a) as when it
is collected from
buyers (panel b).
Slide 19
Copyright © 2004 McGraw-Hill Ryerson Limited
PROBLEM 1
Slide 20
Copyright © 2004 McGraw-Hill Ryerson Limited
ANSWERS 2-3
Slide 21
Copyright © 2004 McGraw-Hill Ryerson Limited