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Transcript
Lecture 5 & 6
Dominika Milczarek-Andrzejewska
Individual Markets
Demand and Supply
Outline of Lecture 5 & 6
•
•
•
•
•
Definition of Market
Demand
Supply
Market Equilibrium
Changes in Supply and Demand, and
Equilibrium
• Applications
2
Market
Market is an institution or mechanism that brings
together buyers (demanders) and sellers
(suppliers) of particular goods and services
–
–
•
•
Local, national, or international markets
Highly personal, face-to-face exchanges or
impersonal and remote markets
A product market involves goods and services
A resource market involves factors of
production
3
Demand
Demand schedule shows the various
amounts of a product that consumers are
willing and able to buy
– at each specific price in a series of possible
prices
– during a specified time period
4
Demand Schedule
P
$5
4
3
2
1
QD
10
20
35
55
80
Various Amounts
A Series of Possible Prices
…a specified time period
…other things being equal
Law of Demand
Law of demand is a fundamental characteristic of
demand behavior
• Other things being equal, as price increases, the
corresponding quantity demanded falls
• Restated, there is an inverse relationship
between price and quantity demanded
“Other-things-equal” assumption refers to:
– consumer income and tastes,
– prices of related goods,
– and other things besides the price of the product being discussed
6
Explanation of the Law of Demand:
• Diminishing marginal utility
– The decrease in added satisfaction with consumption
of additional units of a good or service,
– i.e., the second “Big Mac” yields less extra
satisfaction (or utility) than the first
• Income effect
– A lower price increases the purchasing power of
money income, enabling the consumer to buy more at
a lower price
• Substitution effect
– A lower price gives an incentive to substitute the
lower-priced good for now relatively higher-priced
goods
7
Demand Curve:
• Illustrates the inverse relationship
between price and quantity
• The downward slope indicates
– lower quantity (horizontal axis) at higher price
(vertical axis) and
– higher quantity at lower price,
• reflecting the Law of Demand
8
Graphing Demand
Price of Corn
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
P
$5
4
3
2
1
o
D
10 20 30 40 50 60 70 80
Quantity of Corn
Q
Individual Versus Market Demand
• Transition from an individual to a market
demand - summing individual quantities
at various price levels
• Market curve is horizontal sum of
individual curves
10
Individual Versus Market Demand
11
Individual Versus Market Demand
12
Change in Demand
• An increase in demand involves a
rightward shift, and
• A decrease in demand involves a leftward
shift
13
Increase in Demand
Price of Corn
$5
CORN
P
QD
$5
4
3
2
1
10
20
35
55
80
Increase
in Quantity
Demanded
P
30
40
60
80
+
4
3
2
1
o
Increase
in
Demand
10 20 30 40 50 60 70 80
Quantity of Corn
D’
D
Q
Decrease in Demand
Price of Corn
Decrease
in Quantity
Demanded
$5
CORN
P QD
$5 10
4 20
3 35
2 55
1 80
P
-10
20
40
60
4
3
2
1
o
Decrease
in
Demand
10 20 30 40 50 60 70 80
Quantity of Corn
D
D’
Q
Determinants of the Change in Demand
1. Tastes
• favorable change leads to an increase in demand
• unfavorable change - a decrease in demand
2. Number of buyers
• more buyers lead to an increase in demand
• fewer buyers lead to a decrease
16
Determinants of the Change in Demand
3. Income
•
•
•
more leads to an increase in demand
less leads to a decrease in demand for normal
goods
The rare case of goods whose demand varies
inversely with income is called inferior goods
4. Expectations
•
consumer views about future prices, product
availability, and income can shift demand
17
Determinants of the Change in Demand
5. Prices of related goods
a. Substitute goods - can be used in place of each
other
• The price of the substitute good and demand
for the other good are directly related
• If the price of Coke rises, demand for Pepsi
should increase
18
Determinants of the Change in Demand
5. Prices of related goods
b. Complementary goods - are used together like
tennis balls and rackets
• there is an inverse relationship between the
price of one and the demand for the other
19
Increase in Demand
1.
2.
3.
4.
5.
6.
Favorable change in consumer tastes
Increase in the number of buyers
Rising income if product is a normal good
Falling incomes if product is an inferior good
Increase in the price of a substitute good
Decrease in the price of a complementary
good
7. Consumer expectation of higher prices or
incomes in the future
20
Decrease in Demand
1.
2.
3.
4.
5.
6.
7.
Unfavorable change in consumer tastes
Decrease in number of buyers
Falling income if product is a normal good
Rising income if product is an inferior good
Decrease in price of a substitute good
Increase in price of a complementary good
Consumers expectation of lower prices or
incomes in the future
21
Important Distinction Between:
• a change in quantity demanded caused
by price change and
• a change in demand caused by change in
determinants.
22
Supply
• Supply - a schedule that shows amounts
of a product a producer is willing and
able to produce and sell at each specific
price
– in a series of possible prices
– during a specified time period
• What quantities will be offered at various prices
or
• What price will be required to induce various
quantities to be offered?
23
Supply Schedule
CORN
Various Amounts
A Series of Possible Prices
P QS
$1
2
3
4
5
5
20
35
50
60
…a specified time period
…other things being equal
Law of Supply
• Producers will produce and sell more of their
product at a high price than at a low price
• There is a direct relationship between price and
quantity supplied
• Explanation:
– Given product costs, a higher price means greater
profits and thus an incentive to increase the quantity
supplied
– Beyond some production quantity producers usually
encounter increasing costs per added unit of output
25
Supply Curve
• shows a direct relationship in an upward
sloping curve.
26
Graphing Supply
Price of Corn
P
$5
S
P QS
4
$5
4
3
2
1
3
2
1
o
CORN
10 20 30 40 50 60 70 80
Quantity of Corn
Q
60
50
35
20
5
Change in Supply
• An increase in supply involves a rightward
shift
• and a decrease in supply involves a
leftward shift
28
Increase in Supply
Price of Corn
P
$5
4
3
2
1
Increase
in
Supply
S
S’
CORN
P QS
$5
4
3
Increase 2
in Quantity 1
Supplied
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
60 80
50 70
35 60
20 45
5 30
Decrease in Supply
Price of Corn
P
$5
4
3
2
1
o
Decrease
in
Supply
S’
S
CORN
P QS
$5
4
3
Decrease
2
in Quantity 1
Supplied
10 20 30 40 50 60 70 80
Quantity of Corn
Q
60 45
50 30
35 20
20 0
5 --
Determinants of the Change in Supply
Six basic determinants of supply:
1. Resource prices
• a rise in resource prices causes a decrease in
supply
• a decrease in resource prices causes an increase
in supply
2. Technology
• a technological improvement means more
efficient production and lower costs, so an
increase in supply results
31
Determinants of the Change in Supply
3. Taxes and subsidies
•
•
a business tax is treated as a cost, so decreases
supply
a subsidy lowers cost of production, so
increases supply
4. Prices of related goods
•
if the price of substitute production good rises,
producers might shift production toward the
higher-priced good, causing a decrease in
supply of the original good
32
Determinants of the Change in Supply
5. Expectations
•
about the future price of a product
6. Number of sellers
•
generally, the larger the number of sellers the
greater the supply
33
Important Distinction Between:
• a change in quantity supplied due to
price changes and
• a change or shift in supply due to change
in determinants of supply
34
Market Equilibrium
• Where quantity supplied equals the
quantity demanded
• The equilibrium price and quantity.
– Market clearing or market price is another
name for equilibrium price
– The rationing function of prices is the ability
of competitive forces of supply and demand to
establish a price where buying and selling
decisions are coordinated
35
Market Equilibrium
• An excess quantity or surplus
– at prices above the equilibrium
• An excess quantity demanded or
shortage
– at prices below the equilibrium
36
Market Demand and Supply
BUSHELS
OF CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
MARKET
200
x
B
U
Y
E
R
S
DEMAND
2,000
4,000
7,000
11,000
16,000
BUSHELS
OF CORN
P QS
$5
4
3
2
1
60
50
35
20
5
MARKET
200
x
S
E
L
L
E
R
S
EQUILIBRIUM
SUPPLY
12,000
10,000
7,000
4,000
1,000
Market Equilibrium
• Graphically, the equilibrium price and
quantity are where the supply and
demand curves intersect
• It is NOT correct to say supply equals
demand!
38
Market Equilibrium
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
CORN
MARKET
S
$5
P
4
Market
$5
Clearing
Equilibrium 4
3
3
2
1
2
D
1
o
2
4
6
78
10 12 14 16
Quantity of Corn
Q
QS
12,000
10,000
7,000
4,000
1,000
Surplus
Price of Corn
CORN
MARKET
P
QD
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
P
Surplus
$5
4
S
P
QS
At a $4 price
more is being $5 12,000
supplied than 4 10,000
7,000
3
demanded
4,000
2
1,000
1
3
2
1
o
CORN
MARKET
D
2
4
6
78
10 12 14 16
Q
Quantity of Corn
Shortage
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
S
$5
P
4
QS
At a $2 price
more is being $5 12,000
demanded than 4 10,000
3
7,000
supplied
2
4,000
1
1,000
3
2
Shortage
1
o
CORN
MARKET
2
4
6
78
10 1112 14 16
Quantity of Corn
D
Q
The Analogy of Scissors
Economist Alfred Marshall (1842-1924) used the
analogy of scissors to illustrate the relative
importance of supply and demand:
• Equilibrium price and quantity is
determined by both supply and demand,
just as both blades of a pair of scissors
cut the paper
42
Key Terms
•
•
•
•
•
•
•
•
•
•
•
•
•
MARKET
DEMAND
LAW OF DEMAND
DEMINISHING MARGINAL
UTILITY
INCOME EFFECT
SUBSTITUTION EFFECT
DEMAND CURVE
DETERMINANTS OF DEMAND
NORMAL GOODS
INFERIOR GOODS
SUBSTITUTE GOODS
COMPLEMENTARY GOODS
CHANGE IN DEMAND
• CHANGE IN QUANTITY
DEMANDED
• SUPPLY
• LAW OF SUPPLY
• SUPPLY CURVE
• DETERMINANTS OF SUPPLY
• CHANGE IN SUPPLY
• CHANGE IN QUANTITY
SUPPLIED
• SURPLUS
• SHORTAGE
• EQUILIBRIUM PRICE
• EQUILIBRIUM QUANTITY
• RATIONING FUNCTION OF
PRICES
43