Download Demand and Supply

Demand and Supply
And
Market Equilibrium
demand
• Relationship between the price and the quantity the buyer
is willing to purchase, holding all else constant
Q
P
10
1
7
2
4
3
P
Q=f(P, all other things)
Q
Law of demand and vertical and horizontal demand curves
Shift parameters of demand
•
•
•
•
•
Income (normal vs inferior)
Expectation about future prices
Substitutes vs complements
Preferences and advertising
Market size
Market demand curve
• Horizontal summation
I
Q
3
2
1
market
II
P
1
2
3
Q
5
3
1
P
1
2
3
Q
8
5
2
P
1
2
3
Deriving demand and other
factors
data
model
prediction
Data gathering issues (surveys)
Models and simplifications
Regression analysis and results
Generalized demand function and inverse demand function
supply
Relationship between the price of the product and quantity offered for sale
Quantity supplied is a function of several variables
- Price of the good
- Producer expectation concerning future prices
- Number of firms
- Cost of production (prices of inputs, available technology)
-
Prices of goods related in production
Substitutes in Production
- Goods for which an increase in Px relative to Py causes producers to
increase production of the now higher price good and decrease
production of the lower priced good
ex. Wheat and corn
Complements in Production
- Goods for which an increase in Px relative to Py causes producers to
increase production of both goods
ex. gold and silver
• Generalized supply function
• Law of supply
• Fixed supply
Market equilibrium
• Quantity supplied = quantity demanded
• Demand: Q = a – b * P
• Supply: Q = c + d * P
Equilibrium quantity: (ad+bc)/(d+b)
Equilibrium price:
(a-c)/(d+b)
Who pays sales tax?