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Seminar 2
Demand, Supply, Equilibrium
Consumer and Producer Surplus
Price Ceilings and Price Floors
Taxes
Demand
• Demand
– The relationship between the price and the
amount consumers wish to purchase
– Assumes that nothing changes –
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Income
Preferences
number of buyers
price of related goods
expectations of future prices
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Law of Demand
• Law of demand
– The rule that, holding everything else constant,
when the price of a product falls, the quantity
demanded of the product will increase, and when
the price of a product rises, the quantity
demanded of the product will decrease.
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Law of Demand
• Substitution effect
– The change in the quantity demanded of a good
that results from a change in price, making the
good more or less expensive relative to other
goods that are substitutes.
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Law of Demand
• Income effect
– The change in the quantity demanded of a good
that results from the effect of a change in the
good’s price on consumers’ purchasing power.
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Demand Schedule
• Demand schedule
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Demand Curve
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Moving the demand curve
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Changes in Consumer Income
• Increase in consumer income
– Willing and able to buy more at each price
– Increase in demand
– Demand curve shifts rightward
• Normal good
– Demand increases as income increases
• Inferior good
– Demand decreases as income increases
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Changes in the Prices of Other Goods
• Substitutes
– An increase in the price of one good
• Increases the demand for the other
• Rightward shift
• Complements - used in combination
– An increase in the price of one
• Decreases the demand for the other
• Leftward shift
• Unrelated
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Changes in Consumer Expectations
• Income expectations
– Future income increase
• Increase the current demand
• Price expectations
– Future price increases
• Increase current demand
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Number or Composition of Consumers
• Increase in number of consumers
– Increases demand
– Right shift
• Composition of the population—demographic
changes
– Shift the demand
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Changes in Consumer Tastes
• Tastes
– Likes and dislikes
– Assumed given and relatively stable at any point in
time; however, can change over time
• Change in tastes
– May shift the demand
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Demand: Summary
• Quantity demanded, change in the
price of the good—movement along the
demand curve. Demand does not
change
• Demand, change in a determinant other
than price—shift of the entire demand
curve. Demand changes
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Supply
• Supply
– The relationship between the price of a product
and the quantity of the product supplied.
– Assumes that nothing changes
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State of technology
Prices of relevant resources
Prices of alternative goods
Producer expectations
Number of producers in the market
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Supply Schedule
• Supply schedule
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Supply Curve
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Changes in Technology
• Better technology
– Production costs decrease
– Increase quantity supplied at each price
– Increase supply
– Rightward shift
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Prices of Relevant Resources
• Relevant resources
– Employed in the production
• Decrease in price of relevant resources—input
to the production process
– Production costs decrease
– Increase supply
– Rightward shift
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Changes in Producer Expectations
• Higher prices in the future
– Future profits
– May increase the current supply
– Long run
– Easily stored goods
• Reduce current supply
• Short run
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Changes in the Number of Producers
• Market supply
– Amount supplied
– At each price
– By all producers
• Number of producers increase
– Increase supply
– Rightward shift
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Supply: Summary
• Quantity supplied—movement along the
supply curve
• Supply—shift in the supply curve
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Equilibrium
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Market Equilibrium
• Surplus: excess quantity supplied
– Downward pressure on price
• Decrease quantity supplied
• Increase quantity demanded
• Shortage: excess quantity demanded
– Upward pressure on price
• Increase quantity supplied
• Decrease quantity demanded
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Shortage and Surplus
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Shifts of the Demand Curve
• Increase in demand
– Rightward shift of D curve
– Shortage; Upward pressure on P
– QD decreases; QS increases
– New equilibrium: Increase in P and Q
• Decrease in demand
– Surplus; Downward pressure on P
– New equilibrium: Decrease in P and Q
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Shift of Demand Curve
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Shifts in the Supply Curve
• Increase in supply
– Rightward shift of S curve
– Surplus; Downward pressure on P
– QD increases; QS decreases
– New equilibrium:
• P decreases; Q increases
• Decrease in supply
– New equilibrium:
• P increases; Q decreases
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Shift of Supply Curve
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Simultaneous Shifts of D and S curves
• Both S and D increase:
– Q increases
– D shifts more: P increases
– S shifts more: P decreases
• Both S and D decrease:
– Q decreases
– D shifts more: P decreases
– S shifts more: P increases
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Demand shifts more than Supply
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Supply shifts more than Demand
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Simultaneous Shifts of D and S curves
• S increases; D decreases
– P decreases
– D shifts more: Q decreases
– S shifts more: Q increases
• S decreases; D increases
– P increases
– D shifts more: Q increases
– S shifts more: Q decreases
•33
Disequilibrium
• Price Floors
– Set above equilibrium P
– Minimum selling P
– Surplus
– Distort markets
– Reduce economic welfare
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Minimum Wage
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Disequilibrium
• Price Ceilings
– Set below the equilibrium P
– Maximum selling P
– Shortage
– Distort markets
– Reduce economic welfare
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Rent Control
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