Chapter 3Demand, supply, and the market David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith... Some key
Trang 1Chapter 3
Demand, supply, and the market
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith
Trang 2Some key terms
– a set of arrangements by which buyers and sellers are in contact to exchange goods or services
– the quantity of a good buyers wish to purchase at each conceivable price
– the quantity of a good sellers wish to sell at each
conceivable price
– price at which quantity supplied = quantity demanded
Trang 3The Demand curve shows the relation
between price and quantity demanded
holding other things constant
– the price of related goods
preferences
things affect the position of the demand curve
D
Quantity
Trang 4The Supply curve shows the relation
between price and quantity supplied holding other things constant
“Other things”
include:
– technology
– input costs
– government regulations
Changes in these other things affect the position of the
demand curve
Quantity
S
Trang 5Market equilibrium
Market equilibrium is
at E 0 where quantity demanded equals quantity supplied
– with price P 0 and quantity Q 0
D 0
D 0 S
S
Q 0
0
P ri
ce
Quantity
Trang 6Market equilibrium
If price were above P 0 there would be excess supply
– producers wish to supply more than consumers wish to demand
D 0
D 0 S
S
Q 0
0
P ri
ce
Quantity
Trang 7A shift in demand
D 0
S
Q 0
0
P ri
ce
Quantity
If the price of a substitute good increases
more will be demanded at each price
D 1
D 1
The demand curve shifts from D 0 D 0 to D 1 D 1.
E 1
Q 1
P 1
The market moves to a new equilibrium at E 1
Trang 8A shift in supply
D D
Q 0
P ri
ce
Quantity
Suppose safety regulations are tightened, increasing producers’ costs
S 0
S 0
S 1
S 1
The supply curve shifts to S 1 S 1
If price stayed at P 0 there would be excess demand
Q 1
So the market moves to a new equilibrium at E 2
Trang 9Two ways in which demand may increase
along the demand curve from A to B
consumer reaction
to a price change
supply shift
A
B
P 0
P 1
Q 0 Q Quantity
P ri
ce
D
Trang 10Two ways in which demand may increase
the demand curve from D0 to D1
leads to an increase in demand at each price
e.g at P 0 quantity demanded increases from Q 0 to Q 1
A
B
P 0
Q 0 Q 1
C
D 0 D 1
Quantity
P ri
ce
Trang 11A market in disequilibrium
Suppose a disastrous harvest moves the
supply curve to SS
government may try to protect the poor, setting
a price ceiling at P1
which is below P 0 , the equilibrium price level
RATIONING is needed to
cope with the resulting excess demand
Quantity
P ri
ce
P 0
Q 0
Q 1
D
S
S
P 1
E
P 2
Trang 12What, How and For Whom
equals the quantity supplied
– tells us for whom the goods are produced
to pay a price at which firms would be willing to supply