KINH TẾ VI MÔ Chapter II quan nguyen

The law of demandIn a certain time, ceteris paribus, when the price of a good/servicerises, the quantity demanded of the good falls, and when the pricefalls, the quantity demanded rises.

I Demand

1 Definition

2 The law of demand

3 Demonstrating demand

4 Determinants in demand function

5 Movement and shift of demand curve

DEMAND & SUPPLY

1 Definition

- Demand (D): An economic principle describes the quantity of goods/services that consumer is willing to

buy and afford to buy at various price level in a certain

time, ceteris paribus.

services that consumer is willing to buy and afford to buy

at a price level in a certain time, ceteris paribus.

- Individual demand is the demand of one individual or

firm.

- Market demand is the sum of the individual demand

DEMAND

Market demand as the sum of individual demands

(demand schedule)

Price of ice-cream cone Catherine Nicholas Market

$0.00 0.50 1.00 1.50 2.00 2.50 3.00

12 10 8 6 4 2 0

6 5 4 3 2 1

16 13 10 7 4 1

The quantity demanded in a market is the sum of the quantities demanded by all the buyers at each price Thus, the market demand curve is found by adding horizontally the individual demand curves At a price of $2.00, Catherine demands 4 ice-cream cones, and Nicholas demands 3 ice-cream cones The quantity demanded in the

market at this price is 7 cones.

Market demand as the sum of individual demands

Nicholas’s demand

DMarket

0 2 4 6 8 10 12 14 16 18 Quantity of Ice-Cream Cones

Market demand

2 The law of demand

In a certain time, ceteris paribus, when the price of a good/servicerises, the quantity demanded of the good falls, and when the pricefalls, the quantity demanded rises

P

QDP

QD

DEMAND

4 Determinants in demand function

4.1 Price of related goods (P Y )

- Substitutes goods: A and B are substitutes if the usage of A can

be replaced by the usage of B, provided that the initialconsumption target is unchanged

(Price of substitutes goods) PS ↑ → QDs ↓ → QDx ↑(Price of substitutes goods) PS ↓ → QDs ↑ → QDx ↓

→ covariates

DEMAND

4.1 Price of related goods (P Y )

- Complement goods: A and B are complements if the usage of Amust go together with the usage of B to ensure the initial utility

4.2 Income of consumer (I)

4.2 Income of consumer (I)

- Engel curve: Attitude

toward any goods depends

on buyer’s income, not on

DEMAND

In addition to the preceding factors, which influence the behavior

of individual buyers, market demand depends on the number of these buyers

DEMAND

In addition to the preceding factors, which influence the behavior

of individual buyers, market demand depends on the number ofthese buyers

DEMAND

5 Movement and shift of demand curve

- Movement): PX - endogenous variables

- Shift: The rest determinants - exogenous variables

I Supply

1 Definition

2 The law of supply

3 Demonstrating supply

4 Determinants in supply function

5 Movement and shift of supply curve

DEMAND & SUPPLY

1 Definition

- Supply (S): An economic principle describes the quantity of goods/services that supplier is willing to

supply and able to supply at various price level in a

certain time, ceteris paribus.

services that supplier is willing to supply and able to

supply at a price level in a certain time, ceteris paribus.

- Individual supply is the supply of one individual or

firm.

- Market supply is the sum of the individual supply for

a product from sellers in the market.

SUPPLY

Market supply as the sum of individual supplies

(supply schedule)

Price of ice-cream cone Ben Jerry Market

$0.00 0.50 1.00 1.50 2.00 2.50 3.00

0 0 1 2 3 4 5

0 0 2 4 6 8

0 1 4 7 10 13

At a price of $2.00, Ben supplies 3 cream cones, and Jerry supplies 4

ice-cream cones The quantity supplied in the market at this price is 7 cones

Market supply as the sum of individual supplies

SJerry

0 1 2 3 4 5 6 7

Quantity of Ice-Cream Cones

Jerry’s supply

SMarket

0 2 4 6 8 10 12 14 16 18 Quantity of Ice-Cream Cones

Market supply

2 The law of supply

In a certain time, ceteris paribus, when the price of a good/servicerises, the quantity supplied of the good also rises, and when theprice falls, the quantity supplied also falls

SUPPLY

P

QSP

QS

4 Determinants in supply function

5 Movement and shift of the supply curve

- Movement: PX - endogenous variables

- Shift: The rest determinants - exogenous variables

III Market equilibrium

1 Equilibrium status

1.1 Definition

 Equilibrium - a situation

 Market price has reached the level :

 Quantity supplied = quantity demanded

 Equilibrium price - the price:

 Balances quantity supplied and quantity demanded

 Equilibrium quantity

 Quantity supplied and the quantity demanded at the equilibrium price

Market equilibrium

0 1 2 3 4 5 6 7 8 9 10 11 12

Quantity of Ice-Cream Cones

$3.00 2.50 2.00 1.50 1.00 0.50

Price of Ice-Cream Cones

Equilibrium

Demand

Equilibrium price

Equilibrium quantity

The equilibrium of supply and demand

Market equilibrium

Supply and Demand Together

 Surplus

 Quantity supplied > quantity

demanded

+ P1 > PE+ QS > QE > QD

Supply and Demand Together

 Shortage

 Quantity demanded >

quantity supplied

+ P2 < PE+ QS < QE < QD

Markets not in equilibrium

(a) Excess Supply

In panel (a), there is a surplus Because the market price of $2.50 is above the equilibrium price, the quantity supplied (10 cones) exceeds the quantity demanded (4 cones) Suppliers try to

increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level

In panel (b), there is a shortage Because the market price of $1.50 is below the equilibrium price, the quantity demanded (10 cones) exceeds the quantity supplied (4 cones) With too many buyers chasing too few goods, suppliers can take advantage of the shortage by raising the price Hence,

10

Quantity supplied

Price of Ice Cream Cones

Quantity of Ice-Cream Cones 0

10

Quantity demanded

Supply and Demand Together

 Law of supply and demand

 The price of any good adjusts

demanded into balance

 In most markets

Supply and Demand Together

 Three steps to analyzing changes in

equilibrium

1 Decide: the event shifts the supply curve, the

demand curve, or both curves

2 Decide: curve shifts to right or to left

3 Use supply-and-demand diagram

quantity

How an increase in demand affects the equilibrium

Supply

New equilibrium

D2

An event that raises quantity demanded at any given price shifts the demand

curve to the right The equilibrium price and the equilibrium quantity both rise Here an abnormally hot summer causes buyers to demand more ice cream The demand curve shifts from D1 to D2, which causes the equilibrium price to rise

from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10 cones

Price of Ice-Cream Cones

Quantity of Ice-Cream Cones

$2.50 2.00

10

D1

Initial equilibrium

1 Hot weather increases the demand for ice cream

2 …resulting in

a higher price

3 …and a higher quantity sold.

How a decrease in supply affects the equilibrium

S1

New equilibrium

S2

An event that reduces quantity supplied at any given price shifts the supply curve

to the left The equilibrium price rises, and the equilibrium quantity falls Here an increase in the price of sugar (an input) causes sellers to supply less ice cream

The supply curve shifts from S1 to S2, which causes the equilibrium price of ice

Price of Ice-Cream Cones

Quantity of Ice-Cream Cones

$2.50 2.00

4

Demand

Initial equilibrium

1 An increase in the price of sugar reduces the supply of ice cream

2 …resulting in

a higher price

3 …and a smaller quantity sold.

A shift in both supply and demand

(a) Price Rises, Quantity Rises

Here we observe a simultaneous increase in demand and decrease in supply Two

outcomes are possible In panel (a), the equilibrium price rises from P1 to P2, and the equilibrium quantity rises from Q1 to Q2 In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium quantity falls from Q1 to Q2.

(b) Price Rises, Quantity Falls

New equilibrium

Small decrease

Quantity of Ice-Cream Cones 0

New equilibrium

Large decrease

in supply

Small increase

in demand

What happens to price and quantity when supply or demand shifts?