The Market Forces of Supply and Demand Chapter 2 MICROECONOMICS @KieuMinh.MSc 1 Contents Supply Equilibrium Elasticity @KieuMinh.MSc 2 Markets @KieuMinh.MSc 3 A group of buyers and s
Trang 1The Market Forces
of Supply and Demand
Chapter 2 MICROECONOMICS
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Contents
Supply
Equilibrium
Elasticity
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Markets
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A group of buyers and sellers of a particular good or
service
Can be highly organized
Can be less organized
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Market: any institution,
mechanism, or arrangement
which facilitates exchange.
2.1 DEMAND Buyers determine demand
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Demand
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Quantity demanded (QD)
Buyers are willing and able to purchase
Other things equal, when the price (P) of the good rises, quantity demanded (QD) of a good falls
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Demand
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Quantity demanded (QD) can be shown:
Demand schedule - a table:
Downward sloping curve
Q D = f (P)
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Demand curve
8 Catherine’s demand schedule and demand curve
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Price of Ice-cream cone
Quantity of Cones demanded
$0.00 0.50 1.00 1.50 2.00 2.50 3.00
12 cones 10 8 6 4 2 0
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 1 A decrease
in price
2 increases quantity
of cones demanded.
Trang 31.2 Individual Demand
and Market Demand
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Individual demand:
Sum of all individual demands for a good or service
Sum - individual demand curves horizontally
Market demand as the sum of individual demands (demand schedule)
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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
= 19 16 13 10 7 4 1
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Market demand as the sum of individual demands
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D Catherine
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
Catherine’s
demand
D Nicholas
0 1 2 3 4 5 6 7 Quantity of Ice-Cream Cones
$3.00 2.50 2.00 1.50 1.00 0.50
Price of Ice Cream
Nicholas’s demand
D Market
0 2 4 6 8 10 12 14 16 18 Quantity of Ice-Cream Cones
$3.00 2.50 2.00 1.50 1.00 0.50
Price of Ice Cream
Market demand
1.3 Shifts in Demand
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Any change that increases the quantity demanded at every price
Demand curve shifts right
Any change that decreases the quantity demanded at every price
Demand curve shifts left
Variables that can shift the demand curve
Income
Prices of related goods
Tastes
Expectations
Number of buyers
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Shifts in the demand curve
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Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
Demand
1
Demand curve, D 3
Demand curve, D 2
Increase in Demand
Decrease in
Demand
Changes in demand
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1 Income (I)
Normal good: other things constant, an increase in income makes increase in demand
Necessary goods
Luxury goods
Inferior good: Other things constant, an increase in income makes decrease in demand
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Changes in demand
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2 Prices of related goods (Py)
Substitutes - two goods
An increase in the price of one leads to an increase in the
demand for the other
An increase in the price of one leads to a decrease in the
demand for the other
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Changes in demand
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3 Tastes (T)
4 Expectations - about the future (income, prices) (E)
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Trang 5Quick Review
List the determinants of
the demand for bread
Give an example of a
demand schedule
Give an example of
something that would
shift the demand curve
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2.2 SUPPLY Sellers determine supply
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Supply
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Supply shows the willingness to sell (WTS) of sellers for a
goods
Quantity supplied
Amount of a good that sellers are willing and able to sell
Law of supply
Other things equal, when the price (P) of the good rises
quantity supplied (Qs) of a good rises
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Supply
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Supply schedule - a table: shows the quantity supplied at each price
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Price of Ice-cream cone
Quantity of Cones supplied
$0.00 0.50 1.00 1.50 2.00 2.50 3.00
0 cones 0 1 2 3 4 5
Trang 6Supply
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Supply curve - a graph:
Supply function: QS = g (P)
Ben’s supply schedule and supply curve
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Supply curve
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
1 An increase
in price
2 increases quantity
of cones supplied.
2.2 Individual Supply and Market Supply
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Individual supply: Supply of one seller
Market supply: Sum of the supplies of all sellers for a good
or service
Sum - individual supply curves horizontally
Market supply as the sum of individual supplies (supply schedule)
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Price of ice-cream cone Ben Jerry Market
$0.00 0.50 1.50 2.00 2.50 3.00
0 0 2 3 4 5
0 2 4 6 8
= 0 0 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
Trang 7Market supply as the sum of individual supplies
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S Ben
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
Ben’s
supply
S Jerry
0 1 2 3 4 5 6 7 Quantity of Ice-Cream Cones
$3.00 2.50 2.00 1.50 1.00 0.50
Price of Ice Cream
Jerry’s supply
S Market
0 2 4 6 8 10 12 14 16 18 Quantity of Ice-Cream Cones
$3.00 2.50 2.00 1.50 1.00 0.50
Price of Ice Cream
Market supply
2.3 Shifts in Supply
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Increase in supply
Any change that increases the quantity supplied at every price
Supply curve shifts right
Decrease in supply
Any change that decreases the quantity supplied at every price
Supply curve shifts left
Variables that can shift the supply curve
1 Input Prices (Pi)
Supply – negatively related to prices of inputs
2 Technology (T)
Advance in technology – increase in supply
3 Expectations about future (E)
Affect current supply
4 Number of sellers (N) – increase
Market supply - increase
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Shifts in the supply curve
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Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
0
Supply curve, S 1
Supply
curve, S 3
Supply curve, S 2
Increase in Supply
Decrease in
supply
2.3 Market Equilibrium
Supply and Demand Together
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Trang 8Equilibrium - a situation
Market price has reached the level :
Quantity supplied = quantity demanded
Equilibrium price - PE:
Equilibrium quantity - QE
Quantity supplied and the quantity demanded at the
equilibrium price
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The equilibrium of supply and demand
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Supply
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
Market Surplus and Shortage
Quantity supplied > quantity demanded
Excess supply
Quantity demanded > quantity supplied
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Markets not in equilibrium
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Price of Ice Cream Cones
Quantity of Ice-Cream Cones 0
Demand
7
$2.50 (a) Excess Supply (b) Excess demand
2.00
Supply Surplus
4
Quantity demanded
10 Quantity
Price of Ice Cream Cones
Quantity of Ice-Cream Cones 0
Demand
7
1.50
$2.00
Supply
Shortage 4 Quantity
10 Quantity demanded
Trang 933
Market of good A is shown as:
What is the equilibrium price and quantity?
What are the market quantities at the prices of P1 =
VND 8500 và P2= VND 11500
Three steps to analyzing changes in equilibrium
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Decide: the event shifts the supply curve, the demand curve, or both curves
Decide: curve shifts to right or to left
How the shift affects equilibrium price and quantity
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35
How an increase in demand affects the equilibrium
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Supply
New equilibrium
D 2
Price of
Ice-Cream
Cones
Quantity of Ice-Cream Cones
$2.50
2.00
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D 1
Initial equilibrium
1 Hot weather increases the demand for ice cream
2 …resulting in
a higher price
3 …and a higher quantity sold.
36 How a decrease in supply affects the equilibrium
36
S 1
New equilibrium
S 2
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.
Trang 10A shift in both supply and demand
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Price of
Ice
Cream
Cones
Quantity of Ice-Cream Cones
0
D 1
P 2
(a) Price Rises, Quantity Rises (b) Price Rises, Quantity Falls
P 1
S 1
Q 1 Q 2
D 2
S 2
Initial
equilibrium
New
equilibrium
Small decrease
in supply
Large
increase
in demand
Price of Ice Cream Cones
Quantity of Ice-Cream Cones 0
D 1
P 2
P 1
S 1
Q 1
Q 2
D 2
S 2
Initial equilibrium
New equilibrium
Large decrease
in supply
Small increase
in demand
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What happens to price and quantity when supply or demand shifts?
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No change
In Supply
An increase
In Supply
A decrease
In supply
No change
In demand
An increase
In demand
A decrease
In demand
P same
Q same
P up
Q up
P down
Q down
P down
Q up
P ambiguous
Q up
P Down
Q ambiguous
P up
Q down
P up
Q ambiguous
P ambiguous
Q down
Quiz
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True or False Explain
leads the price of B decreased
Quick review
determinants?
determinants?
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Trang 112.3 The Elasticity
Elasticity of Demand Elasticity of Supply
The Price Elasticity of Demand
good responds to 1% change in the price of that good
E d p < 0
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%
%
D D
P
Q E
P
Computing the price elasticity of
demand
Use absolute value (drop the minus sign)
Arc-elasticity of demand: Midpoint method
Two points: (Q1, P1) and (Q2, P2)
) Q
)(Q
P
(P
) P
P
)
Q
(Q
] )/
P )/[(P
P
(P
] )/
Q )/[(Q
Q
(Q
D
P
1
2
1
2
1
2
1
2
1 2 1
2
1 2 1
2
(
2
2 E
Q
Q B
Q A
P
PA = 25, QA = 150
PB = 12, QB = 320 What is the AB arc elasticity
of demand?
Computing the price elasticity of demand
Point-elasticity of demand
One points (Q*, P*)
E.g Demand curve Q = 50- 3P What is the elasticity of demand at the point of P = 5
44
*
* ) ( ' /
/
%
%
Q
P p Q Q
P dP
dQ P dP Q dQ P
Q
E D
Trang 12Variety of demand curves
(a) Demand is perfectly inelastic
Elasticity = 0
Demand curve: vertical
(b) Demand is inelastic
Elasticity < 1
(c) Demand has unit elasticity
Elasticity = 1
(d) Demand is elastic
Elasticity > 1
(e) Demand is perfectly elastic
Elasticity = infinity
Demand curve – horizontal
The flatter the demand curve, the greater the price elasticity of
demand
Determinants of price elasticity of demand
Availability of close substitutes
Goods with close substitutes: More elastic demand
Necessities vs luxuries
Necessities – inelastic demand
Luxuries – elastic demand
Definition of the market
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Elasticity of a linear demand curve (graph)
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1 an
Quantity 0
Price
Demand
$7
14
6
5
4
3
2
1
2 4 6 8 10 12
Elasticity
is larger than 1
Elasticity
is smaller than 1
The slope of a linear demand curve is constant, but its elasticity is not
I)
responds to 1% change in consumers’ income
Normal goods: EDI >0
Necessities: O< E DI<1
Luxuries:E DI>1
Inferior goods: EDI <0
I
Q
%
%
Trang 13(3)Cross-price elasticity of demand
X responds to 1% change in the price of another good Y
Substitutes: Exy >0
Complements: Exy <0
%
%
Dx XY
Y
Q E
P
(4) The Price Elasticity of Supply
responds to 1% change in the price of that good
Depends on the flexibility of sellers to change the amount
of the good they produce
50
P
Q E
S S
%
%
Computing price elasticity of supply
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Arc elasticity
(P1, Q1)
(P2, Q2)
Point elasticity
A(P, Q)
)
2
2
1
(
2
1
)
2
0
1
(
0
1
P
P
P
P
Q
Q
Q
Q
E S
P
P
Q
E S S
%
%
Q P P Q Q P dP
dQ
Variety of supply curves
Supply is perfectly inelastic
Elasticity =0
Supply curve – vertical
Inelastic supply
Elasticity < 1
Supply curve – sloppy
Unit elastic supply
Elasticity =1
Elastic supply
Elasticity >1
Supply curve – flat
Supply is perfectly elastic
Elasticity = infinity
Supply curve – horizontal
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Trang 14Determinant of price elasticity of supply
Supply is more elastic in long run
Substitutions of inputs:
Supply is more elastic when inputs have more substitutes
53
Applications of Supply, Demand, &
Elasticity
Why did OPEC fail to keep the price of oil high?
Increase in prices 1973-1974 and 1971-1981
Short-run: supply is inelastic
Decrease in supply: large increase in price
1982-1990 – price of oil decreased
Long-run: supply is elastic
Decrease in supply: small increase in price
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1 an Price
1 an
Price
A reduction in supply in the world market for oil
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55 Demand
P 2
(a) The Oil Market in the Short Run
Demand
When the supply of oil falls, the response depends on the time horizon In the short run,
shifts from S 1 to S 2 , the price rises substantially By contrast, in the long run, supply and
demand are relatively elastic, as in panel (b) In this case, the same size shift in the supply
curve (S 1 to S 2 ) causes a smaller increase in the price.
(b) The Oil Market in the Long Run
S 1
S 2
P 1
1 In the short run, when supply and
demand are inelastic, a shift in supply .
2 … leads to a
large increase
in price
P 2
S 1
S 2
P 1
1 In the long run, when supply and demand are elastic, a shift in supply .
2 … leads to a small increase
in price Quantity
2.4 Government Policies
In a “free”, unregulated market system, market forces establish
equilibrium prices and quantities.
While equilibrium conditions may be efficient it may be true that
not everyone, i.e buyer or seller are satisfied
56
Trang 15(1) Controls on Prices
Enacted when policy-makers believe that the market price
is unfair to buyers and sellers
Result in government policies,
price ceilings and floors
Tax policies
Subsidies
a Price ceiling
58
Price ceiling: Legal maximum on the price at which a good can be sold
Examples:
Above the equilibrium price
Binding constraint
Below the equilibrium price
Shortage: Sellers must ration the scarce goods
The rationing mechanisms – not desirable
A market with a price ceiling
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Price of
Ice
Cream
Quantity of Ice-Cream Cones
0
Demand
100
(a) A price ceiling that is not binding (b) A price ceiling that is binding
3
Supply
$4 Price ceiling
Equilibrium
price
Equilibrium
quantity
Price of Ice Cream
Quantity of Ice-Cream Cones 0
Demand
$3
Supply
2 Price ceiling
Equilibrium price
75
Quantity demanded Quantity
125
Shortage
b Price floor
60
Price floor: Legal minimum on the price at which a good can be sold
Not binding
Below the equilibrium price
Binding constraint
Above the equilibrium price
Surplus: Some seller are unable to sell what they want
Trang 16A market with a price floor
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Price of
Ice
Cream
Cone
Quantity of Ice-Cream Cones
0
Demand
100
(a) A price floor that is not binding (b) A price floor that is binding
$3
Supply
2 Price floor
Equilibrium
price
Equilibrium
quantity
Price of Ice Cream Cone
Quantity of Ice-Cream Cones 0
Demand 3
Supply
$4
Price floor Equilibrium
price
80
Quantity Quantity
demanded
120
Surplus
The minimum wage
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Workers - supply of labor
How the minimum wage affects the labor market
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Wage
Quantity 0
Labor demand
Equilibrium
employment
(a) A free labor market (b) A Labor Market with a
Binding Minimum Wage
Equilibrium
wage
Labor supply Wage
Quantity
of Labor 0
Minimum wage
Quantity demanded Quantity
Labor surplus (unemployment)
Labor demand
Labor supply
Quiz
64
Market of good B has demand and supply as:
P = 3Q – 12
P = 18 – 2Q (P: $/unit, Q:kg)
1 What is the price and quantity of the free market?
2 If the Government controls the price by a price ceiling of
$4/kg and supplies shortage, what is the price and quantity
on the market?
3 Graphing out the result.
4 How much is the total surplus of this market according to a-question?
5 How did the total surplus change in b- question?