KINH TẾ VI MÔ Chapter 2 demand supply

The law of demand Given everything else held constant, the quantity demanded of a good will increase when the price decrease, and vice versa... Movement Along the Demand Curve … is no

CHAPTER 2

THE BASICS

OF DEMAND

& SUPPLY

Supply and demand model

model of how a competitive market works

curve and demand shifting

Demand

1   Key Definitions

commodity that buyers are willing and

can afford to buy at different prices in a

certain period of time given everything else held constant

ü  Demand versus Need?

- Quantity demanded is the amount of

commodity that buyers are willing and can

afford to buy at a certain price during a period

of time given everything else held constant

è Demand captures the whole relationship

between price and quantity demanded

- Individual demand: the demand of a single consumer

- Market demand: the sum of the quantity

demanded for each individual buyer at each

price

DEMAND

2 The law of demand

Given everything else held constant, the

quantity demanded of a good will increase when the price decrease, and vice versa

Ceteris Paribus

Price of cotton (per pound)

Quantity of cotton demanded (billions of pounds)

1.75 1.50 1.25 1.00 0.75 0.50

$2.00

Demand Schedule for Cotton

Demand curve, D

As price rises, the quantity demanded falls

-   Demand function is a mathematical

representation of the relationship between

quantity demanded and demand determinants

QD = f( P, Py, I, T, E, N) Where

QD : Quantity demanded

P : Price of the commodity

Py : Price of related commodities

I : Income

E : Expectations

N : Number of buyers

A change in quantity demanded vs a change in demand

—  When price changes,

quantity demanded will

change sequentially

—  However demand, as

the relationship between

price and quantity

demanded, will not

change

—  Thus the demand curve

remains at the same

What Causes a Demand Curve to

Movement along demand curve vs demand shift

—  Other factors are

D

8.5 9.0 9.7 10.7 12.0 13.8 17.0

in 2007 in 2010

$2.00 1.75 1.50 1.25 1.00 0.75 0.50

Price of cotton (per pound)

Quantity of cotton demanded (billions of pounds)

Demand Schedules for Cotton

7

$2.00 1.75 1.50 1.25 1.00 0.75

Movement Along the Demand Curve

… is not the same thing

as a movement along the

A movement along the demand curve is a change in the quantity demanded of a good that is the result of a

change in that good’s price

Shifts of the Demand Curve

A “decrease in demand”

means a leftward shift of

the demand curve:

at any given price, consumers demand a smaller quantity than

Decrease

in demand

An “increase in demand” means a

rightward shift of the

demand curve:

at any given price, consumers demand a larger quantity than

before (D 1àD 2)

DETERMINANTS CAUSING SHIFTS DEMAND

Price of Substitute

use either of them to achieve the same purpose

DETERMINANTS OF DEMAND

Price of Complement

necessarily consumed together to guarantee their usefulness

—   Impact

—   Ernst Engel : At different income levels,

consumers have different perspectives toward the same goods

Normal goods Inferior goods

Determinants of Demand

Expectations

Expectations about future income or

prices will affect the demand for a good today

Current Demand Increases

Current Demand Decreases

Current demand increases

Individual Demand Curve and the Market Demand Curve

The market demand curve is the horizontal sum of the

individual demand curves of all consumers in that market

(c) Market Demand Curve

Price of blue jeans (per pair)

Key definitions

that sellers are willing and able to sell at

different prices in a certain period of time

given everything else held constant

commodity that sellers are willing and

able to sell at a given price in a certain

period of time given everything else held constant

THE LAW OF SUPPLY

Illustrating supply

Quantity of

cotton supplied (billions of pounds)

$2.00 11.6 1.75 11.5 1.50 11.2 1.25 10.7 1.00 10.0 0.75 9.1 0.50 8.0

As price rises, the quantity supplied

rises

A supply curve shows

graphically how much of a good or service people are willing to sell at any

given price

Supply curve, S

Supply function

QS = g ( Px, Pi, G, Tec, E, N) Where

Any “increase in supply” means a

rightward shift of the

supply curve:

at any given price, there is an increase in the quantity supplied

leftward shift of the

supply curve:

at any given price, there is a decrease in the quantity supplied

(S 1à S3)

Determinants causing shifts of supply curve

Determinants causing shifts of supply curve

Determinants causing shifts of supply curve

ask for a price which

is $t higher than the

Determinants causing shifts of supply curve

Determinants causing shifts of supply

Market equilibrium

—  Equilibrium in a market: when the

quantity demanded of a good equals the quantity supplied of that good

equilibrium price (or market-clearing price)

◦  The quantity of the good bought and sold at

that price is the equilibrium quantity

Market Equilibrium

There is a surplus of a

good when the quantity supplied exceeds the quantity demanded Surpluses occur when the price is above its equilibrium level

Quantity demanded

Quantity supplied

Price of cotton

(per pound)

Quantity of cotton (billions of pounds)

Surplus

Quantity supplied

Price of

cotton (per

pound)

Quantity of cotton (billions of pounds)

There is a shortage of a

good when the quantity demanded exceeds the quantity supplied

Shortages occur when the price is below its equilibrium level

Shortage

Equilibrium and Shifts of the Demand Curve

An increase

in demand…

… leads to a movement along the supply curve due to a higher equilibrium

price and higher equilibrium quantity

Equilibrium and Shifts of the Supply Curve

A decrease in supply…

… leads to a movement along the demand curve

due to a higher equilibrium price and lower equilibrium

quantity

Technology Shifts of the Supply Curve

on each chip

Simultaneous Shifts of Supply and Demand

Two opposing forces determining the equilibrium quantity

The increase in demand dominates the decrease

(a) One Possible Outcome: Price Rises, Quantity Rises

Price of cotton Small

decrease in supply

Large increase in

demand

Simultaneous Shifts of Supply and Demand

Two opposing forces determining the equilibrium quantity

in supply

Small increase in demand

The decrease in supply dominates the increase

in demand

Simultaneous Shifts of Supply and Demand

We can make the following predictions about the outcome when the supply and demand curves shift simultaneously:

Price: up Quantity:

ambiguous

Demand

Decreases

Price: down Quantity:

ambiguous

Price: ambiguous Quantity: down

Why Governments Control Prices

the quantity supplied equals the quantity

demanded But, this equilibrium price does not necessarily please either buyers or sellers

regulate prices by imposing price controls,

which are legal restrictions on how high or

low a market price may go

Price controls

— Price ceiling is the maximum price sellers are

allowed to charge for a good or service

— Price floor is the minimum price buyers are

required to pay for a good or service

Price Ceilings

crises—wars, harvest failures, natural disasters

—because these events often lead to sudden price increases that hurt many people but

produce big gains for a lucky few

◦  U.S government–imposed ceilings on aluminum and steel during World War II

◦  Rent control in New York City

◦  Interest rate ceiling

The Market for Apartments in the Absence of Government Controls

1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4

Quantity supplied

Quantity demanded

Monthly rent

(per apartment)

Quantity of apartments

(millions)

The Effects of a Price Ceiling

Housing shortage of 400,000 apartments caused by price ceiling

Price ceiling

The Market for Butter in the Absence of Government Controls

8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0

Quantity of butter (millions of pounds )

The Effects of a Price Floor

Butter surplus of 3 million pounds caused

by price floor

Price floor

Quantity of butter (millions of pounds) Price of butter

(per pound)

2  The demand schedule shows the quantity

demanded at each price and is represented

graphically by a demand curve

The law of demand says that demand curves

slope downward; that is, a higher price for a good or service leads people to demand a smaller quantity, other things equal

SUMMARY

occurs when a price change leads to a

change in the quantity demanded

When economists talk of increasing or

decreasing demand, they mean shifts of the

demand curve—a change in the quantity

demanded at any given price

An increase in demand causes a rightward shift of the demand curve A decrease in

demand causes a leftward shift

SUMMARY

demand curve:

• A change in the prices of related goods or

services, such as substitutes or

complements

• A change in income: when income rises,

the demand for normal goods increases and the demand for inferior goods decreases

• A change in tastes

• A change in expectations

• A change in the number of consumers

SUMMARY

service is the horizontal sum of the

individual demand curves of all consumers

in the market

supplied at each price and is represented

graphically by a supply curve Supply

curves usually slope upward

SUMMARY

occurs when a price change leads to a

change in the quantity supplied

When economists talk of increasing or

decreasing supply, they mean shifts of the

supply curve—a change in the quantity

supplied at any given price

An increase in supply causes a rightward shift of the supply curve A decrease in

supply causes a leftward shift

SUMMARY

supply curve:

• A change in input prices

• A change in the prices of related goods

and services

• A change in technology

• A change in expectations

• A change in the number of producers

service is the horizontal sum of the

individual supply curves of all producers in

the market

SUMMARY

the principle that the price in a market moves

to its equilibrium price, or

market-clearing price, the price at which the

quantity demanded is equal to the quantity

supplied This quantity is the equilibrium

quantity

When the price is above its market-clearing

level, there is a surplus that pushes the price

down

When the price is below its market-clearing

level, there is a shortage that pushes the

price up

SUMMARY

equilibrium price and the equilibrium

quantity; a decrease in demand has the

opposite effect

An increase in supply reduces the

equilibrium price and increases the

equilibrium quantity; a decrease in supply has the opposite effect

SUMMARY

curve can happen simultaneously

When they shift in opposite directions, the

change in equilibrium price is predictable but the change in equilibrium quantity is not

When they shift in the same direction, the

change in equilibrium quantity is predictable but the change in equilibrium price is not

In general, the curve that shifts the greater

distance has a greater effect on the changes

in equilibrium price and quantity

—  Shift of the demand curve

—   Movement along the

—   Shift of the supply curve

—  Movement along the supply curve

—   Consider the market for good X:

—   (P: $/kg, Q: ton)

—   a Determine the market equilibrium

—   b If the Government imposes a price ceiling of 42$/kg and supplies the shortage amount, determine the price and

quantity

—   c If the Government doesn’t want to impose price ceiling but still desires the same outcome as (b), should the Gov impose tax or subsidize producers? Determine that subsidy

or tax

—   A market demand curve

individual demand curves

individual demand curves

price of the good

demand curve

—   If buyers today become more willing and able than before

to purchase larger quantities of Vanilla Coke at each price

c the demand curve for Vanilla Coke will shift to the right

d the demand curve for Vanilla Coke will shift to the left

—   During the last decade, we observe that the price of laptop has fallen sharply while the quantity has increased This fact can be

explained by which of the following events?

production

—   What will happen if the price of Urban

Station coffee goes up?

rightward

leftward

—   An increase in the price of oranges would lead to

orange production

supply curve for oranges

—   Another term for equilibrium price is

—   If at the current price,there is a shortage

of a good,

a sellers are producing more than buyers

wish to buy

b the market must be in equilibrium

c the price is below the equilibrium price

d quantity demanded equals quantity

supplied

—   A weaker demand together with a stronger supply would necessarily result in

a a lower price

b a higher price

c an increase in equilibrium quantity

d a decrease in equilibrium quantity