Chapter 3 - Individual markets: Demand and supply. After studying this chapter you will be able to understand: What markets are, what demand is and what factors affect it, what supply is and what factors affect it, how demand and supply together determine market equilibrium.
Trang 2In this chapter you will learn
In this chapter you will learn
What markets are
What demand is and what factors affect
it
What supply is and what factors affect it
How demand and supply together
determine market equilibrium
Trang 5INSTITUTIONS THAT BRING TOGETHER BUYERS AND SELLERS
Trang 9DEMAND
a schedule or a curve that shows the
various amounts consumers are willing
and able to purchase at each of a series
of possible prices, during some
specified period of time
Trang 10The information
can be presented in a
demand schedule
DEMAND
Trang 11quantity demanded
The information
can be presented in a
demand schedule
Trang 1380 Figure 3-1 Demand
0 1 2 3 4 5 6
Trang 1480 Figure 3-1 Demand
0 1 2 3 4 5 6
Trang 1580 Figure 3-1 Demand
0 1 2 3 4 5 6
Trang 1680 Figure 3-1 Demand
0 1 2 3 4 5 6
Trang 1780 Figure 3-1 Demand
0 1 2 3 4 5 6
Trang 18LAW OF DEMAND
LAW OF DEMAND
all else equal, as price falls, the quantity
demanded rises (& vice versa)
supported by:
– concept of diminishing marginal utility
– income effect
– substitution effect
Trang 19INDIVIDUAL VS MARKET DEMAND
price QD–1st
buyer
QD–2nd buyer
QD– market
Trang 21DETERMINANTS OF DEMAND
DETERMINANTS OF DEMAND
PRICE is the most important influence
on the amount of any product
purchased
a change in price yields a movement
along the demand curve & a change in the demand curve & a change in
quantity demanded
Trang 22QAD
Trang 24Demand Shifters are changes in:
Trang 25Changes in tastes (preferences)
positive change shifts D curve right
more will be demanded at each price
Trang 26Changes in number of buyers:
increase will shift curve right
Trang 27Changes in money incomes:
when income increases
Trang 28Changes in prices of related goods:
when two products are
when two products are SUBSTITUTES SUBSTITUTES,
price of one & demand for the other are
positively related
CHANGE IN DEMAND
CHANGE IN DEMAND
Trang 29Changes in prices of related goods:
when two products are
demand for the other are negatively
related
CHANGE IN DEMAND
CHANGE IN DEMAND
Trang 30Changes in prices of related goods:
when products are unrelated no effect
CHANGE IN DEMAND
CHANGE IN DEMAND
Trang 31Changes in expectations:
about future prices or incomes
CHANGE IN DEMAND
CHANGE IN DEMAND
Trang 32If the price of a good changes, but all other
influences on buyers’ plans are held constant,
there is a change in quantity demanded, but
no change in demand.
NOT demand!
Trang 33If any other determinant of demand changes
(tastes, no of buyers, income, etc.) there is a
curve.
price
quantity D
Increase in D
Decrease in D
Figure 3-3
Trang 35SUPPLY
a schedule or a curve showing the
amounts that producers are willing and
able to make available for sale at each
of a series of possible prices, during
some specified period of time
Trang 37SUPPLY
quantity supplied
5
The information
could be captured in
a supply schedule
Trang 380 1 2 3 4 5 6
Trang 39LAW OF SUPPLY
LAW OF SUPPLY
all else being constant, as price rises,
the quantity supplied rises (& vice
versa)
why?
– price is revenue to suppliers
– higher price necessary to induce higher
supply, to cover higher costs of production
Trang 40INDIVIDUAL VS MARKET SUPPLY
Firm
200 Firms In Market
Market
Trang 41Individual Firm Supply
Trang 43DETERMINANTS OF SUPPLY
DETERMINANTS OF SUPPLY
PRICE is the most important
determinant of quantity supplied
a change in price yields a movement
along the supply curve & a change in the supply curve & a change in
quantity supplied
Trang 44QAS
Trang 46Supply Shifters are changes in:
resource prices
technology
taxes & subsidies
prices of other goods
Trang 47Changes in resource prices:
decrease will increase supply & shift
Trang 49Changes in taxes & subsidies:
increases in taxes will reduce supply
DETERMINANTS OF SUPPLY
DETERMINANTS OF SUPPLY
PA
QAS
S’
Trang 50DETERMINANTS OF SUPPLY
DETERMINANTS OF SUPPLY
Changes in prices of other goods:
higher prices of substitutes in
production will reduce supply
PA
QAS
S’
Trang 51Changes in price expectations:
of the future price of a product
difficult to generalize
DETERMINANTS OF SUPPLY
DETERMINANTS OF SUPPLY
Trang 52Changes in number of sellers:
as the number of sellers increases, so
does supply
DETERMINANTS OF SUPPLY
DETERMINANTS OF SUPPLY
Trang 53If the price of a good changes, but all other
influences on producers’ plans are held constant,
there is a change in quantity supplied, but no
change in supply.
NOT supply!
Trang 54quantity
S
Increase in S Decrease in S
If any other determinant of supply changes
(resource prices, technology, etc.) there is a
change in supply, and a shift in the supply
curve.
Figure 3-4
Trang 56EQUILIBRIUM
equilibrium price will be established
where the supply decisions of
producers and the demand decisions of
buyers are mutually consistent
surpluses drive prices down
shortages drive prices up
Trang 57EQUILIBRIUM
let’s look at the process of adjustment
to equilibrium graphically
Trang 58D
$4 is not the equilibrium
price
Trang 59D
$2 is not the equilibrium
price
Trang 60price
Trang 61Changes in Supply, Demand &
Equilibrium
Changes in Supply, Demand &
Equilibrium
changes in demand or supply will affect
the equilibrium price and quantity
Trang 62INCREASE IN DEMAND
An increase in demand will cause:
a shortage at the original price p1
Trang 63INCREASE IN DEMAND
Consumers will bid price up to p2
QS will increase, QD will decrease
new equilibrium reached at p2, q2
1
to p2, quantity traded has
NOT an increase in supply
Trang 64DECREASE IN DEMAND
An decrease in demand will cause:
a surplus at the original price p1
Trang 65Producers will drop price to p2
QS will decrease, QD will increase
new equilibrium reached at p2, q2
price has
to p2, quantity traded has decreased
NOT a decrease in
supply
Trang 66INCREASE IN SUPPLY
S1
S2P
An increase in supply will cause:
a surplus at the original price p1
Trang 67INCREASE IN SUPPLY
S1
S2P
Producers will drop price to p2
QS will decrease, QD will increase
new equilibrium reached at p2, q2
Trang 68DECREASE IN SUPPLY
S2
S1P
An decrease in supply will cause:
a shortage at the original price p1
Trang 69DECREASE IN SUPPLY
S2
S1P
Consumers will bid price up to p2
QS will increase, QD will decrease
new equilibrium reached at p2, q2
Trang 70Complex Cases
Complex Cases
when both supply and demand change,
the effect is a combination of the
individual effects
if both demand and supply shift, one of
either price or quantity cannot be
predicted–-the result is indeterminate
Trang 71Table 3-9
Trang 72Complex Cases
Complex Cases
A Reminder: “Other Things Equal”
Application: Pink Salmon