Chapter 3 - Supply and demand intertwined. After reading this chapter, you should be able to answer the following questions: How do supply and demand determine prices? What is equilibrium? What is surplus? What is shortage? What is the effect of a change in demand? What is the effect of a change in supply?
Trang 1Chapter 3
Supply and Demand
Intertwined
Trang 2• What is the effect of a change in demand?
• What is the effect of a change in supply?
Trang 3Quantity demanded at 0.45
Trang 4Quantity demanded at 0.70
10,000 14,600
Trang 5Quantity demanded at 0.25
Trang 6• A market at equilibrium is stable unless
disturbed by shift of supply or demand
curves.
• A market not at equilibrium moves towards equilibrium with change in price.
Trang 7Equilibrium price
Trang 8Do You Know?
• When does a surplus arise?
When price is above equilibrium where quantity supplied exceeds quantity
demanded.
• When does a shortage arise?
When price is below equilibrium where quantity demanded exceeds quantity supplied.
Trang 9New Supply
Old equilibrium
New equilibrium
Trang 10Old Demand
Moving Towards New Equilibrium
New equilibrium
New Demand
Trang 11Old Supply
New equilibrium
Old equilibrium
Trang 12New Demand
Moving Towards New Equilibrium
Old equilibrium
Old Demand
Trang 13Market Forces in a Fictional Tale
In anticipation of the blockade…
• Increase in demand for food and hence its price
• Smuggler transports food rather than luxury
goods
After the blockade…
• With higher food prices, the smuggler is willing
to take the risk of shipping food
After government control over food prices…
Trang 14Invisible Hand
• Invisible hand of the market pushes
self-interested people to act for the good of society.
“It is not from the benevolence of the butcher, the brewer or the baker, that
we expect our dinner, but from their regard to their own interest.”
Trang 15Demand before
Markets in Times of Crisis
• Pets destroy wheat
New equilibrium
Demand after
$7
$4
Trang 16Markets in Times of Crisis
• War in the Middle
East reduces supply
of oil
• Price of oil rises
• Higher price causes
people to use less oil
• Market offers the best
solution among all the
alternatives
Supply after
$Price
Supply before
New equilibrium
Old equilibrium 150
70
Trang 17Markets in Times of Crisis
Hurricane damage affects the supply and demand for bottled water
• Decrease in supply
• Increase in demand
How will it affect new equilibrium price?
How will it affect new equilibrium quantity?Only one can be determined, the other is
Trang 18Demand after
Supply after
Supply after
Supply
Trang 19Markets in Times of Crisis
Price gouging:
• Increase in price as a result of market
reaction to increase in demand or
decrease in supply.
• It provides incentive to firms to sell more.
• It provides incentive to consumers to
conserve the good short in supply.
Trang 20Water demand Diamond
supply
Diamond demand
Diamond Equilibrium
Water Equilibrium
Trang 22Supply before
New Equilibrium
Old Equilibrium
Market for Developable Land
Trang 23newly built homes.
• Higher price and
lower quantity sold of
newly built homes
New Supply Price
Old Supply
New Equilibrium after higher land prices
Old Equilibrium before higher land prices
Market for Newly Built Homes
Trang 24Old Demand
• Newly built and
previously occupied
homes are substitutes.
Higher price of newly built
homes:
• Increase in demand for
previously occupied
homes
• Higher price and higher
quantity sold of previously
occupied homes
Price
Supply
New Equilibrium before higher prices of new homes
Old Equilibrium before higher prices of new homes
Market for Previously Occupied Homes
New Demand
Trang 25Do You Know?
• Do markets move to new equilibrium
instantaneously?
No It takes time How long depends on the type
of market It can be from a few seconds to a few months
• What are some examples of forces that disturb market equilibrium?
Any changes that effect demand or supply
disturb market equilibrium, e.g., change in input prices, future expectations, change in price of
Trang 26Do You Know?
• What is Adam Smith’s Invisible Hand?
Market forces guide self-interested people as if
by an invisible hand to act for the good of
society
• How does marginal value relate to the price of
water?
A good’s price is influenced by its marginal value
to consumers The marginal value of water is
very low since lots of water is consumed
Trang 27Summary
• Equilibrium = When quantity demanded
meets quantity supplied.
• Surplus = When quantity supplied
exceeds quantity demanded.
• Shortage = When quantity demanded
exceeds quantity supplied.
• A market not at equilibrium moves towards equilibrium with change in price.
Trang 28Summary
• A good’s price is determined by
intersection of demand and supply
• A change in demand or supply shifts the
market to a new equilibrium.
• Market forces offer the best solution to any changes in the society.
Trang 29Coming Up
By how much does quantity change when there is a change in
price?