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- 1. Demand and Supply: Basics September 9, 2009
- 2. Demand <ul><li>Ceteris Paribus </li></ul><ul><ul><li>“ all else remaining the same” or “other things being equal” </li></ul></ul><ul><li>Relative prices and Money Prices </li></ul><ul><ul><li>Money Price is the price that is observed in terms of today’s dollars. </li></ul></ul><ul><ul><li>Relative price is the price of good or service in terms of another. It is the money price of one commodity divided by the money price of another; the number of units of one commodity that must be sacrificed to purchase one unit of another commodity. </li></ul></ul>
- 3. Demand
- 4. Demand <ul><ul><li>The money prices of both commodities has fallen from last year to this year. </li></ul></ul><ul><ul><li>The relative price of 4-Gigabite flash memory drives has fallen, whereas the relative price of rewritable DVDs has risen. </li></ul></ul><ul><li>When evaluating the effects of price changes, we must always compare price per constant-quality unit. </li></ul>
- 5. Demand <ul><li>In a market economy, the price of a good is determined by the interaction of demand and supply. </li></ul><ul><li>All the analysis about demand and supply in this chapter will be in the competitive market. </li></ul><ul><ul><li>Competitive Market: a market that has many buyers and many sellers so no single buyer or seller can influence the price. </li></ul></ul>
- 6. Demand <ul><li>Demand is the relationship between the price of a good and the quantity of the good demanded at each price. </li></ul><ul><ul><li>The various combinations of price and quantity demanded can be reported in a demand schedule. </li></ul></ul><ul><ul><li>Each individual in a market has a demand schedule since each person has different preference over the products. </li></ul></ul>
- 7. Demand <ul><li>The law of demand : The greater the price the lower the quantity demanded, other things being equal. </li></ul><ul><li>This is the result of two effects: </li></ul><ul><ul><li>Substitution Effect : The tendency for people to substitute in favor of cheaper goods and away from more expensive ones. </li></ul></ul><ul><ul><li>Income Effect: The change in people’s purchasing power when the price of one of the goods they buy changes. </li></ul></ul>
- 8. Demand <ul><li>The good with an upward demand curve is called “Giffen Good”, but it rarely exits in the real world. </li></ul><ul><li>Discussion: </li></ul><ul><li>Whether luxury goods are Giffen Goods? Some people say that in certain circumstances, only when the prices of some goods, such as luxury goods, are high, they tend to be willing to buy it. When the prices are low, they will not buy it. </li></ul>
- 9. Demand <ul><li>Market Demand: the total quantity demanded in the market equals the sum of the quantities demanded by each person in the market at a given price. </li></ul><ul><li>The law of demand also holds for market demand. </li></ul>
- 10. Demand <ul><li>Demand schedules in the Market for Chewing Gum </li></ul>Price Quantity Demanded by Total Quantity Demanded Person 1 Person 2 Person 3 Person 4 $0.01 10 17 13 20 60 $0.10 7 16 10 17 50 $0.20 5 15 5 15 40 $0.30 4 8 4 14 30 $0.40 2 6 3 9 20 $0.50 1 3 1 5 10
- 11. Demand <ul><li>A simple demand curve </li></ul>
- 12. Demand <ul><li>Distinction between Quantity Demanded and Demand </li></ul><ul><ul><li>Demand : The overall relationship between price and quantity demanded. </li></ul></ul><ul><ul><li>Quantity Demanded : The amount that would be purchased at a given price. </li></ul></ul><ul><li>A change in demand is not the same as a change in the quantity demanded. </li></ul>
- 13. Demand <ul><li>A change in demand indicates a shift of the demand curve. </li></ul><ul><li>A change in the quantity demanded is represented by the movement long the demand curve, when there is a change of the own price. </li></ul>
- 14. Demand <ul><li>A change in the quantity demanded versus a change in demand </li></ul>A change in demand – shift of demand curve A change in the quantity changed – movement along the same demand curve
- 15. Demand <ul><li>Determinants of Demand ( other than own price) </li></ul><ul><ul><li>Changes in the prices of related goods </li></ul></ul><ul><ul><li>The disposable income of consumers </li></ul></ul><ul><ul><li>Expected future prices and future income </li></ul></ul><ul><ul><li>The number of demanders in the market(market size) </li></ul></ul><ul><ul><li>Tastes and Preferences </li></ul></ul>
- 16. Demand <ul><ul><li>Changes in the prices of related goods </li></ul></ul><ul><ul><ul><li>Substitutes : Goods that can replace each other in consumption. </li></ul></ul></ul><ul><ul><ul><li>Complements : Goods that are used in conjunction with each other. </li></ul></ul></ul><ul><li>When the price of a substitute increases, ceteris paribus, the demand for the good in focus will increase. When the price of a complement increases, the demand for the product in focus will decline. </li></ul>
- 17. Demand <ul><ul><li>The disposable income of consumers </li></ul></ul><ul><ul><li>Normal goods : Demand increases after an increase in income. </li></ul></ul><ul><ul><li>Inferior goods : Demand decreases after an increase in income. </li></ul></ul>
- 18. Demand <ul><ul><li>Expected future prices and future income </li></ul></ul><ul><ul><li>If a sufficient number of demanders expect the price of the good to increase in the future, these people will increase their demand for the product today in order to stock up on the good and avoid the higher price in the future. If a sufficient number of demanders think the price will decline tomorrow, the demand today will decrease. </li></ul></ul><ul><ul><li>Expectation of a rise in income may cause consumers to purchase more of normal goods today at current prices. </li></ul></ul>
- 19. Demand <ul><ul><li>The number of demanders in the market(market size) </li></ul></ul><ul><ul><li>As the number of demanders in the market or population increases, the demand for the good increases. </li></ul></ul><ul><li>Tastes and Preferences </li></ul><ul><ul><li>If the taste or preference increases, then the demand for that product will increase, and vice versa. </li></ul></ul><ul><ul><li>Economists tend to think that preferences change slowly over time and therefore this influence on demand is relatively minor. </li></ul></ul>
- 20. Supply <ul><li>Supply is the relationship between the price of a good and the quantity supplied by producers. </li></ul><ul><li>A market supply is found by adding up individual producer supply schedules. Summing the quantity supplied at each price by each producer (horizontal summing of the individual supply curves) derives the market supply curve. </li></ul>
- 21. Supply <ul><li>The law of supply: The higher the price of a good, the greater the quantity supplied, other things being equal. </li></ul><ul><li>The law of supply is the result of the law of increasing cost. </li></ul><ul><ul><li>As the quantity of a good rises, the marginal opportunity cost rises. </li></ul></ul><ul><ul><li>Sellers will only produce and sell additional unit of a good if the price rises above the marginal opportunity cost of producing additional unit. </li></ul></ul>
- 22. Supply <ul><li>Supply Schedules in the Market for Chewing Gum </li></ul>Price Quantity Supplied by Total Quantity Supplied Firm 1 Firm 2 Firm 3 $0.01 10 15 0 25 $0.10 20 25 5 50 $0.20 30 35 10 75 $0.30 40 45 15 100 $0.40 50 55 20 125 $0.50 60 65 25 150
- 23. Supply <ul><li>A simple supply curve </li></ul>
- 24. Supply <ul><li>A change in supply indicates a shift of the supply curve. </li></ul><ul><li>A change in the quantity supplied is represented by the movement long the supply curve, when there is a change of the own price. </li></ul>
- 25. Supply <ul><li>Determinants of Supply (other than own price) </li></ul><ul><ul><li>The prices of factors of production </li></ul></ul><ul><ul><li>The price of related goods: substitutes and complements in the production process. </li></ul></ul><ul><ul><li>Expected future prices </li></ul></ul><ul><ul><li>Number of suppliers </li></ul></ul><ul><ul><li>Technology </li></ul></ul><ul><ul><li>Taxes and subsidies </li></ul></ul><ul><ul><li>The state of nature </li></ul></ul>
- 26. Demand and Supply <ul><li>Market Equilibrium </li></ul><ul><ul><li>Equilibrium is a situation in which opposing forces balance each other. </li></ul></ul><ul><ul><li>In the supply and demand model, the equilibrium occurs when there is neither a shortage nor a surplus in the market. </li></ul></ul>
- 27. Demand and Supply <ul><li>Supply and demand diagram </li></ul>Surplus Shortage
- 28. Demand and Supply <ul><li>Equilibrium Price is the price at which the quantity demanded equals the quantity supplied. </li></ul><ul><li>Equilibrium Quantity is the quantity bought and sold at the equilibrium price. </li></ul>
- 29. Demand and Supply <ul><li>Changes in demand and Supply does not change </li></ul><ul><ul><li>Increase in demand leads to a rise in the equilibrium price and quantity. </li></ul></ul><ul><ul><li>Decrease in demand leads to a fall in the equilibrium price and quantity. </li></ul></ul>
- 30. Demand and Supply <ul><li>Changes in demand </li></ul>
- 31. Demand and Supply <ul><li>Changes in supply and demand does not change </li></ul><ul><ul><li>Increase in supply leads to a fall of equilibrium price and quantity. </li></ul></ul><ul><ul><li>Decrease in supply leads to a rise of equilibrium price and quantity. </li></ul></ul>
- 32. Demand and Supply <ul><li>Changes in supply </li></ul>
- 33. Demand and Supply <ul><li>Changes in supply and demand(in the same direction) </li></ul><ul><ul><li>If both the demand and the supply of a good or service increase, both the demand and supply curves shift rightward. The quantity unambiguously increases but the effect on the price is ambiguous. </li></ul></ul><ul><ul><ul><li>If the increase in demand is greater than the increase in supply, the price rises. </li></ul></ul></ul><ul><ul><ul><li>If the increase in demand is the same size as the increase in supply, the price does not change. </li></ul></ul></ul><ul><ul><ul><li>If the increase in demand is less than the increase in supply, the price falls. </li></ul></ul></ul>
- 34. Demand and Supply <ul><ul><li>If both the demand and the supply of a good or service decrease, both the demand and supply curves shift leftward. The quantity unambiguously decreases but the effect on the price is ambiguous. </li></ul></ul><ul><ul><ul><li>If the decrease in demand is greater than the decrease in supply, the price falls. </li></ul></ul></ul><ul><ul><ul><li>If the decrease in demand is the same size as the decrease in supply, the price does not change. </li></ul></ul></ul><ul><ul><ul><li>If the decrease in demand is less than the decrease in supply, the price rises. </li></ul></ul></ul>
- 35. Demand and Supply <ul><li>Increase in both demand and supply </li></ul>
- 36. Demand and Supply <ul><li>Changes in supply and demand(in the opposite direction) </li></ul><ul><ul><li>If the demand increases and the supply decreases, the demand curve shifts rightward and the supply curve shifts leftward. The price unambiguously rises but the effect on the quantity is ambiguous. </li></ul></ul><ul><ul><ul><li>If the increase in demand is greater than the decrease in supply, the quantity increases. </li></ul></ul></ul><ul><ul><ul><li>If the increase in demand is the same size as the decrease in supply, the quantity does not change. </li></ul></ul></ul><ul><ul><ul><li>If the increase in demand is less than the decrease in supply, the quantity decreases. </li></ul></ul></ul>
- 37. Demand and Supply <ul><ul><li>If the demand decreases and the supply increases, the demand curve shifts leftward and the supply curves shifts rightward. The price unambiguously falls but the effect on the quantity is ambiguous. </li></ul></ul><ul><ul><ul><li>If the decrease in demand is greater than the increase in supply, the quantity decreases. </li></ul></ul></ul><ul><ul><ul><li>If the decrease in demand is the same size as the increase in supply, the quantity does not change. </li></ul></ul></ul><ul><ul><ul><li>If the decrease in demand is less than the increase in supply, the quantity increases. </li></ul></ul></ul>
- 38. Demand and Supply <ul><li>Increase in supply and a decrease in demand </li></ul>

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