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Dem&sup(1) Dem&sup(1) Presentation Transcript

  • This is a PowerPoint presentation on elementary supplyand demand. A left mouse click or the enter key will addand element to a slide or move you to the next slide. Theback space key will take you back an element or slide. If youwish to exit the presentation, the escape key will do it! R. Larry Reynolds © 1997 Principles of Fall ‘ 97 slide 1 Microeconomics
  • Demand and Supply· Markets as allocative mechanism require: · nonattenuated property rights [exclusive, enforceable, transferable] · “voluntary” transactions· Markets include all “potential buyers and sellers” · behavior of buyers is represented by “demand” [benefits side of model] · behavior of sellers is represented by “supply” [cost side of model] Principles of Fall ‘ 97 slide 2 Microeconomics
  • Markets, Supply and Demand· markets include all potential buyers and sellers · geographic boundaries of market · markets defined by nature of product and characteristics of buyers · conditions of entry into market · markets, competition and substitutes Principles of Fall ‘ 97 slide 3 Microeconomics
  • Demand· Definition: “A schedule of the quantities of a good that buyers are willing and able to purchase at each possible price during a period of time, ceteris paribus. [all other things held constant]”· Demand can also be perceived as a schedule of the maximum prices buyers are willing and able to pay for each unit of a good. Principles of Fall ‘ 97 slide 4 Microeconomics
  • Demand Function· Is the functional relationship between the price of the good and the quantity of that good purchased in a given time period [UT], income, other prices and preferences being held constant.· A change in income, prices of other goods or preferences will alter [‘shift’] the demand function. Principles of Fall ‘ 97 slide 5 Microeconomics
  • Quantity demanded· A change in the price of the good under consideration will change the “quantity demanded.”· Q = f (P, holding M, Pr , preferences constant); where: M = income Pr = prices of related goods• ∆P causes a change in X [∆Q], this is a “change in quantity demanded” Principles of Fall ‘ 97 slide 6 Microeconomics
  • Change in demand· If M, Pr, or preferences change, the demand function [relationship between P and Q] will change.· These are sometimes called “demand shifters”· Be sure to understand difference between a “change in demand” and a “change in quantity demanded” · change in demand --- shift of the function · change in quantity demanded --- move on the function Principles of Fall ‘ 97 slide 7 Microeconomics
  • “Law of Demand”· Theory and empirical evidence suggest that the relationship between Price and Quantity is an inverse or negative relationship· At higher prices, quantity purchased is smaller, or at lower prices the quantity purchased is greater. Principles of Fall ‘ 97 slide 8 Microeconomics
  • An example of hot chocolate:There is a coffee cart in the building that primarily serves theindividuals who work in the building. The market is defined to someextent by the geography of the building. Individuals who buy thehot chocolate rarely come from other buildings to purchase a cup.During the time period [UT]under consideration [8:00-9:00am ona week day ] the incomes and preferences of buyers are unlikely tochange. The prices of coffee, lattes, etc. can be controlled by thevendor and the price of soft drinks from the machines remainsconstant. The number of workers in the building remain at aconstant level.Under these circumstances, we observe the number of cups of hotchocolate [H] sold each morning as the price [P] is changed.From these observations the demand relationship is estimated. Principles of Fall ‘ 97 slide 9 Microeconomics
  • Cups of Hot Chocolate [H] purchased each day between 8 -9 am price cups The demand relationship per cup purchased can be demonstrated as a table:A 0 20 .B $ .50 15 . Demand is a schedule of quantities that will beC $ .75 12 . 5 purchased at a schedule ∆P > 0 ∆Q < 0D $ 1.00 [+.75] 10 . [-7.5] of prices during a given time period, cet. par.E $ 1 . 25 7.5 As the price is increased,F the quantity purchased $ 1.50 5.G $ 1 . 75 2.5 decreases.H $ 2 .00 0 This demand relationship can be expressed as an equation: P = 2 - .1Q or Q = 20 - 10P: [Q = f (P, . . .) but we graph P on the Y axis and Q on the X axis.] Principles of Fall ‘ 97 slide 10 Microeconomics
  • The demand relationship can be expressed as a table(previous slide) or an equation [either P = 2 - .1Q or Q = 20 - 10P] The data from the table or equation can be graphed: $PRICE P = $2, Then Q = 0 P = $1.75, then Q = 2.5 .. 2.25 2.00 P = $1.50, then Q = 5 .. 1.75 1.50 P = $1.25, Q = 7.5 1.25 .. 1.00 P = $1, then Q = 10 .75 P = 0, then Q = 20 .50 .25 Demand 2 4 6 8 10 12 14 16 18 20 22 24 QUANTITY The demand function can be represented as a table, {CUPS/UT} an equation or a graph. Principles of Fall ‘ 97 slide 11 Microeconomics
  • The demand equation P = 2 - .1Q was graphedA change in “quantity demanded” is a movement on the demandfunction caused by a change in the independent variable [ price].PRICE ∆P from $1.50 to $1 causes ∆Q from 5 to 10 units 2.25 . 2.00 A change in quantity demanded is a move 1.75 A from point A to B “on the demand function” . 1.50 caused by a change in the price! 1.25 Β 1.00 .75 .50 Demand [P = 2 - .1Q] .25 QUANTITY 2 4 5 6 8 10 12 14 16 18 20 22 24 {CUPS/ UT} Principles of Fall ‘ 97 slide 12 Microeconomics
  • The demand equation P = 2 - .1Q was graphed A change in any of the parameters (income, price of related goods, preferences, population of buyers, etc.) will cause a “shift of the demand function.” In this example, the intercepts have changed, the slope has remained constantPRICE 2.50 2.25 2.00 1.75 an increase in demand ad 1.50 D’ [ P’ = 2.5 - .1Q] ec 1.25 re 1.00 as ei .75 nd .50 Demand [P = 2 - .1Q] em .25 nda 2 4 6 8 10 12 14 16 18 20 22 24 QUANTITY {CUPS/UT} D`` [P`` = 1.5 - Principles of .1Q] Fall ‘ 97 slide 13 Microeconomics
  • PRICE 2.50 2.25 2.00 1.75 buyers are more responsive to ∆P 1.50 1.25 P` = 2- .048076923Q 1.00 buyers .75 a decrease in the are less slope .50 responsive an increase in Demand [P = 2 - .1Q] to ∆P the slope .25 P = 2 - .25Q 2 4 6 8 10 12 14 16 18 20 22 24 QUANTITY {CUPS/UT} A change in the parameters [income, Pr, preferences, population, etc.] might alter the relationship by changing the slope A change in demand refers to a movement or shift of the entire demand function Principles of Fall ‘ 97 slide 14 Microeconomics
  • PRICE 2.50 An increase in demand 2.25 2.00 results in a larger quantity being 1.75 purchased at each price increase 1.50 1.25 1.00 D2 [an increase in demand] .75 .50 Demand [P = 2 - .1Q] .25 Q = 7.5 2 4 6 8 10 12 14 16 18 20 22 24 QUANTITY In this case, an increase in demand results {CUPS/UT} in an increase in the amount that will be purchased at a price of $1.25. At this price the Quantity purchased increases from 7.5 to 18. An increase in demand! Principles of Fall ‘ 97 slide 15 Microeconomics
  • PRICE Effect of a change in the price of a 2.50 substitute 2.25 Dem 2.00 the and fo pric r 1.75 e of steak chic incre 1.50 ken as incr es wh eas e es n 1.25 a 1.00 in dec .75 fo th re r e as .50 s t de e ea m Demand [P = 2 - .1Q] k an .25 d D2 2 4 6 8 10 12 14 16 18 20 22 24 QUANTITY If the price of a substitute, like chicken, increases [steak /UT] buyers will buy more steak at each price of steak If the price of chicken decreases, the buyers will want less steak at each possible price of steak; the demand for steak decreases! Principles of Fall ‘ 97 slide 16 Microeconomics
  • Complementary goods Two goods may be complimentary, i.e. the two goods are “used together. [tennis rackets and tennis balls or CD’s and CD Players] An increase in the price of CD’s will tend to reduce the demand [shift the demand function to the left] for CD Players As people buy fewerPCD’s Pplayers CD’s, the demand for As the price of CD’s increases CD players decreases. from P1 to P2, the quantity of At the same price, CD’s decreases from Y1 Ppl , the demand P2 to Y. Ppl is reduced from Dto D’. D’player P1 Dcd Dplayer Y Y1 CD’s/UT X X1 CD Players Principles of per UT Fall ‘ 97 slide 17 Microeconomics
  • Compliments and Substitutes· Substitutes: · if the price of a substitute increases, the demand for the good increases. · if the price of a substitute decreases, the demand for the good decreases.· Compliments: · if the price of a compliment increases, the demand for the good decreases. · if the price of a compliment decreases, the demand for the good increases. Principles of Fall ‘ 97 slide 18 Microeconomics
  • Demand Summary· “Law of Demand” holds that usually as the price of a good increases, individuals will buy less of it.· The nature of this relationship is influenced by a variety of other variables; · income, preferences, prices of related goods, and other circumstances · as these circumstances change, the demand relationship changes or “shifts.” Principles of Fall ‘ 97 slide 19 Microeconomics
  • Demand Summary [cont. . . ]· A “change in demand” means the relationship between price and quantity was altered by a change in some other variable [a demand “shifter”] The demand “shifts.”· A “change in quantity demanded” is a change in the quantity bought that was caused by a change in the price of the good. There is a movement on the demand function. Principles of Fall ‘ 97 slide 20 Microeconomics
  • Supply· Supply is defined as a schedule of quantities of a good that will be produced and offered for sale at a schedule of prices during a given time [UT], ceteris paribus.· Generally, producers are willing to offer greater quantities of a good for sale at higher prices; a positive relationship between price and quantity supplied. Principles of Fall ‘ 97 slide 21 Microeconomics
  • Supply ScheduleObservation Price Quantity Supplied The information can be represented A $1 6 on a graph by plotting each B $2 10 price quantity combination. C $3 14 D $4 18 E F $5 22 P Both the graph and the table $5 . represent a supply relationship: Q = 2 + 4P $4 $3 . . ppl y . A supply schedule can be $2 su displayed as a table. $1 Fall ‘ 97 Principles of 2 4 6 8 10 12 14 slide 22 Q Microeconomics
  • Change in Quantity Supplied· A change in the price of the good causes a change in the “quantity supplied.”· The change in the price of the good causes a “movement on the supply function,” not a change or “shift of the supply function.” Principles of Fall ‘ 97 slide 23 Microeconomics
  • Supply ScheduleObservation Price Quantity Supplied A change in the price “causes” a A $1 $1 6 change in the “quantity supplied.” B $2 ∆P “CAUSES” ∆Q 10 This can be represented by a C $3 $3 14 “movement” on the supply D $4 18 function in the graph E F $5 22This is a change in “quantity Psupplied.” Not to be $5 ∆P “causes” the quantity suppliedconfused with a “change in to increase from 6 to 14. $4supply!” ply $3 ∆P from $1 to $2 sup $3 $1 Principles 2 4 of 6 8 10 12 14 16 Q Fall ‘ 97 slide 24 /ut Microeconomics
  • “Change in Supply”· A change in supply [like a change in demand] refers to a change in the relationship between the price and quantity supplied.· A change in supply is “caused” by a change in any variable, other than price, that influences supply· A change in supply can be represented by a shift of the supply function on a graph Principles of Fall ‘ 97 slide 25 Microeconomics
  • “Change in Supply” [cont. . . ]· There are many factors that infuence the willingness of producers to supply a good. · technology · prices of inputs · returns in alternative choices · taxes, expectations, weather, number of sellers, . . . · Qs = fs (P, Pinputs, technology, . . .) Principles of Fall ‘ 97 slide 26 Microeconomics
  • “Change in Supply” [cont. . . ]· Qs = fs (P, Pinputs, technology, number of sellers, taxes, . . .)· A change in the price [P] causes a “change in quantity supplied;”· a change in any other variable causes a “change in supply” Principles of Fall ‘ 97 slide 27 Microeconomics
  • Supply ScheduleGiven the supply schedule, Observation Price Quantity An increase in the prices Supplied of inputs would make it A $1 46 more expensive to produce B $2 810 each unit of output, C $3 1214 therefore, the supply decreases D $4 1618 E F $5 20 22P a shift to the left ct io n$5 is a decrease in supply n fu The decreased quantity$4 pl y in at each price “shifts” the ply supply curve to the left! an increase p$3 sup The development of a “new” su$2 w supply ne technology that reduces the$1 cost of production will “shift” the supply function to the right 2 4 6 8 10 12 14 Q 16 Principles of Fall ‘ 97 slide 28 Microeconomics
  • Equilibrium· Equilibrium: 1. a state of rest or balance due to the equal action of opposing forces. 2. equal balance between any powers, influences, [Webster’s Encyclopedic Unabridged Dictionary of the English Language]· In a market an equilibrium is said to exist when the forces of supply [sellers] and demand [buyers] are in balance: the actions of sellers and buyers are coordinated. The quantity supplied equals the quantity demanded! Principles of Fall ‘ 97 slide 29 Microeconomics
  • [Price] 100 90 Given a demand 80 function [whichPx $70 70 represents the behavior or choices 60 of buyers, 50 40 and a supply function 30 that represents the behavior of 20 sellers, 10 10 20 30 40 50 60 70 80 90 100 110 120 130 60 Qx/ UT De Where the quantity that people want to buy is equal to the quantity ma that the producers want to sell, there is an equilibrium quantity. dn The price that coordinates the preferences of the buyers and sellers is the equilibrium price. At the equilibrium price of $70, the quantity supplied is equal to the quantity demanded. Principles of Fall ‘ 97 slide 30 Microeconomics
  • When the price is greater than the equilibrium price, theamount that sellers want to sell at that price [quantity supplied]exceeds the amount that buyers are willing to purchase [quantitydemanded] at that price. The price is “too high.” p lyAt a Price of $90 the quantity supplied is 80, the quantity demanded is 35 Sup surplus = 45 $90 equilibrium quantity At $90 there is a surplus $70 of 45 units [80-35=45] / equilibrium price 0 13 x 12 0 Q De 0 11 ma 0 0 nd ] 10 10 ce 90 i Pr 90 [ 80 80 70 70 Px 60 60 35 800 60 5 50 Principles of 40 Fall ‘ 97 40 slide 31 30 30 Microeconomics
  • surplus = 45 S . $90 lower At a price of $90 a surplus price of 45 units exists $70 Suppliers have more to sell than T U 3 / buyers will purchase at 1a0price of $90. 0thesexunsold To get rid of 12 Q units De 0 [inventory], the 11 Quantity Quantity ma 10 0 demanded supplied 0 nd 10 sellers lower] increases the price. e decreases 90 90 ric 80 80[P 70 70 Px 60 60 35 80 60 50 50 0 40 As the price4of the good is reduced, the quantity supplied decreases. 0 30 3 20 20 The quantity demanded increases as the price falls. 10 As the price moves10 toward equilibrium, quantity supplied and quantity demanded are brought into equilibrium. Principles of Fall ‘ 97 slide 32 . Microeconomics
  • [Price] As a result of market forces . 100 the market moves to 90 equilibrium At a price below equilibrium the 80 the quantity demanded exceedsPx $70 70 the quantity supplied. 60 price At a price of $30 the quantity 50 rises demanded is 110. The quantity 40 supplied is 15. $30 30 quantity quantity 20 supplied demanded 10 increases decreases shortage = 95 10 1520 30 40 50 60 70 80 90 100 110 120 130 110 60 Qx/ UT De mAt a price of $30 the quantity demanded exceeds the quantity andsupplied by 95 units [110 - 15 = 95]. This is a shortage.Since the buyers cannot obtain all they want at a price of $30, some buyers willoffer to pay more. Some buyers will not pay the higher price, they buy less so thequantity demanded decreases. At the higher price the quantity supplied increases Principles of .. Fall ‘ 97 slide 33 Microeconomics
  • Su demand increases $89 The market for good X is price rises in equilibrium at Px = $70 T $70 U x/ 30 Q 1 1 20 D 11 em 0 0 equilibrium 0 a nd D2 10 quantity 10 90 90 ric increases 80 80P [ 70 70 Px 60 80 60 60 50 50 An increase in the price of a 0 40 4 The increase in the demand for substitute [good Y] causes the 30 30 20 good X results in an increase in demand for good X to increase. 20 10 both the equilibrium price and As a result of the 0increased demand, 1 quantity. market forces push Px up. Identify other factors that could increase demand! Principles of Fall ‘ 97 slide 34 Microeconomics
  • [Price] 100 90 Given a demand function, 80 an equilibrium is defined.Px 70 $7 0 A decrease in demand, 60 establishes a new equilibrium $50.89 50 at a lower price and 40 quantity. 30 D1 20 10 10 20 30 39.2 50 6 0 70 80 90 100 110 120 130 40 60 Qx/ UT De Demand might be reduced by: A change in the ma a decrease in the price of a substitute, price of the good n an increase in the price of a compliment, does not change d a change in income, demand! It changes a change in the number of buyers the quantity or their preferences, or, . . . demanded. Principles of Fall ‘ 97 slide 35. Microeconomics
  • Su S2 UT supply $70 price falls increases x / 0 Q 13 $50 12 0 D 11 em 0 0 10 0 and 10 90 ice 90 80Pr 80 [ 70 70 Px 60 60 60 86 50 0 Given an equilibrium 5 40 condition in a 0 4 market, Quantity Identify factors that increase supply: 30 30 1. fall in price of inputs an increase in supply will 20increases 20 2. improved technology increase the equilibrium 10 10 3. increase in number of sellers quantity and decrease 4. fall in return in alternative equilibrium P. uses of inputs 5. or, . . . Principles of Fall ‘ 97 slide 36 Microeconomics
  • A decrease in supply causes the equilibrium price to increase and equilibrium quantity to decrease. What forces might cause the supply to decrease? ly Supp 1. an increase in the prices Px S1 of inputs 2. increase in returns from 100 alternative actions decrease in supply$90 90 3. problems in technology [regulations, . . . ] 80 price rises 4. decrease in number of 70$7 0 sellers or producers 60 50 quantity 40 decreases 30 20 10 35 10 20 30 40 50 6 0 70 80 90 100 110 120 130 60 Qx/ UT De ma Principles of Fall ‘ 97 slide 37 n Microeconomics d
  • P100 upp x demand S2 If both supply and S 90 increases and decrease 80 demand decrease, price might price 70 +∆P and the ∆P will be $7 0 go up or down increase indeterminate and 60 or stay the same -∆P price the equilibrium Q increase will decrease. 50 results in increase 40 a market D2 30 supply results to force in De increases aincrease Q ma 20 market force to nd 10 increase Q 10 20 30 40 50 6 0 70 80 90 100 110 120 130 60 100 Qx/ UT When demand and supply both shift, the resultant effect on either equilibrium price or quantity will be indeterminate.Both the increase in demand and supply increase quantity; equilibrium Q increases.The increase in demand pushes price up. The increase in supply pushes price down. The change in price may be positive or negative, it depends on the magnitude of the shifts in and slopes of demand and supply. Principles of Fall ‘ 97 slide 38 Microeconomics
  • A decrease in supply tends to increase P and reduce Q.An increase in demand tends to increase both P and Q.Result is that Price will rise, Quantity may increase, decrease or stay the same lydepending on the magnitudes of the shifts and slopes of supply and demand. SuppIn this example,the price Priceincreases to $105 100 S1$105. decrease in supply to push 90 price upWhen supply 80 pushesincreases and $70 70 price updemanddecreases, 60 an increase inthe price will 50 demand tends D2fall but the 40 reducesandchange in Q increase quantity 30 Qwill be 20indeterminate! 10 10 20 3035 49 60 70 80 90 100 110 120 40 50 60 Qx/ UT De the quantity decreases to 49 Principles of ma Fall ‘ 97 slide 39 Microeconomics n d
  • Supply and Demand Analysis· Supply and demand is a simplistic model that provides insights into the effects of events that are related to a specific market.· Whether an event will tend to cause the price of a good to increase or decrease is of importance to decision makers.· To estimate the magnitude of price and quantity changes more sophisticated models are needed. Principles of Fall ‘ 97 slide 40 Microeconomics