Bec doms ppt on demand & supply demand & supply

1,099 views

Published on

Bec doms ppt on demand & supply demand & supply

Published in: Business, Technology
0 Comments
4 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
1,099
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
104
Comments
0
Likes
4
Embeds 0
No embeds

No notes for slide

Bec doms ppt on demand & supply demand & supply

  1. 1. Demand & Supply <ul><li>Demand </li></ul><ul><li>Supply </li></ul><ul><li>Market Equilibrium </li></ul><ul><li>Examples </li></ul><ul><li>Price ceiling/floor </li></ul>
  2. 2. Build a model <ul><li>buyers </li></ul><ul><li>sellers </li></ul><ul><li>& their interaction </li></ul>
  3. 3. Use the model <ul><li>to predict </li></ul><ul><ul><li>the impact of changes </li></ul></ul><ul><li>to explain </li></ul><ul><ul><li>changes that occur </li></ul></ul>
  4. 4. Demand <ul><li>behavior of buyers </li></ul><ul><li>relationship between </li></ul><ul><ul><li>quantity demanded of a good </li></ul></ul><ul><ul><li>price </li></ul></ul><ul><ul><li>holding other factors constant </li></ul></ul>
  5. 5. quantity demanded (Qd) <ul><li>amount of good or service </li></ul><ul><ul><li>unit of measure </li></ul></ul><ul><li>per unit of time </li></ul><ul><li>“ 2 bottles of water per day” </li></ul>
  6. 6. Law of Demand If the price of a good then the Qd holding other things constant!!!
  7. 7. Why? <ul><li>higher price makes you feel poorer </li></ul><ul><ul><li>income effect </li></ul></ul><ul><li>higher price on one good, </li></ul><ul><li>substitute other goods. </li></ul><ul><ul><li>substitution effect </li></ul></ul>
  8. 8. Example: bottles of water per day <ul><li>Describe demand in 2 ways: </li></ul><ul><li>Demand schedule </li></ul><ul><ul><li>a list of Qd </li></ul></ul><ul><ul><li>at each price </li></ul></ul><ul><li>Demand curve </li></ul><ul><ul><li>a graph of demand schedule </li></ul></ul>
  9. 9. Demand Schedule P Qd Price = $/bottle Qd = bottles/day $2.00 0 $1.50 1 $1.00 2 $.50 3
  10. 10. Demand curve P Qd 0 1 2 3 4 2 1.5 1 .5 D
  11. 11. <ul><li>individual demand </li></ul><ul><ul><li>demand curve for 1 buyer </li></ul></ul><ul><li>market demand** </li></ul><ul><ul><li>demand curve for all buyers </li></ul></ul><ul><ul><li>add up individual Qd for each price </li></ul></ul>
  12. 12. Changes in Demand <ul><li>recall our assumption </li></ul><ul><ul><li>hold other things constant </li></ul></ul><ul><ul><li>allow only price to change </li></ul></ul><ul><li>but what if other factors do change? </li></ul><ul><ul><li>change in demand </li></ul></ul><ul><ul><li>shift to a new demand curve </li></ul></ul>
  13. 13. increase in demand <ul><li>increase in Qd at every price </li></ul><ul><li>demand curve shifts to the right </li></ul>
  14. 14. P Qd 0 1 2 3 4 2 1.5 1 .5 D D’
  15. 15. decrease in demand <ul><li>decrease in Qd at every price </li></ul><ul><li>demand curve shifts to the left </li></ul>
  16. 16. P Qd D D’’
  17. 17. Factors affecting demand <ul><li>income </li></ul><ul><li>prices of related goods </li></ul><ul><li>buyer expectations </li></ul><ul><li># of buyers </li></ul><ul><li>preferences </li></ul>
  18. 18. income <ul><li>for normal goods , </li></ul><ul><li>an increase in income will increase demand </li></ul><ul><li>examples: </li></ul><ul><ul><li>CDs, bottled water, </li></ul></ul><ul><ul><li>eating out, </li></ul></ul>
  19. 19. <ul><li>for inferior goods , </li></ul><ul><li>an increase in income will </li></ul><ul><li>decrease the demand </li></ul><ul><li>examples: </li></ul><ul><ul><li>ramen noodles, </li></ul></ul><ul><ul><li>check-cashing service </li></ul></ul>
  20. 20. Prices of related goods <ul><li>what are related goods? </li></ul><ul><ul><li>substitutes </li></ul></ul><ul><ul><li>e.g. Snapple, Coke </li></ul></ul><ul><ul><li>complements </li></ul></ul><ul><ul><li>goods consumed with water </li></ul></ul><ul><ul><li>e.g. pretzels </li></ul></ul>
  21. 21. substitutes <ul><li>if price of Snapple rises, </li></ul><ul><ul><li>people switch to water </li></ul></ul><ul><ul><li>increase in demand for water </li></ul></ul><ul><li>if price of Snapple falls, </li></ul><ul><ul><li>people switch from water </li></ul></ul><ul><ul><li> to Snapple </li></ul></ul><ul><ul><li>decrease in demand for water </li></ul></ul>
  22. 22. complements <ul><li>if price of pretzels rises </li></ul><ul><ul><li>eat fewer pretzels, </li></ul></ul><ul><ul><li>so drink less water, </li></ul></ul><ul><ul><li>demand for water falls </li></ul></ul>
  23. 23. buyer expectations <ul><li>buyers can expect change in </li></ul><ul><ul><li>future income </li></ul></ul><ul><ul><li>future prices </li></ul></ul><ul><li>and act to change demand today </li></ul>
  24. 24. <ul><li>expect price of water to rise next month, </li></ul><ul><ul><li>buy a case today, </li></ul></ul><ul><ul><li>increase demand today </li></ul></ul>
  25. 25. # of buyers <ul><li>size of population </li></ul><ul><li>demographics </li></ul><ul><ul><li>age </li></ul></ul><ul><ul><li>gender </li></ul></ul><ul><ul><li>race </li></ul></ul>
  26. 26. <ul><li>if there are more buyers </li></ul><ul><ul><li>increase market demand for water </li></ul></ul><ul><ul><li>could be due to </li></ul></ul><ul><ul><li>more people overall </li></ul></ul><ul><ul><li>more people who like water </li></ul></ul>
  27. 27. preferences <ul><li>what do we want to buy? </li></ul><ul><li>change in our likes/dislikes </li></ul><ul><ul><li>acid washed jeans? </li></ul></ul><ul><ul><li>tattoos? </li></ul></ul><ul><li>change in technology </li></ul><ul><ul><li>5 1/4” floppies? </li></ul></ul><ul><ul><li>DVDs? </li></ul></ul>
  28. 28. <ul><li>if drinking more water </li></ul><ul><li>beneficial to health, </li></ul><ul><ul><li>increase in demand for bottled water </li></ul></ul>
  29. 29. Important!! <ul><li>Change in demand </li></ul><ul><li>-- occurs when other factors change </li></ul><ul><li>-- shift to a new demand curve </li></ul><ul><li>change in demand </li></ul><ul><ul><li>NOT caused by change in price of </li></ul></ul><ul><ul><li>the good </li></ul></ul>
  30. 30. <ul><li>Change in quantity demanded </li></ul><ul><li>-- occurs when prices change </li></ul><ul><li>-- movement along existing demand curve </li></ul>
  31. 31. Change in Qd P Qd D
  32. 32. Change in Demand P Qd D D
  33. 33. Supply <ul><li>behavior of sellers </li></ul><ul><li>relationship between </li></ul><ul><ul><li>quantity supplied of a good </li></ul></ul><ul><ul><li>price </li></ul></ul><ul><ul><li>holding other factors constant </li></ul></ul>
  34. 34. Law of Supply If the price of a good then the Qs holding other things constant!!!
  35. 35. Why? <ul><li>Holding costs constant </li></ul><ul><li>higher price means higher profit margin </li></ul>
  36. 36. Supply Schedule P Qs Price = $/bottle Qs = bottles/day $2.00 3 $1.50 2 $1.00 1 $.50 0
  37. 37. Supply curve P Qs 0 1 2 3 4 2 1.5 1 .5 S
  38. 38. <ul><li>Individual supply </li></ul><ul><ul><li>supply curve for 1 supply </li></ul></ul><ul><li>market supply** </li></ul><ul><ul><li>supply curve for all sellers </li></ul></ul><ul><ul><li>add up individual Qs for each price </li></ul></ul>
  39. 39. Changes in Supply <ul><li>if other factors do change, </li></ul><ul><ul><li>change in supply </li></ul></ul><ul><ul><li>shift to a new supply curve </li></ul></ul>
  40. 40. increase in supply <ul><li>increase in Qs at every price </li></ul><ul><li>supply curve shifts to the right </li></ul>
  41. 41. P Qs S S’
  42. 42. decrease in supply <ul><li>decrease in Qs at every price </li></ul><ul><li>supply curve shifts to the left </li></ul>
  43. 43. P Qs S S’’
  44. 44. Factors affecting supply <ul><li>Cost of inputs </li></ul><ul><li>prices of related goods </li></ul><ul><li>seller expectations </li></ul><ul><li># of seller </li></ul><ul><li>productivity </li></ul>
  45. 45. Cost of inputs <ul><li>As input prices get higher, </li></ul><ul><li>supply decreases </li></ul><ul><li>example: increase in cost of </li></ul><ul><ul><li>bottles </li></ul></ul><ul><ul><li>labor </li></ul></ul><ul><ul><li>electricity </li></ul></ul>
  46. 46. Prices of related goods <ul><li>Substitutes in production </li></ul><ul><ul><li>a good that can be made instead </li></ul></ul><ul><ul><li>of bottled water </li></ul></ul><ul><ul><li>e.g. bottled tea </li></ul></ul><ul><li>If price of bottled tea increases, </li></ul><ul><li>switch to tea production, </li></ul><ul><li>supply of bottled water falls </li></ul>
  47. 47. <ul><li>Complements in production </li></ul><ul><ul><li>good that is produced with other good </li></ul></ul><ul><ul><li>e.g. Beef & leather </li></ul></ul><ul><ul><li>if price of beef rises, </li></ul></ul><ul><ul><li>Qs of beef rises, </li></ul></ul><ul><ul><li>& supply of leather rises </li></ul></ul>
  48. 48. Seller expectations <ul><li>Expect input prices to rise in future </li></ul><ul><ul><li>increase supply today </li></ul></ul><ul><li>expect price of good to rise in future </li></ul><ul><ul><li>decrease supply today </li></ul></ul>
  49. 49. # of sellers <ul><li>As more sellers supply good, </li></ul><ul><ul><li>market supply increases </li></ul></ul>
  50. 50. Productivity <ul><li>Amount of output per unit of input </li></ul><ul><ul><li>bottles of water per hour of labor </li></ul></ul><ul><li>Increase in productivity lowers cost </li></ul><ul><ul><li>increases supply </li></ul></ul><ul><li>what makes productivity increase? </li></ul><ul><ul><li>Technology </li></ul></ul><ul><ul><li>human capital </li></ul></ul>
  51. 51. Important!! <ul><li>Change in supply </li></ul><ul><li>-- occurs when other factors change </li></ul><ul><li>-- shift to a new supply curve </li></ul><ul><li>(right or left) </li></ul><ul><li>change in supply </li></ul><ul><li>-- NOT caused by change in price of </li></ul><ul><ul><li>the good </li></ul></ul>
  52. 52. <ul><li>Change in quantity supplied </li></ul><ul><li>-- occurs when prices change </li></ul><ul><li>-- movement along existing supply curve </li></ul>
  53. 53. Change in Qs P Qs S
  54. 54. Change in Supply P Qs S S’’
  55. 55. Market Equilibrium <ul><li>What will be the price of bottled water? </li></ul><ul><ul><li>Price at which Qs = Qd </li></ul></ul><ul><ul><li>-- equilibrium price </li></ul></ul><ul><ul><li>-- equilibrium quantities </li></ul></ul>
  56. 56. Market for Bottled Water P (millions bottles per day) Q D S $10 10 Equilibrium
  57. 57. Why is this an equilibrium? <ul><li>If Qs > Qd </li></ul><ul><ul><li>surplus </li></ul></ul><ul><ul><li>price falls until Qs = Qd </li></ul></ul><ul><li>If Qs < Qd </li></ul><ul><ul><li>shortage </li></ul></ul><ul><ul><li>price rises until Qs = Qd </li></ul></ul>
  58. 58. Changes in equilibrium <ul><li>If supply and/or demand changes </li></ul><ul><li>(shifts left or right), </li></ul><ul><li>then equilibrium will change too. </li></ul>
  59. 59. Example 1 <ul><li>Market for bottled water </li></ul><ul><li>price of plastic bottles rises </li></ul><ul><li>what happens to equilibrium? </li></ul>
  60. 60. Which curve is affected? <ul><li>buyers or sellers? </li></ul><ul><li>Supply curve </li></ul><ul><ul><li>bottles are an input </li></ul></ul>
  61. 61. Increase or decrease in supply? <ul><li>Increase in cost of input </li></ul><ul><li>supply decreases </li></ul><ul><ul><li>shift LEFT </li></ul></ul>
  62. 62. P (millions bottles per day) S Q D $10 10 S’ Equilibrium: P Q
  63. 63. note <ul><li>Change in supply causes </li></ul><ul><li>change in equilibrium price </li></ul><ul><li>BUT </li></ul><ul><li>Change in price does NOT cause a </li></ul><ul><li>change in supply </li></ul>
  64. 64. Example 2 <ul><li>Market for bottled water </li></ul><ul><li>sugar is found to be harmful to health </li></ul><ul><li>what happens to equilibrium? </li></ul>
  65. 65. Which curve is affected? <ul><li>Demand curve </li></ul><ul><ul><li>health concerns increase </li></ul></ul><ul><ul><li>preferences for water </li></ul></ul>
  66. 66. Increase or decrease in demand? <ul><li>Increase in preference for water </li></ul><ul><li>demand increases </li></ul><ul><ul><li>shift RIGHT </li></ul></ul>
  67. 67. P (millions bottles per day) S Q D $10 10 D’ Equilibrium: P Q
  68. 68. Example 3 <ul><li>Market for bottled water </li></ul><ul><li>incomes fall & </li></ul><ul><li>sellers expect utilities to rise </li></ul>
  69. 69. Which curve is affected? <ul><li>Demand curve </li></ul><ul><ul><li>income falls </li></ul></ul><ul><li>Supply curve </li></ul><ul><ul><li>seller expectations change </li></ul></ul><ul><ul><li>expect costs to rise </li></ul></ul>
  70. 70. Increase or decrease? <ul><li>Demand decreases (left) </li></ul><ul><ul><li>income falls & </li></ul></ul><ul><ul><li>bottled water is normal good </li></ul></ul><ul><li>Supply increases (right) </li></ul><ul><ul><li>make more water today before </li></ul></ul><ul><ul><li>costs go up </li></ul></ul>
  71. 71. P (millions bottles per day) S Q D D’ Equilibrium: P Q ? S’
  72. 72. Example 4: Leather sandals <ul><li>Market for leather sandals </li></ul><ul><li>A. Mad cow disease </li></ul><ul><li>-- must destroy 20% of herds </li></ul><ul><li>what happens to equilibrium </li></ul>
  73. 73. P Q S D S’ Supply decreases Q decreases P increases
  74. 74. B. <ul><li>PETA </li></ul><ul><li>campaign against leather products </li></ul><ul><li>what happens to equilibrium? </li></ul>
  75. 75. P Q S D D’ demand decreases Q decreases P decreases
  76. 76. Example 5: Natural Gas Prices <ul><li>Winter 2000-2001 </li></ul><ul><li>prices increased over 100% </li></ul><ul><li>why? </li></ul>
  77. 77. <ul><li>3 possible causes: </li></ul><ul><li>1. Supply decreases </li></ul><ul><li>or </li></ul><ul><li>2. Demand increases </li></ul><ul><li>or </li></ul><ul><li>3. both </li></ul>
  78. 78. P Q S D S’ Decrease in Supply
  79. 79. Why would S fall? <ul><li>regulation </li></ul><ul><li>-- tougher to drill </li></ul><ul><li>-- increase costs </li></ul><ul><li>hot summer (2000) </li></ul><ul><li>-- depletes inventories </li></ul>
  80. 80. P Q S D D’ Increase in Demand
  81. 81. <ul><li>Why would D rise? </li></ul><ul><li>booming economy (2000) </li></ul><ul><li>EPA rules </li></ul><ul><li>-- fewer coal plants, more gas plants </li></ul><ul><li>cold winter </li></ul>
  82. 82. Why did P rise? <ul><li>both falling supply & rising demand </li></ul><ul><li>-- but demand was most important </li></ul>
  83. 83. Price ceiling <ul><li>gov’t regulation sets maximum price </li></ul><ul><li>example: rent control in NYC </li></ul><ul><li>what happens? </li></ul>
  84. 84. rent ceiling = $1200 Rent Q S D $2500 500 $1200 250 750
  85. 85. Qd = 750 units Qs = 250 units at P = $1200: Rent Q S D $2500 500 $1200 250 750 SHORTAGE
  86. 86. who gets housing? <ul><li>those willing to pay more </li></ul><ul><ul><li>bogus fees:“key money” </li></ul></ul><ul><li>those who look harder </li></ul><ul><ul><li>loss of time </li></ul></ul><ul><li>those who get lucky </li></ul><ul><ul><li>Monica on Friends </li></ul></ul>
  87. 87. Result <ul><li>Price does not ration scarce good </li></ul><ul><li>too few apt. units </li></ul><ul><li>lost resources in searching </li></ul><ul><li>price ceiling is inefficient </li></ul>
  88. 88. Why have rent control? <ul><li>intended to help make housing affordable </li></ul><ul><li>secondary effect </li></ul><ul><ul><li>shortage </li></ul></ul><ul><ul><li>run-down buildings </li></ul></ul><ul><ul><li>rent-controlled apts. go to the “connected” </li></ul></ul>

×