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  • Chap2

    1. 1. Chapter 2 DEMAND, SUPPLY & MARKET EQUILIBRIUM
    2. 2. Chapter Outline <ul><li>1.1 Introduction: Market and the Circular Flow </li></ul><ul><li>1.2 Demand (DD) </li></ul><ul><li>1.3 Supply (SS) </li></ul><ul><li>1.4 Market Equilibrium </li></ul><ul><li>1.5 Change in Equilibrium (SS & DD) </li></ul><ul><li>1.6 SS/DD Analysis: Example </li></ul>
    3. 3. 1.1 INTRODUCTION Demand & supply interaction Economics decision-making units Market & the circulation flow
    4. 4. Markets <ul><li>A market is a group of buyers and sellers of a particular goods and services. </li></ul><ul><li>A market may be local, national or international in scope. </li></ul><ul><li>This chapter concern purely competitive market with a large number of independent buyers and sellers. </li></ul>
    5. 5. 1.2 DEMAND <ul><li>Quantity consumers are both willing and able to buy at each possible price during a given time period, other things constant. </li></ul><ul><li>can be defined as the purchase of product </li></ul>How many packs of ‘ai yu bing’ will student buy at a price of RM2? What if the price is RM1.50? Relationship between price & quantity demanded
    6. 6. Law of Demand <ul><ul><li>Says that quantity demanded varies inversely, or negatively, to the price, other things constant. </li></ul></ul><ul><ul><li>Negative relationship between price and quantity demanded. </li></ul></ul><ul><ul><li>The higher the price, the smaller the quantity demanded. </li></ul></ul>Figure: Price & Quantity Demanded: The Law of Demand
    7. 7. <ul><li>Demand Schedule & Demand Curve </li></ul><ul><ul><li>The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. </li></ul></ul><ul><ul><li>The demand curve is a graph of the relationship between the price of a good and the quantity demanded. </li></ul></ul><ul><ul><ul><li>Downward sloping & to the right because </li></ul></ul></ul><ul><ul><ul><li>law of demand. </li></ul></ul></ul>
    8. 8. May’s Demand Schedule and Demand Curve Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-Cream Cones $3.00 12 Example 1. A decrease in price ... 2. ... increases quantity of cones demanded.
    9. 9. <ul><li>Individual Demand & Market demand </li></ul><ul><ul><li>The individual demand is the relationship between the quantity demanded by a single buyer and its prices </li></ul></ul><ul><ul><li>The market demand is the relationship between the total quantity demanded by all consumers in the market and its price. </li></ul></ul>
    10. 10. The market demand curve is the horizontal sum of the individual demand curves! Price of Ice-Cream Cone Price of Ice-Cream Cone Price of Ice-Cream Cone 2.00 2.00 2.00 4 3 7 1.00 1.00 1.00 8 5 13 Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Catherine’s Demand Nicholas’s Demand Market Demand + = When the price is $2.00, Catherine will demand 4 ice-cream cones. When the price is $2.00, Nicholas will demand 3 ice-cream cones. The market demand at $2.00 will be 7 ice-cream cones. When the price is $1.00, Catherine will demand 8 ice-cream cones. When the price is $1.00, Nicholas will demand 5 ice-cream cones. The market demand at $1.00, will be 13 ice-cream cones. Example
    11. 11. <ul><li>Changes in Quantity Demanded & Changes in Demand </li></ul><ul><ul><li>Changes in quantity demanded result in movement along the demand curve due a change in price while other factors remain constant. (upward/downward movement) </li></ul></ul><ul><ul><li>Change in demand is the shift of the demand curve due a change in other factors while price remains constant. (leftward/ rightward shift) </li></ul></ul>
    12. 12. Changes in Quantity Demanded 0 D Price of Ice-Cream Cones Quantity of Ice-Cream Cones A tax on sellers of ice-cream cones raises the price of ice-cream cones and results in a movement along the demand curve. A 8 1.00 B $2.00 4
    13. 13. Change in Demand <ul><li>A shift in the demand curve either to the left or right caused by any changes that alters the quantity demanded at every price. Such as: </li></ul><ul><ul><li>Income </li></ul></ul><ul><ul><li>Prices of related goods </li></ul></ul><ul><ul><li>Tastes </li></ul></ul><ul><ul><li>Expectations </li></ul></ul><ul><ul><li>Number of buyers </li></ul></ul>
    14. 14. Shifts in The Demand Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in demand Decrease in demand Demand curve, D 3 Demand curve, D 1 Demand curve, D 2
    15. 15. Changes in Consumer Income <ul><li>Goods can be classified into two broad categories: </li></ul><ul><ul><li>Normal goods : the demand increases when income increases and decreases when income decreases </li></ul></ul><ul><ul><li>Inferior goods : the demand decreases when income increases and increases when income decreases </li></ul></ul>
    16. 16. Changes in Price of Related Good <ul><li>Substitute Goods </li></ul><ul><li>A product that can be used in place of another product </li></ul><ul><li>A change in the price of substitute products affect the demand for the product in the same direction in which the price change. </li></ul><ul><li>E.g: tea vs coffee; a bus ride vs an LRT ride </li></ul><ul><li>( P coffee ↑ Q dd coffee ↓ DD tea ↑ ) </li></ul>
    17. 17. Changes in Price of Related Good <ul><li>(ii) Complementary Goods </li></ul><ul><li>A product that is used in conjunction with another product. </li></ul><ul><li>The change in the price of a complementary product affects the demand for the product in the opposite direction to the change price. </li></ul><ul><li>E.g: a disk and computer, pen and ink. </li></ul><ul><li>( P pen ↑ Q dd pen ↓ DD ink ↓ ) </li></ul>
    18. 18. <ul><li>Taste & Preference </li></ul><ul><ul><li>Tastes and preferences of consumers change significantly. </li></ul></ul><ul><ul><li>If a product become more fashionable, the demand for it will increase and if the same product becomes outdated, the demand for it will fall. </li></ul></ul><ul><ul><li>E.g: Changes in music, apparel or recreation. </li></ul></ul>
    19. 19. <ul><li>Expectations </li></ul><ul><ul><li>The higher the expected future price of a product, the higher the current demand for that product and vice versa. </li></ul></ul><ul><ul><li>E.g: When the government plans to increase the price of sugar the following week, the demand for sugar will immediately increase. </li></ul></ul>
    20. 20. <ul><li>Population or Number of Buyers </li></ul><ul><ul><li>A larger population with a high rate of growth creates greater demand for goods and services. </li></ul></ul><ul><ul><li>E.g : An increase in the population of UTAR would increase the demand for houses, F & B, and other goods and services. </li></ul></ul>
    21. 21. <ul><li>Taste / preference </li></ul>Summary for Movement/Shift in Demand
    22. 22. 1.3 SUPPLY <ul><li>Supply indicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant </li></ul><ul><li>Law of supply states that the quantity supplied is usually directly related to its price, other things constant </li></ul><ul><ul><li>The lower the price, the smaller the quantity supplied </li></ul></ul><ul><ul><li>The higher the price, the greater the quantity supplied </li></ul></ul>
    23. 23. <ul><li>Supply Schedule & Supply Curve </li></ul><ul><ul><li>The supply schedule is a table that showing how much of a product firms will set at different prices. </li></ul></ul><ul><ul><li>The supply curve is a graph illustrating how much of a product a firm will set at different prices. </li></ul></ul><ul><ul><ul><li>Upward slopping & to the right due to the law of supply. </li></ul></ul></ul>
    24. 24. Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-Cream Cones $3.00 12 0.50 1. An increase in price ... 2. ... increases quantity of cones supplied.
    25. 25. <ul><li>Individual Supply & Market Supply </li></ul><ul><ul><li>The individual supply is the relationship between price of good and the quantity an individual producer is willing and able to sell per period, other things constant. </li></ul></ul><ul><ul><li>The market supply is the sum of all that is supplied each period by all producers of a single product. </li></ul></ul>
    26. 26. Market Supply Curve
    27. 27. <ul><li>Changes in Quantity Supplied & Changes in Supplied </li></ul><ul><ul><li>A changes in quantity supplied result in the movement along the supply curve due a change in price while other factors remain constant. </li></ul></ul><ul><ul><li>Change in supply is shift of supply curve resulting from a change in one of the determinants of supply other than price of the goods. </li></ul></ul>
    28. 28. Change in Quantity Supplied 1 5 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C A rise in the price of ice cream cones results in a movement along the supply curve. 0 $3.00
    29. 29. Changed in Supply <ul><li>A shift of the supply curve, either to the left or right. </li></ul><ul><li>Determinants of supply other than the price of the good </li></ul><ul><ul><li>Cost of production </li></ul></ul><ul><ul><li>Technology </li></ul></ul><ul><ul><li>Prices of related goods </li></ul></ul><ul><ul><li>Expectation </li></ul></ul><ul><ul><li>Number of sellers </li></ul></ul>
    30. 30. Shifts in The Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve, S 1 Supply curve, S 3 Supply curve, S 2
    31. 31. <ul><li>The Cost of Production </li></ul><ul><ul><li>Response to the factor of production (labor, land, capita, energy, and so on). </li></ul></ul><ul><ul><li>Supply of a goods are negatively related to the price of the inputs used to make the good. </li></ul></ul><ul><ul><li>Objective is to maximize profit. </li></ul></ul><ul><ul><li>Example: to produce ice-cream, sellers use various inputs such as cream, sugar, flavoring, ice-cream machines. When price of one or more of these inputs rises, producing ice-cream is less profitable & firm supply less ice-cream. </li></ul></ul>
    32. 32. <ul><li>Technology </li></ul><ul><ul><li>Represents the economy’s knowledge about how to combine resources efficiently. </li></ul></ul><ul><ul><li>If a better technology is discovered, production costs will fall. Thus, suppliers will be more willing & able to supply the good at each price. </li></ul></ul><ul><ul><li>Example: when new technology are introduced in the production of sushi, supply of sushi will increase and shift the supply curve. </li></ul></ul>
    33. 33. <ul><li>Price of Related Goods </li></ul><ul><ul><li>Substitutes Goods </li></ul></ul><ul><ul><ul><li>If there is an increase in the price of substitute goods in production, supply of a good will decrease. </li></ul></ul></ul><ul><ul><ul><li>Example: Pepsi and Coke </li></ul></ul></ul><ul><ul><ul><li>( P pepsi ↑ Q SS pepsi ↑ SS coke ↓ ) </li></ul></ul></ul><ul><ul><li>Complementary Goods </li></ul></ul><ul><ul><ul><li>An increase in the price of complementary goods will increase the supply of a good & vice versa. </li></ul></ul></ul><ul><ul><ul><li>Example: Pen and Ink </li></ul></ul></ul><ul><ul><ul><li>( P pen ↑ Q SS pen ↑ SS ink ↑ ) </li></ul></ul></ul>
    34. 34. <ul><li>Expectations </li></ul><ul><ul><li>Expectation of price in the future could either increase or decrease current supply. </li></ul></ul><ul><ul><li>Example: when government announced an increase in the price of petrol, current supply will decrease because the supplier wants to sell after the price hike to gain profit with new price. </li></ul></ul>
    35. 35. <ul><li>Number of Sellers </li></ul><ul><ul><li>Market supply sums the amount supplied at each price by all producers, market supply depends on the number producers in the market. </li></ul></ul><ul><ul><li>Example: if there are more than one economic rice shop at New Town, there will be more economic rice supplied. </li></ul></ul>Shift of SS curve
    36. 36. Summary for Movement/Shift in Supply
    37. 37. Consumers (Demand) Firms (Supply) DD & SS Interaction Output (Product) Market 1.4 MARKET EQUILIBRIUM 3 set of market condition / effect: (a) The quantity demanded equal the quantity supplied at the current price. This situation called “ equilibrium ” (b) The quantity demanded exceeds the quantity supplied at the current price. This situation called “ excess demand ” or “ shortage ” (c) The quantity supplied exceeds the quantity demanded at the current price. This situation called “ excess supply ” or “ surplus ”
    38. 38. Equilibrium Price of Ice-Cream Cone 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00
    39. 39. <ul><li>Market Equilibrium </li></ul><ul><ul><li>The condition that exists in a market when the plans of buyers match those of sellers, so quantity demanded equals quantity supplied and the market clears. There is no tendency for price to change. </li></ul></ul><ul><ul><li>DD = SS </li></ul></ul><ul><li>Equilibrium price </li></ul><ul><ul><li>The price that balances quantity supplied and quantity demanded. </li></ul></ul><ul><li>Equilibrium quantity </li></ul><ul><ul><li>The quantity supplied and the quantity demanded at the equilibrium price. </li></ul></ul>
    40. 40. Excess Supply (Surplus) Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand Quantity demanded Quantity supplied Surplus 4 $2.50 10 2.00 7
    41. 41. <ul><li>Excess Supply (Surplus) </li></ul><ul><ul><li>When: </li></ul></ul><ul><ul><li>Pri ce > Equilibrium Price , then </li></ul></ul><ul><ul><li>Qs > Qd </li></ul></ul><ul><ul><li>There is excess supply or a surplus . </li></ul></ul><ul><ul><li>Suppliers will lower the price to increase sales, thereby moving toward equilibrium. </li></ul></ul>
    42. 42. Excess Demand (Shortage) Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand Quantity supplied Quantity demanded 1.50 10 $2.00 7 4 Shortage
    43. 43. <ul><li>Excess Demand (Shortage) </li></ul><ul><ul><li>When: </li></ul></ul><ul><ul><li>Price < Equilibrium Price , then </li></ul></ul><ul><ul><li>Qd > Qs </li></ul></ul><ul><ul><li>There is excess demand or a shortage . </li></ul></ul><ul><ul><li>Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium. </li></ul></ul>
    44. 44. 1.5 CHANGE IN EQUILIBRIUM <ul><li>The market equilibrium will change when there is a shift in the demand or supply curve. </li></ul><ul><li>We will see what happens when: </li></ul><ul><li>The demand curve shifts and supply remains constant. </li></ul><ul><li>The supply curve shifts and demand remains constant. </li></ul><ul><li>Both the demand and supply curves shift. </li></ul>
    45. 45. <ul><li>Three Steps for Analyzing Changes in Equilibrium </li></ul><ul><ul><li>1. Decide whether the events shifts the supply or demand curve (or both) </li></ul></ul><ul><ul><li>2. Decide in which direction the curve shifts. </li></ul></ul><ul><ul><li>3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity . </li></ul></ul>
    46. 46. Effect of Change in Demand <ul><li>Change in DD can arise from a number of factors; change in income, tastes, etc. </li></ul>Quantity Price SS D0 D1 E0 E1 <ul><li>Suppose there is an increase in the demand for ‘Pilot’ pens, the demand curve will shift rightwards , to D1. </li></ul><ul><li>Equilibrium price will increase , and equilibrium quantity will also increase. </li></ul>Note: If there is a decrease in the demand, the effect will be vice versa.
    47. 47. Effect of Change in Supply <ul><li>Change in SS can arise from a number of factors; change in cost, technology, etc. </li></ul>Quantity Price S0 S1 <ul><li>Suppose there is an increase in the supply for ‘Pilot’ pens, the supply curve will shift rightwards , to S1. </li></ul><ul><li>Equilibrium price will decrease , and equilibrium quantity will increase. </li></ul>Note: If there is a decrease in the supply, the effect will be vice versa. DD E0 E1
    48. 48. <ul><li>As long as only one curve shifts, equilibrium price and quantity will change. </li></ul><ul><li>If both curve shift, the outcome is obvious. </li></ul><ul><li>For example : </li></ul>Effect of Changes in Both Demand and Supply (a) Supply change > demand change (b) Supply change < demand change
    49. 49. 1.6 ACTIVITY ?
    50. 50. Supply and Demand Analysis (a) Proton Berhad decreases the price of its car model, Proton Persona from P 0 to P 1. Explain the law of demand and based on it, explain what will happen to the quantity demanded for Proton Persona car . Sketch a graph to illustrate your explanation.
    51. 51. (b) What will happen to the Perodua Nautica (substitutes) when the price of Proton Persona car drop? Sketch a graph to illustrate your explanation
    52. 52. (c) Assume that Proton Persona cars need a specific regular maintenance service to bring out the performance of the car. Based on situation in (a), what will happen to the demand of that specific regular maintenance service? End
    53. 53. THANK YOU

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