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2. Demand - supply market equilibrium (1) (1).ppt
- 1. Contents Law of Demand Individual demand and market demand Reasons for negative slope Movement along the demand curve Exceptions to the law of demand Demand function - Demand determinants Shift in the demand curve
- 2. Contents….. Law of supply Movement along the supply curve Supply function – supply determinants Shift in the supply curve Market equilibrium Price flooring and price ceiling
- 3. Law of demand Demand The quantity consumers are willing and able to buy at each possible price during a given time period, other things constant Amounts purchased per period At each possible price Willing and able Specific period Other things constant
- 4. Demand Schedule and Demand Curve Demand schedule Possible prices Quantity demanded at each price Law of demand Demand curve Downward slope
- 5. The Demand Schedule and Demand Curve for Pizza Price and quantity demanded are inversely related. Demand schedule D a b c d e Price Quantity Demanded a b c d e 15 12 9 6 3 8 14 20 26 32 26 20 14 8 Q D 32 0 9 6 3 12 Price per pizza 15
- 7. Reasons for negative slope • Income effect • Substitution effect • Law of diminishing marginal utility MU = f (Q) QD = f (P)
- 8. Individual & Market demand
- 9. Individual’s demand schedule Law of demand • The inverse relationship between the price and quantity demanded of the commodity per time period Schedule Price Quantity 50 5 40 15 30 25 20 35 10 45
- 10. Individual’s demand curve Law of demand Schedule Price Quantity 50 5 40 15 30 25 20 35 10 45
- 11. Market demand schedule horizontal summation of the individual s’ demand Qdx = f(Px,N, Py, I,T…) N= no. of consumers in the market Price A’s Quantity demanded B’s Quantity demanded Market Demand 50 5 10 15 40 15 20 35 30 25 30 55 20 35 40 75 10 45 50 95
- 12. Market demand curve 0 10 20 30 40 50 60 10 20 30 40 50 price B's demand B's demand 0 10 20 30 40 50 60 15 35 55 75 95 price Market demand Market demand 0 10 20 30 40 50 60 5 15 25 35 45 price A's demand A's demand
- 13. Movement along the demand curve Change in quantity demanded Due to a change in price
- 14. Movement along the Demand Curve Price and quantity demanded are inversely related. Demand schedule D a b c d e Price Quantity Demanded a b c d e 15 12 9 6 3 8 14 20 26 32 26 20 14 8 Q D emanded 32 0 9 6 3 12 Price per pizza 15
- 15. Exceptions to Market demand • Bandwagon effect – (demonstration effect) • Giffen goods - inferior • Conspicuous - Snob effect - Veblen goods • Speculation • Emergencies
- 16. Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 16 Demand Function Qdx = f(Px, Py, I,T…) • Qdx is quantity demanded, • Px price of X • Py price of Y • I consumer income • T consumer taste 16
- 17. Demand determinants • Price • Income - Normal goods - Inferior goods • Price of other commodities - Substitute - complementary
- 18. Shifts of the Demand Curve 1. Money income of consumers 2. Prices of other goods 3. Consumer expectations 4. The number or composition of consumers in the market 5. Consumer tastes
- 19. Changes in Consumer Income Increase in consumer income Willing and able to buy more at each price Increase in demand Demand curve shifts rightward Normal good Demand increases as income increases Inferior good Demand increases as income increases
- 20. An Increase in the Market Demand for Pizza An increase in the demand for pizza is shown by a rightward shift of the demand curve, so the quantity demanded increases at each price. D’ D b f 26 20 14 8 Millions of pizzas per week 32 0 9 6 3 12 Price per pizza $15
- 21. shows how the quantity demanded of a good or service changes as the consumer's income level changes - named after the 19th century German statistician Ernst Engel. ENGEL CURVE
- 22. Changes in Consumer Tastes Tastes Likes and dislikes Assumed given and relatively stable Change in tastes May shift the demand
- 23. For normal goods, the Engel curve has a positive slope. For inferior goods, the Engel curve has a negative slope.
- 25. Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved 25 Demand determinants….. Product or Service Cause Effect Normal Good Incomes Increase Demand Increases Inferior Good Income Increases Demand Decreases Substitute Good Price of Related Product Increases Demand for Substitute Increases Complementary Good Price of Related Product Increases Demand for Second Product Decreases 25
- 26. Changes in the Prices of Other Goods Substitutes An increase in the price of one good Increases the demand for the other Rightward shift Complements – used in combination An increase in the price of one Decreases the demand for the other Leftward shift Unrelated
- 27. Changes in Consumer Expectations Income expectations Future income increase Increase the current demand Price expectations Future price increases Increase current demand
- 28. Number or Composition of Consumers Increase in number of consumers Increases demand Right shift
- 29. Supply Supply How much producers are willing and able to offer for sale per period at each possible price, other things constant Willing and able Specific period Other things constant
- 30. Supply Schedule and Supply Curve Supply schedule Possible prices Quantity supplied at each price Law of supply Supply curve Upward slope Law of supply
- 31. The Supply Schedule and Supply Curve for Pizza Price per pizza Quantity Supplied Per week (millions) $15 12 9 6 3 28 24 20 16 12 The market supply S shows the quantity of pizza supplied, at various prices, by all pizza makers. Price and quantity supplied are directly related. (a) Supply schedule (b) Supply curve S 24 20 16 12 Millions of pizzas per week 28 0 9 6 3 12 Price per pizza $15
- 32. Movement along the supply curve Change in quantity supplied Due to a change in price Individual supply Market supply
- 33. Law of Supply Law of supply Quantity supplied is directly related to its price, other things constant Higher price: higher quantity supplied Higher reward, profit More willing to increase quantity supplied Can afford to cover the marginal costs Increasing opportunity cost More able to increase quantity supplied
- 34. Movement along the supply curve… S Price per unit p p’ Quantity per period q q’ 0 If the price increases from p to p’, the quantity supplied increases from q to q’. Price and quantity supplied move in the same direction, so the price elasticity of supply is a positive number.
- 35. Supply Function Qs = f(Pt, Pf, O…) where § Production Technology § Prices of factors § Prices of Other factors
- 36. Determinants of Supply § Production Technology § Prices of factors § Prices of Other factors § Objective of the firm § Number of Producers(Or Firms) § Future price expectations § Taxes and Subsidies
- 37. Shifts of the Supply Curve 1. State of technology 2. Prices of relevant resources 3. Prices of alternative goods 4. Producer expectations 5. Number of producers in the market
- 38. Changes in Technology Better technology Production costs decrease Increase quantity supplied at each price Increase supply Rightward shift
- 39. An Increase in the Supply of Pizza An increase in the supply of pizza is reflected by a rightward shift of the supply curve, from S to S’. Quantity supplied increases at each price level. S’ S 24 20 16 12 Millions of pizzas per week 28 0 9 6 3 12 Price per pizza $15 g h
- 40. Prices of Relevant Resources Relevant resources Employed in the production Decrease in the production of relevant resources Production costs decrease Increase supply Rightward shift
- 41. Prices of Alternative Goods Resources Alternative uses Alternative goods Use some resources employed to produce the good Decrease in price of alternative goods Increase supply Rightward shift
- 42. Changes in Producer Expectations Higher prices in the future Future profits May increase the current supply Easily stored goods Reduce current supply
- 43. Changes in the Number of Producers Market supply Amount supplied At each price By all producers Number of producers increase Increase supply Rightward shift
- 44. Demand and Supply Create a Market Markets Sort out differences between demanders and suppliers Reduce transaction costs Adam Smith The “invisible hand”
- 45. Market Equilibrium Surplus: excess quantity supplied Downward pressure on price Decrease quantity supplied Increase quantity demanded Shortage: excess quantity demanded Upward pressure on price Increase quantity supplied Decrease quantity demanded
- 46. Market Equilibrium Quantity demanded = Quantity Supplied Plans of buyers and sellers match Equilibrium point Equilibrium quantity Equilibrium price Market clears No pressure on price ‘X marks the spot’
- 47. Equilibrium in the Pizza Market Millions of pizzas per Week Price per pizza Quantity Demanded Quantity Supplied Surplus or Shortage Effect on Price $15 12 9 6 3 8 14 20 26 32 28 24 20 16 12 Surplus of 20 Surplus of 10 Equilibrium Shortage of 10 Shortage of 20 Falls Falls Remains the same Rises Rises (a) Market schedules
- 48. Equilibrium in the Pizza Market (b) Market curves S 24 20 16 14 Millions of pizzas per week 26 0 9 6 3 12 Price per pizza $15 D c Shortage Surplus Market equilibrium occurs at: Price where QD=QS; Point c Above the equilibrium price: QS>QD; Surplus; Downward pressure on P Below the equilibrium price: QD>QS; Shortage; Upward pressure on P
- 49. Disequilibrium Surplus Downward pressure on P Shortage Upward pressure on P Disequilibrium Temporary, or Result of government intervention Price floors Price ceilings
- 50. Disequilibrium Price Floors Set above equilibrium P Minimum selling P Surplus Distort markets Reduce economic welfare
- 51. Disequilibrium Price Ceilings Set below the equilibrium P Maximum selling P Shortage Distort markets Reduce economic welfare
- 52. Price Floors and Price Ceilings S D (a) Price floor for milk (b) Price ceiling for rent $2.50 1.90 Price per gallon 19 14 Millions of gallons per month 0 24 S D $1,000 600 Monthly rental price 50 40 Thousands of rental units per month 0 60 Surplus Shortage No effect if price floor is set at or below equilibrium P No effect if price ceiling is set at or above equilibrium P
- 53. Effects of an Increase in Demand S 24 20 Millions of pizzas per week 30 0 9 $12 Price per pizza D c D’ g Original equilibrium c Increase in demand: Rightward shift to D’ At P=$9: QD>QS; shortage Upward pressure on P QD decreases QS increases New equilibrium g Higher P Higher Q
- 54. Effects of an Increase in Supply Original equilibrium c Increase in supply: Rightward shift to S’ At P=$9: QS>QD; surplus Downward pressure on P QD increases QS decreases New equilibrium d Higher Q Lower P S 26 20 Millions of pizzas per week 30 0 $9 6 Price per pizza D c S’ d
- 55. Simultaneous Shifts of D and S curves Both S and D increase; Q increases D shifts more: P increases S shifts more: P decreases Both S and D decrease: Q decreases D shifts more: P decreases S Shifts more: P increases
- 56. Indeterminate Effect of an Increase in Both Demand and Supply S p’ p Price D S’ a D’ b Q’ Q Units per period 0 (a) Shift of D dominates S p’’ p Price D S’’ a D’’ c Q’’ Q Units per period 0 (b) Shift of S dominates
- 57. Effects of Shifts of Both Demand and Supply Demand increases Demand decreases Supply Increases Equilibrium price change is indeterminate. Equilibrium quantity increases. Equilibrium price falls. Equilibrium quantity change is indeterminate. Supply decreases Equilibrium price rises. Equilibrium quantity change is indeterminate. Equilibrium price change is indeterminate. Equilibrium quantity decreases. Change in demand Change in supply
- 58. The Effect on Increases in Demand and Supply on Farm Revenue S’ D’ D 5 10 14 Billions of bushels per year 0 Price per bushel $8 4 S Technological advance - sharp increase in S Increase in consumer income - small increase in D Drop in P Drop in total revenue
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