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Supply and demand 29032014 important .ppt
- 1. Tanvir Hossain B.Com Hon’s,MBS (Accounting), MBA, PGDFM, PGdMC, ITP, CFC MPA in International Economics Relations, Senior Management Counsellor, BIM 01726-134400, tanvir.fm@gmail.com Theory of Supply and Demand
- 2. Markets In economics,a market is not a place but rather a group of buyers and sellers with the potential to trade with each other Market is defined not by its location but by its participants First step in an economic analysis is to define and characterize the market or collection of markets to analyze Economists think of the economy as a collection of individual markets 2
- 3. How Broadly ShouldWe Define The Market Defining the market often requires economists to group things together Aggregation is the combining of a group of distinct things into a single whole Markets can be defined broadly or narrowly, depending on our purpose How broadly or narrowly markets are defined is one of the most important differences between Macroeconomics and Microeconomics 3
- 4. Defining Macroeconomic Markets Goods and services are aggregated to the highest levels Macro models lump all consumer goods into the single category “consumption goods” Macro models will also analyze all capital goods as one market Macroeconomists take an overall view of the economy without getting bogged down in details 4
- 5. Defining Microeconomic Markets Markets are defined narrowly Focus on models that define much more specific commodities Always involves some aggregation But stops it reaches the highest level of generality that macroeconomics investigates 5
- 6. Buyers and Sellers Buyers and sellers in a market can be Households Business firms Government agencies All three can be both buyers and sellers in the same market, but are not always For purposes of simplification we will usually follow these guidelines In markets for consumer goods, we’ll view business firms as the only sellers, and households as only buyers In most of our discussions, we’ll be leaving out the “middleman” 6
- 7. Using Supply andDemand Supply and demand model is designed to explain how prices are determined in competitive markets Supply and demand is one of the most versatile and widely used models in the economist’s tool kit 7
- 8. Demand A household’squantity demanded of a good Specific amount household would choose to buy over some time period, given A particular price that must be paid for the good All other constraints on the household Market quantity demanded (or quantity demanded) is the specific amount of a good that all buyers in the market would choose to buy over some time period, given A particular price they must pay for the good All other constraints on households 8
- 9. Quantity Demanded Impliesa choice How much households would like to buy when they take into account the opportunity cost of their decisions? Is hypothetical Makes no assumptions about availability of the good How much would households want to buy, at a specific price, given real-world limits on their spending power? Stresses price Price of the good is one variable among many that influences quantity demanded We’ll assume that all other influences on demand are held constant, so we can explore the relationship between price and quantity demanded 9
- 10. The Law ofDemand The price of a good rises and everything else remains the same, the quantity of the good demanded will fall The words, “everything else remains the same” are important In the real world many variables change simultaneously However, in order to understand the economy we must first understand each variable separately Thus we assume that, “everything else remains the same,” in order to understand how demand reacts to price 10
- 11. The Demand Schedule Demand schedule A list showing the quantity of a good that consumers would choose to purchase at different prices, with all other variables held constant Demand V.S. Quantities demanded - demand is the entire relationship between price and quantity - quantities demanded are specific amount of goods buyers want to buy at a specific price 11
- 12. The Demand Curve The market demand curve (or just demand curve) shows the relationship between the price of a good and the quantity demanded , holding constant all other variables that influence demand Each point on the curve shows the total quantity buyers would choose to buy at a specific price Law of demand tells us that demand curves virtually always slope downward 12
- 13. 13 Number of Bottles perMonth Price per Bottle A B Tk.4.00 2.00 D 40,000 60,000 At Tk.2.00 per bottle, 60,000 bottles are demanded (point B). When the price is Tk.4.00 per bottle, 40,000 bottles are demanded (point A).
- 14. “Shifts” vs. “MovementsAlong” The Demand Curve Move along the demand curve From a change in the price of the good we analyze In Figure 1 A fall in price would cause a movement to the right along the demand curve (point A to B) See figure 2 in the next slide 14
- 15. 15 Quantity Price P2 Q2 Q1 Q3 P1 P3 Priceincrease moves us leftward along demand curve Price decrease moves us rightward along demand curve
- 16. “Shifts” vs. “MovementsAlong” The Demand Curve Shift of demand curve a change in other things than price of the good causes a shift in the demand curve itself, for example, income In Figure 3 Demand curve has shifted to the right of the old curve as income has risen A change in any variable that affects demand— except for the good’s price—causes the demand curve to shift 16
- 17. 17 B C Tk.2.00 60,000 80,000 D1 D2 Anincrease in income shifts the demand curve for maple syrup from D1 to D2. Number of Bottles per Month Price per Bottle At each price, more bottles are demanded after the shift
- 18. “Change in QuantityDemanded” vs. “Change in Demand” Language is important when discussing demand “Quantity demanded” means A particular amount that buyers would choose to buy at a specific price It is a number represented by a single point on a demand curve When a change in the price of a good moves us along a demand curve, it is a change in quantity demand The term demand means The entire relationship between price and quantity demanded —and represented by the entire demand curve When something other than price changes, causing the entire demand curve to shift, it is a change in demand 18
- 19. Income: Factors ThatShift The Demand Curve An increase in income has effect of shifting demand for normal goods to the right However, a rise in income shifts demand for inferior goods to the left A rise in income will increase the demand for a normal good, and decrease the demand for an inferior good Normal good and inferior good are defined by the relation between demand and income 19
- 20. Wealth: Factors ThatShift The Demand Curve Your wealth—at any point in time—is the total value of everything you own minus the total dollar amount you owe - Example An increase in wealth will Increase demand (shift the curve rightward) for a normal good Decrease demand (shift the curve leftward) for an inferior good 20
- 21. Prices of RelatedGoods: Factors that Shift the Demand Curve Substitute—good that can be used in place of some other good and that fulfills more or less the same purpose Example A rise in the price of a substitute increases the demand for a good, shifting the demand curve to the right Complement—used together with the good we are interested in Example A rise in the price of a complement decreases the demand for a good, shifting the demand curve to the left 21
- 22. Other Factors ThatShift the Demand Curve Population As the population increases in an area Number of buyers will ordinarily increase Demand for a good will increase Expected Price An expectation that price will rise (fall) in the future shifts the current demand curve rightward (leftward) Tastes Combination of all the personal factors that go into determining how a buyer feels about a good When tastes change toward a good, demand increases, and the demand curve shifts to the right When tastes change away from a good, demand decreases, and the demand curve shifts to the left 22
- 23. Small Summary -- FactorsAffecting Demand Price (depends on good’s nature: normal, inferior or Giffen) Income (depends on good’s nature: normal or inferior) Wealth (depends on good’s nature) Prices of substitutes (positively related) Prices of complements (negatively related) Population (positively related) Expected price (positively related) Tastes (positively related) 23
- 24. 24 Quantity Price D2 D1 Entire demand curveshifts rightward when: • income or wealth ↑ • price of substitute ↑ • price of complement ↓ • population ↑ • expected price ↑ • tastes shift toward good
- 25. 25 Quantity Price D1 D2 Entire demand curveshifts leftward when: • income or wealth ↓ • price of substitute ↓ • price of complement ↑ • population ↓ • expected price ↓ • tastes shift toward good
- 26. Supply A firm’squantity supplied of a good is the specific amount its managers would choose to sell over some time period, given A particular price for the good All other constraints on the firm Market quantity supplied (or quantity supplied) is the specific amount of a good that all sellers in the market would choose to sell over some time period, given A particular price for the good All other constraints on firms 26
- 27. Quantity Supplied Impliesa choice Quantity that gives firms the highest possible profits when they take account of the constraints presented to them by the real world Is hypothetical Does not make assumptions about firms’ ability to sell the good How much would firms’ managers want to sell, given the price of the good and all other constraints they must consider? Stresses price The price of the good is just one variable among many that influences quantity supplied We’ll assume that all other influences on supply are held constant, so we can explore the relationship between price and quantity supplied 27
- 28. The Law ofSupply States that when the price of a good rises and everything else remains the same, the quantity of the good supplied will rise The words, “everything else remains the same” are important In the real world many variables change simultaneously However, in order to understand the economy we must first understand each variable separately We assume “everything else remains the same” in order to understand how supply reacts to price 28
- 29. The Supply Scheduleand The Supply Curve Supply schedule—shows quantities of a good or service firms would choose to produce and sell at different prices, with all other variables held constant Supply curve—graphical depiction of a supply schedule Shows quantity of a good or service supplied at various prices, with all other variables held constant 29
- 30. 30 F G 2.00 S 40,000 60,000 Tk.4.00 At Tk.4.00per bottle, quantity supplied is 60,000 bottles (point G). When the price is Tk.2.00 per bottle, 40,000 bottles are supplied (point F). Number of Bottles per Month Price per Bottle
- 31. Shifts vs. MovementsAlong the Supply Curve A change in the price of a good causes a movement along the supply curve In Figure 6 A rise (fall) in price would cause a rightward (leftward) movement along the supply curve A drop in transportation costs will cause a shift in the supply curve itself In Figure 7 Supply curve has shifted to the right of the old curve as transportation costs have dropped A change in any variable that affects supply—except for the good’s price—causes the supply curve to shift 31
- 32. 32 S2 G J S1 60,000 Tk.4.00 80,000 A decrease intransportation costs shifts the supply curve for maple syrup from S1 to S2. Number of Bottles per Month Price per Bottle At each price, more bottles are supplied after the shift
- 33. Factors That Shiftthe Supply Curve Input prices A fall (rise) in the price of an input causes an increase (decrease) in supply, shifting the supply curve to the right (left) Price of Related Goods When the price of a related good rises (falls), the supply curve for the good in question shifts leftward (rightward) Technology Cost-saving technological advances increase the supply of a good, shifting the supply curve to the right 33
- 34. Factors That Shiftthe Supply Curve Number of Firms An increase (decrease) in the number of sellers— with no other changes—shifts the supply curve to the right (left) Expected Price An expectation of a future price increase (decrease) shifts the current supply curve to the left (right) 34
- 35. Factors That Shiftthe Supply Curve Changes in weather Favorable weather Increases crop yields Causes a rightward shift of the supply curve for that crop Unfavorable weather Destroys crops Shrinks yields Shifts the supply curve leftward Other unfavorable natural events may effect all firms in an area Causing a leftward shift in the supply curve 35
- 36. 36 P2 Q3 Q1 Q2 P1 P3 Quantity PricePrice increase moves us rightward along supply curve S Price decrease moves us leftward along supply curve
- 37. 37 Quantity Price S2 S1 Entire supply curveshifts rightward when: • price of input ↓ • price of related good ↓ • number of firms ↑ • expected price ↑ • technological advance • favorable weather
- 38. 38 Quantity Price S1 S2 Entire supply curveshifts leftward when: • price of input ↑ • price of related good ↑ • number of firms ↓ • expected price ↑ • unfavorable weather
- 39. Summary: Factors ThatShift The Supply Curve The short list of shift-variables for supply that we have discussed is far from exhaustive In some cases, even the threat of such events can cause serious effects on production Basic principle is always the same Anything that makes sellers want to sell more or less of a good at any given price will shift supply curve 39
- 40. Equilibrium: Putting Supplyand Demand Together When a market is in equilibrium Both price of good and quantity bought and sold have settled into a state of rest The equilibrium price and equilibrium quantity are values for price and quantity in the market but, once achieved, will remain constant Unless and until supply curve or demand curve shifts The equilibrium price and equilibrium quantity can be found on the vertical and horizontal axes, respectively At point where supply and demand curves cross 40
- 41. Figure 11: MarketEquilibrium 41 E H J 1.00 Tk.3.00 D S 50,000 75,000 25,000 Excess Demand 4. until price reaches its equilibrium value of Tk.3.00 . 2. causes the price to rise . . . 3. shrinking the excess demand . . . 1. At a price of Tk.1.00 per bottle an excess demand of 50,000 bottles . . . Number of Bottles Price per Bottle
- 42. Excess Demand Excessdemand At a given price, the excess of quantity demanded over quantity supplied Price of the good will rise as buyers compete with each other to get more of the good than is available Example: does the irrational fare structure of the CNGs in Dhaka represent excess demand? 42
- 43. Figure 12: ExcessSupply and Price Adjustment 43 3. shrinking the excess supply . . . K L E 3.00 D S Tk.5.00 50,000 35,000 65,000 Excess Supply at Tk.5.00 2. causes the price to drop, 4. until price reaches its equilibrium value of Tk.3.00. Number of Bottles per Month Price per Bottle 1. At a price of Tk.5.00 per bottle an excess supply of 30,000 bottles . . .
- 44. Excess Supply ExcessSupply At a given price, the excess of quantity supplied over quantity demanded Price of the good will fall as sellers compete with each other to sell more of the good than buyers want 44
- 45. Solve for EquilibriumAlgebraically Suppose that demand is given by the equation , where is quantity demanded, P is the price of the good. Supply is given by where is quantity supplied. What is the equilibrium price and quantity? 45 P QD 10 140 P QS 5 80 D Q s Q
- 46. Income Rises: WhatHappens When Things Change Income rises, causing an increase in demand Rightward shift in the demand curve causes rightward movement along the supply curve Equilibrium price and equilibrium quantity both rise Shift of one curve causes a movement along the other curve to new equilibrium point 46
- 47. 47 1. An increasein demand . . . E F' 3.00 D1 D2 S Tk.4.00 50,000 60,000 3. to a new equilibrium. 5. and equilibrium quantity increases too. 2. moves us along the supply curve . . . Number of Bottles of Maple Syrup Price per Bottle 4. Equilibrium price increases
- 48. A Cyclone Hits:What Happens When Things Change A cyclone causes a decrease in supply Weather is a shift variable for supply curve Any change that shifts the supply curve leftward in a market will increase the equilibrium price And decrease the equilibrium quantity in that market 48
- 49. Figure 14: AShift of Supply and A New Equilibrium 49 E' E 3.00 D Tk.5.00 50,000 35,000 S2 S1 Number of Bottles Price per Bottle
- 50. Using Supply andDemand: The Invasion of Kuwait Why did Iraq’s invasion of Kuwait cause the price of oil to rise? Immediately after the invasion, United States led a worldwide embargo on oil from both Iraq and Kuwait A significant decrease in the oil industry’s productive capacity caused a shift in the supply curve to the left Price of oil increased 50
- 51. Figure 15: TheMarket For Oil 51 P2 D E' P1 E Q2 Q1 S2 S1 Barrels of Oil Price per Barrel of Oil
- 52. Using Supply andDemand: The Invasion of Kuwait Why did the price of natural gas rise as well? Oil is a substitute for natural gas Rise in the price of a substitute increases demand for a good Rise in price of oil caused demand curve for natural gas to shift to the right Thus, the price of natural gas rose 52
- 53. Figure 16: TheMarket For Natural Gas 53 Cubic Feet of Natural Gas Price per Cubic Foot of Natural Gas P4 P3 F Q3 Q4 S D2 F' D1
- 54. 54 1. An increasein supply . . . 2. and a decrease in demand . . . 5. and quantity decreased as well. A B Tk.400 D2003 S2002 S2003 D2002 Tk.500 2.45 3.33 Millions of Handheld PCs per Quarter Price per Handheld PC 4. Price decreased . . . 3. moved the market to a new equilibrium.
- 55. Summaries Through the studyof the chapter, we are now able to Characterize a market. Use a demand schedule and a demand curve to demonstrate the law of demand. Explain the difference between a change in demand (shift of the curve) and a change in quantity demanded (movement along the curve). List the factors that will lead to a change in demand, and give examples of each. Similar analysis for supply side. Explain how equilibrium price and quantity are determined in a competitive market. Explain what will happen in a competitive market after a shift in the supply curve, the demand curve, or both. 55
- 56. Task 1 Ifthe demand function is Q = 200 – 10P what is the quantity demanded if the price is Taka 12? 56
- 57. Task 2 Ifthe supply function is Q = -100 + 10P what is quantity supplied if the price is Taka 12? 57
- 59. Task 4 thefollowing function describes the demand for a company that makes shopping bags. Q = 1000 – 50P ; where Q is number of bags sold and P is price. a) how many bags could be sold at Taka 12 each? b) what price would the consumers pay to buy 500 bags? 59
- 60. Task 5 thefollowing relations describe monthly demand and supply for a good “X”. Qd = 3000 – 10P Qs = -1000 + 15P a) at what price would the quantity demanded equal zero? b) at what price would the quantity supplied equal zero? c) plot the supply and demand curves d) what is the equilibrium price? e) if the demand shifts to Qd = 3500 – 10P, then what is the new equilibrium price? 60
Editor's Notes
- #7 (example: laptop computers; orange juice)
- #10 Consider an example from our real life: the price of laptop decreases, how is the total number of computer bought changed?
- #12 Emphasize the “other things constant” Emphasize the price influence Exercise and example: - Illustrate the example of maple syrup in the textbook – how to draw the graph? what is the relations? Is it the linear relation?
- #13 Maple syrup example Horizontal axis; Vertical axis Points A and B, interpretation Negative relations Move along the curve – price change