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Demand and Supply
A relationship between price and quantity demanded in a given time period, ceteris paribus.
Cēterīs paribus (Latin phrase), literally translated as "with other things the same." It is commonly rendered in English as "all other things being equal."
Demand
Demand schedule
An inverse relationship exists between the price of a good and the quantity demanded in a given time period, ceteris paribus.
Reasons:◦ We want to buy goods as cheap as possible◦ We have limited amount of money.
Law of demand
Change in quantity demanded vs. change in demand
Change in quantity demanded Demand shocks
Market demand is the horizontal summation of individual consumer demand curves
Market demand curve
tastes and preferences prices of related goods and services income number of consumers expectations of future prices and income
Determinants of demand
Effect of fads:
Tastes and preferences
substitute goods – an increase in the price of one results in an increase in the demand for the other.◦ Example: tea and coffee
complementary goods – an increase in the price of one results in a decrease in the demand for the other.◦ Example: car and fuel
Prices of related goods
Price of coffee rises:
Change in the price of a substitute good
Price of DVDs rises:
Change in the price of a complementary good
A good is a normal good if an increase in income results in an increase in the demand for the good.
Income and demand: normal goods
A good is an inferior good if an increase in income results in a reduction in the demand for the good.
Income and demand: inferior goods
An increase in the number of buyers results in an increase in demand.
Demand and the number of buyers
A higher expected future price will increase current demand.
A lower expected future price will decrease current demand.
A higher expected future income will increase the demand for all normal goods.
A lower expected future income will reduce the demand for all normal goods.
Expectations
the relationship that exists between the price of a good and the quantity supplied in a given time period, ceteris paribus.
Supply
Supply schedule
A direct relationship exists between the price of a good and the quantity supplied in a given time period, ceteris paribus.
Law of supply
Change in supply vs. change in quantity supplied
Supply shock Change in quantity supplied
The market supply curve is the horizontal summation of the supply curves of individual firms.
Individual firm and market supply curves
the price of resources, technology and productivity, the expectations of producers, the number of producers, the prices of related goods and services
◦ note that this involves a relationship in production, not in consumption
Determinants of supply
As the price of a resource rises, profitability declines, leading to a reduction in the quantity supplied at any price.
Price of resources
Technological improvements (and any changes that raise the productivity of labour) lower production costs and increase profitability.
Technological improvements
An increase in the expected future price of a good or service results in a reduction in current supply.
Expectations and supply
Increase in the number of sellers
Firms produce and sell more than one commodity.
Firms respond to the relative profitability of the different items that they sell.
The supply decision for a particular good is affected not only by the good’s own price but also by the prices of other goods and services the firm may produce.
Prices of other goods
Firms import raw materials (and often the final product) from foreign countries. The cost of these imports varies with the exchange rate.
When the exchange value of PLN rises, the domestic price of imported inputs will fall and the domestic supply of the final commodity will increase.
A decline in the exchange value of the PLN raises the price of imported inputs and reduce the supply of domestic products that rely on these inputs.
International effects
Market equilibrium
If the price exceeds the equilibrium price, a surplus occurs:
Price above equilibrium
If the price is below the equilibrium a shortage occurs:
Price below equilibrium
Demand rises
Demand falls
Supply rises
Supply falls
Price ceiling - legally mandated maximum price
Purpose: ◦ to keep price below the market equilibrium price◦ to protect the poor consumers – they can buy
products at lower prices than at the free market Examples:
◦ rent controls◦ price controls during wartime◦ price controls during socialism time
Binding and non-binding price ceiling
Price ceiling(film)
Price ceiling – maximum prices
The demand exceeds the supply Long queues in shops Black market grows Rationing of goods – ration coupons Double currencies system Domestic currency loses its value – inflation
Results of price ceiling (maximum price):
No innovations Mass production The quality of goods falls Standstill of economy development Vertical price control Horizontal price control
Results of price ceiling (maximum price) introduction:
price floor - legally mandated minimum price
designed to maintain a price above the equilibrium level
A price floor must be set above the free-market equilibrium price, otherwise it has no effect
examples:◦ agricultural price supports◦ minimum wage laws
Price floor(film)
Price floor – minimum price
The supply exceeds the demand What to do with production surplus?
◦ To Export – no countries want to buy◦ Intervention purchase – for taxpayers money◦ To store – for taxpayers money◦ To destroy – for taxpayers money◦ Producers who can’t sell by means of intervention
purchase must sell at the black market (illegally) Problems with abolishing of the price floor –
huge reserves The quality of goods goes down
Results of price floor introduction
Examples of floor prices Examples of ceiling prices
Short presentation
Czarny B. „Podstawy Ekonomii” Begg D., „Economics” http://www.oswego.edu/~kane/eco101.htm
Bibliography
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