Bah - MacroPrinciples 03 Markets, Demand and Supply

8/13/2019 Bah - MacroPrinciples 03 Markets, Demand and Supply

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Markets, Demand and Supply,Markets, Demand and Supply,

and the Price Systemand the Price System

ECN 211ECN 211

Fall, 2007Fall, 2007

ELEL--HADJ BAHHADJ BAH

Chapter 3Chapter 3

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Allocation Systems:Allocation Systems:

Different ways to allocate scarce goods andresources First-come-first-serve

Prices

Government

Random

No allocation mechanism is fair

Each mechanism has different incentives-Only amarket system creates incenti ves for higherliving standard

The market determines at which poi nt on the PPC

an economy locates

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Markets and ExchangeMarkets and Exchange

What is a market?

A market is a place or service that enablesA market is a place or service that enables

buyers and sellers to exchange goods andbuyers and sellers to exchange goods and

services.services.

ExamplesExamples::

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Types of MarketsTypes of Markets

Barteris the exchange of goods andservices directly, without the involvementof money.

Examples:

Monetary exchanges involve exchangingmoney for goods and services.

Examples:


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Demand vs. Quantity DemandedDemand vs. Quantity Demanded

Demand is the amount of a product thatpeople are willing and able to purchase ateach possible price during a given periodof time, everything else (but price) heldconstant (ceteris paribus). It is a relationship between prices and

quantities.

The quantity demand is the amount of aproduc t that people are willing and able topurchase at one specific pr ice.

It is a quantity. 6

Law of DemandLaw of Demand

1. The quantity of a well-defined good or servicethat

2. People are willi ng and able to purchase

3. During a particular period of time

4. Decreases as the price of the good or servicesrises and increases as the price falls,

5. Everything else held constant.

Example: If price of CDs go up, do youbuy more or less CDs ?

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Representations of DemandRepresentations of Demand

Demand Schedule: A table or list of theprices and corresponding quantitiesdemanded of a particular good or service.It is the price-quantity relationshippresented in tabular form.

Demand Curve: A graph of the demandschedule with price on t he vertical axisand quantity demanded on the horizontal

axis.8

Demand Schedule andDemand Schedule and

Demand Curve for VideosDemand Curve for Videos

QuantityPrice

50$1

40$2

30$3

20$4

10$5


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Aggregation of Demand (I)Aggregation of Demand (I)

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Aggregation of Demand (II)Aggregation of Demand (II)

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Changes in Demand andChanges in Demand and

Quantity DemandedQuantity Demanded

Change in Quantity Demanded -movement along the same demandcurve in response to a price change.

Results from a price change

Change in Demand - shift of theentire demand curve.

Results from a change in a determinant

of demand (a ceteris paribus variable)12

Change in Demand vs.Change in Demand vs.

Change in the Quantity DemandedChange in the Quantity Demanded


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ConceptsConcepts

Normal goods: goods for which demandincreases as income increases.

Inferior goods: goods for which demanddecreases as income increases

Examples:

Cars are ..goods

Ramon noodles are..goods

Potato ships are.goods

Laptops are.goods

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ConceptsConcepts

Substitute goods: goods that can beused in place of each other.

Complementary goods: goods thatare used together.

Examples: Tennis rackets and tennis balls are: .

Butter and margarine are: .

CDs and CD players are: ..

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Determinants of demandDeterminants of demand--factorsfactors

that shift demandthat shift demand

The determinants of demand (or ceterisparibus variables) are factors other thanprice that influence demand:

income

Tastes and preferences

prices of related goods

expectations

number of buyers16

Demand ShiftDemand Shift


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RecapRecap

Demand vs. quanti ty demanded

Law of demand

Determinants o f demand.

Normal vs. inferior good

Complements vs. supplements

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Test questionTest question

If the price of movie rentalsincreases then:

The demand for movie rentals woulddecrease.

The quantity demanded of movie rentalswould increase.

The quantity demanded of movie rentalswould decrease.

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Test question: True or False ?Test question: True or False ?

If the price of Coke goes up then thequantity demanded for Pepsi will godown.

If the price of Coke goes up then thedemand for Coke will go up.

If there is new improved type DVDplayers in the market, the demand forDVDs wil l inc rease.

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Supply and Quantity SuppliedSupply and Quantity Supplied

Supply is the amount of a good or servicethat producers are willing and able to offerfor sale at each poss ible price dur ing aperiod of time, all else constant. It is a price-quantity relationship.

The quantity supplied is the amountsellers are willing and able to offer for saleduring a period of time at a specific price,all else constant.

Its a quantity.


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Law of SupplyLaw of Supply

1. The quantity of a well-defined good or servicethat

2. Producers are willing and able to offer for sale

3. During a particular period time

4. Increases as the price of the good or serviceincreases and decreases as the pricedecreases,

5. Everything else held constant.

Example: If the price of DVDs go up, you

supply more DVDs 22

Representations of SupplyRepresentations of Supply

Supply Schedule: A table or list of theprices and corresponding quantitiessupplied of a particular good or service. Itis the price-quantity relationshippresented in tabular form.

Supply Curve: A graph of the supplyschedule with price on the vertical axisand quantity demanded on the horizontalaxis.

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Supply Curve for VideosSupply Curve for Videos

20$1.00E

30$2.00D

40$3.00C

50$4.00B

60$5.00A

Quantitysupplied

Priceper

Video

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Aggregation of Supply (I)Aggregation of Supply (I)


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Aggregation of Supply (II)Aggregation of Supply (II)

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Changes in SupplyChanges in Supply

Change in Quantity Supplied -movement along the same supplycurve in response to a price change. Result s from a change in price

Change in Supply - shift of the entiresupply curve. Result s from a change in the

determinants of supply (a ceterisparibus variable).

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Change in Supply vs.Change in Supply vs.

a Change in the Quantity Supplieda Change in the Quantity Supplied

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Determinants of SupplyDeterminants of Supply--FactorsFactors

that shift Supplythat shift Supply

Factors other than price thatinfluence supply:

Technology and productivity

Price of resources

Expectations of producers

Number of producers

Price of related goods


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Decrease in SupplyDecrease in Supply

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Increase in SupplyIncrease in Supply

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Test question: True or False?Test question: True or False?

If there is a change in the price of agood, then the supply of that goodwill change.

An improvement in the educationlevel of computer engineers willresult to:An i ncrease of the supply of computers

A decrease in the pr ice of computers

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EquilibriumEquilibrium : Putting demand and: Putting demand and

Supply togetherSupply together

Equilibrium is the price and quantityat which the quantity supp lied and thequantity demanded are equal.

A market is said to be indisequilibrium at all points at whichthe quantities demanded and suppliedare not equal.


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Surplus and ShortageSurplus and Shortage

A surplus occurs whenever quantitysupplied is greater than quantitydemanded (QS>QD)

A shortage occurs whenever QD>QS.

Surpluses and shor tages can beresolved with price changes.

Can you prices to resolve scarcity?

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Equilibrium (Table)Equilibrium (Table)

Shortage

Shortage

EQUILIBRIUM

Surplus

Surplus

Status

Price Rises30102$1

Price Rises4884$2

No Change6666$3

Price Falls8448$4

Price Falls10230$5

Price ChangeQuantitySupplied

QuantityDemanded

Price

Per Video

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Equilibrium (Graph)Equilibrium (Graph)

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The Effects of a Shift of the DemandThe Effects of a Shift of the Demand

Curve and Supply curvesCurve and Supply curves

When demand changes, equilibriumprice and quantity change in thesame direction.

When supply changes, equilibriumprice and quantity change inopposite directions.


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The Effects of a Shift of theThe Effects of a Shift of theDemand CurveDemand Curve

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The Effects of a Shift of theThe Effects of a Shift of theSupply CurveSupply Curve

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Price Floors and CeilingsPrice Floors and Ceilings

Price Floor: price is not allowed todecrease below a certain level. Examples: m inimum w age, agricultural price

supports. If the floor is above the equilibrium price, then

it results in a surplus.

Price Ceiling: price is not allowed toincrease above a certain level. Example: rent controls. If the ceiling is b elow the equilibrium price,

then it results in a shortage.

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A Price FloorA Price Floor


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Price ceiling: rent controlsPrice ceiling: rent controls

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Effect of rent controlsEffect of rent controls

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Test questionTest question

If price is below the equilibriumprice:

Quantity demanded exceed quantit ysupplied and a shortage exists

Demand will increase

Quantity supplied is below quantitydemanded and a surplus exists

Documents

Bah - MacroPrinciples 03 Markets, Demand and Supply