Basic Elements of Demand, Supply Chapter 2 Remaining topics: laissez-faire economy Post –hoc fallacy Fallacy of composition PPF Visible hands of Government
Demand and its determinantsSupply and its determinantsSupply,
demand, & market equilibriumChanges in supply and demand
Government-set prices
3-*
A Market
Interaction between buyers and sellersBuyers demand goodsSellers
supply goodsAssumptionsStandardized goodCompetitive market
3-*
Demand
Schedule or curveAmount consumers willing and able to purchase at a
given price in a specific timeOther things equalIndividual demand
Market demand
3-*
Law of Demand
Other things equal, as price falls quantity demanded
risesExplanations:Diminishing marginal utilityIncome
effectSubstitution effect
3-*
Individual Demand
P
Qd
Rs.5
4
3
2
1
10
20
35
55
80
P
Q
D
3-*
6
5
4
3
2
1
0
10 20 30 40 50 60 70 80
Quantity Demanded (bushels per week)
Price (per bushel)
Determinants of Demand
Factors that shift the demand curveCause more or less to be bought
at any possible priceIncrease or decrease in demandTastesNumber of
buyers (Population)
3-*
Determinants of Demand
IncomeNormal goodsInferior goodsPrice of related goodsSubstitute
goodComplementary goodUnrelated goods
3-*
Determinants of Demand
Tastes and preferencesExpectations of future
pricesAdvertisingDistribution of incomeConsumer expectations
3-*
Types of Goods
Normal goods are those goods whose demand goes up when the
consumers income increases.Inferior goods are those goods whose
demand falls when the consumers income increases. e.g. autotravel,
PetrolGiffen goods are those goods whose demand moves in same
direction as price (demand decreases when price decreases) the
consumer spends saved amount on other goodsSnob or Veblen goods
(position goods; like luxury cars, designers good) are those goods
whose demand falls when price fallsBandwagon When individuals make
rational choices based on the information they receive from others
3-*
Individual Demand
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Price (per bushel)
P
Qd
$5
4
3
2
1
10
20
35
55
80
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
3-*
Individual Demand
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Price (per bushel)
P
Qd
Rs.5
4
3
2
1
10
20
35
55
80
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
Change in Demand
Change in Quantity Demanded
3-*
Supply
Schedule or curveAmount producers willing and able to sell at a
given price in a specific timeIndividual supplyMarket supply
3-*
Law of Supply
Other things equal, as price rises the quantity supplied
risesExplanations:Revenue implications (effects)Marginal cost
3-*
Individual Supply
6
5
4
3
2
1
0
Quantity Supplied (bushels per week)
Price (per bushel)
P
Qs
Rs.5
4
3
2
1
60
50
35
20
5
Individual
Supply
P
Q
S1
10 20 30 40 50 60 70
3-*
Determinants of Supply
Resource pricesTechnologyTaxes and subsidiesPrices of other
goodsProducer expectationsNumber of sellers
3-*
Individual Supply
6
5
4
3
2
1
0
Quantity Supplied (bushels per week)
Price (per bushel)
P
Qs
60
50
35
20
5
Individual
Supply
P
Q
S1
S2
S3
10 20 30 40 50 60 70
3-*
Rs.5
4
3
2
1
Individual Supply
6
5
4
3
2
1
0
Quantity Supplied (bushels per week)
Price (per bushel)
P
Qs
60
50
35
20
5
Individual
Supply
P
Q
S1
S2
S3
10 20 30 40 50 60 70
Change in Quantity Supplied
Change in Supply
3-*
Rs.5
4
3
2
1
Market Equilibrium
Equilibrium price and quantitySurplus and shortageRationing
(Controlling) function of priceEfficient allocationProductive
efficiencyAllocative efficiency
A price ceiling is a maximum price that sellers may charge for a
good, usually set by government.Example: rent controlA price floor
is a price above equilibrium price that the buyers have to
pay.Example : agricultural support price, minimum wages
*
Market Equilibrium
6
5
4
3
2
1
0
2 4 6 8 10 12 14 16 18
Bushels of Corn (thousands per week)
Price (per bushel)
P
Qd
Rs.5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
Market
Demand
200 Buyers
P
Qs
Rs.5
4
3
2
1
12,000
10,000
7,000
4,000
1,000
Market
Supply
200 Sellers
7
3
D
S
Rs.4 Price Floor
6,000 Bushel
Surplus
Rs.2 Price Ceiling
7,000 Bushel
Shortage
3-*
Market Equilibrium
Change in demandShift of the demand curveChange in supplyShift of
the supply curveChange in equilibrium price and quantity
demanddemand schedulelaw of demanddiminishing marginal
utilityincome effectsubstitution effectdemand curvedeterminants of
demandnormal goodsinferior goodssubstitute goodcomplementary
goodchange in demandchange in quantity demandedsupplysupply
schedulelaw of supplysupply curvedeterminants of supplychange in
supplychange in quantity suppliedequilibrium priceequilibrium
quantitysurplusshortageprice ceilingprice floor
