Demand Model & Supply Model

8/3/2019 Demand Model & Supply Model

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Demand Model

UNIT 2


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Supply and Demand Model

The English historian Thomas Carlyleonce said:

Teach any parrot the words supply anddemandand youve got an economist.


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Demand & Supply Model

The supply and demand model is a basic workhorseof economics.

We will consider each of its pieces.

Then, we will use it to answer some basic questions.

Note: When employing supply and demand we areconsidering perfectly competitive markets. For now

that simply means all buyers and sellers areassumed to be price takers.


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Demand

Demand means the willingness andcapacity to pay.

Prices are the tools by which the marketcoordinates individual desires.


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Demand (Verbal)

The demand describes the relation between agoods price and the maximum quantity thatconsumers are willing and able to buy at that

price, ceteris paribus.

Ceteris paribus means holding all the other demandfunction variables constant at some given level.


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The Law of Demand

What accounts for the law of demand?

People tend to substitute for goods whoseprice has gone up.

Income effect

Substitution effect


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The Demand Curve

The demand curve is the graphicrepresentation of the law of demand.

The demand curve slopes downward andto the right.

As the price goes up, the quantitydemanded goes down.


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The Demand Table

The demand schedule assumes all thefollowing:

As price rises, quantity demanded declines. The schedule assumes that everything else is

held constant.

All the products involved are identical in

shape, size, quality, etc.


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Pric

eperDVDs(indollars)

A Demand Curve

Quantity of DVDs demanded (per week)1 2 3 4 5 6 7 8 9 10 11 12 13

$6.00

5.00

4.00

3.00

2.00

1.00.50

0

3.50

E

D

C

BFA

From a Demand Table to a

Demand Curve

Price percassette

A

B

C

D

E

A Demand Table

DVD rentalsdemanded per

week

$0.501.002.00

3.004.00

9

8

6

4

2

Demand forDVDs

G


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D

Price(perun

it)

0

Quantity demanded (perunit of time)

PA

QA

A

A Sample Demand Curve


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The Law of Demand

The demand curve is downward slopingfor the following reasons:

At lower prices, existing demanders buymore.

At lower prices, new demanders enter themarket.


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Demand Schedule andDemand Curve for DVDs


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Other Things Constant

Other things constant places a limitationon the application of the law of demand.

All other factors that affect quantity demandedare assumed to remain constant, whetherthey actually remain constant or not.

These factors may include changing tastes,

prices of other (related) goods, income of theconsumer, advertising and even the weather.


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Movements vs. Shifts

A movement along the demand curve for X would be caused by a change in Px.

A shift of the entire demand curve wouldbe caused by a change in one of theceteris paribus demand variables.

This would be referred to as an increase or

decrease in demand.


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The Demand Curve (Verbal)

The Law ofDemand states that the relationship betweena goods price and the quantity demanded of that good isnegative.

Example: when the price of a good falls from 25 to 10,the quantity demanded rises from 15 to 30.

This is referred to as a change in quantity demandedand in this case an increase in quantity demanded.

Own-price changes cause movements along a givendemand curve.


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Demand vs. QuantityDemanded

Demand is the amount of a product thatpeople are willing and able to purchase ateach possible price during a given periodof time.

The quantity demand is the amount of aproduct that people are willing and able topurchase at one, specific price.


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Change in Quantity Demanded

D1

Change in quantity demanded(a movement along the curve)

B

0

Price(perunit)

Quantity demanded (perunit of time)100

$2

$1

200

A

Specifically decrease in

quantity demanded


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Change in Quantity Demanded

D1

Change in quantity demanded(a movement along the curve)

A

0

Price(perunit)


$2

$1

200

B

Specifically increase in

quantity demanded


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Demand refers to a schedule of quantities of a good that will be bought

per unit of time at various prices, otherthings constant.

Graphically, it refers to the entire

demand curve.

Shifts in Demand VersusMovements Along a Demand

Curve


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Quantity demanded refers to a specific

amount that will be demanded perunit of time at a specific price.

Graphically, it refers to a specific pointon the demand curve.

Shifts in Demand VersusMovements Along a

Demand Curve


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A movement along a demand curve is

the graphical representation of the effectof a change in price on the quantitydemanded.

Shifts in Demand Versus

Movements Along a DemandCurve


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A shift in demand is the graphical

representation of the effect of anythingother than price on demand.

Shifts in Demand Versus

Movements Along aDemand Curve


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D0

D1

Shift in Demand

Price(perun

it)


$2

$1

200

B A

Change in demand(a shift of the curve)

250

Specifically decrease in

demand


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D1

D0

Shift in Demand

Price(perun

it)


$2

$1

200

A B

Change in demand(a shift of the curve)

250

Specifically increase in demand


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Factors that Shift Demand

Consumer

Income

Tastes

And

Preferences

Taxes &

Subsidies

Expectations

Price of

Related Goods

Number

Of

Buyers

Demand


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Income

An increase in income will increasedemand for normal goods.

An increase in income will decreasedemand for inferior goods.

A1


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Slide 27

A1 Define Normal and Inferior goodsAMNA, 5/29/2008


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Price ofOther Goods

When the price of a substitute good falls,demand falls for the good whose price hasnot changed.

When the price of a complement goodfalls, demand rises for the good whoseprice has not changed.

A2


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Slide 28

A2 Define substitute and complementary goodsAMNA, 5/29/2008


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Tastes

A change in taste will change demand withno change in price.


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Expectations

If you expect your income to rise, you mayconsume more now.

If you expect prices to fall in the f uture,you may put offpurchases today.


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Taxes and Subsidies

Taxes levied on consumers increase thecost of goods to consumers, therebyreducing demand.

Subsidies have a n opposite effect.


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Change in Demand vs. Changein the Quantity Demanded


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Individual and Market Demand

Curves A market demand curve is the horizontalsum of all individual demand curves.

This is determined by adding the individualdemand curves of all the demanders.


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Individual and Market Demand

Curves Sellers estimate total market demand fortheirproduct which becomes smooth anddownward sloping curve.


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From Individual Demands

to a Market Demand Curve

(1)Price percassette

$.0.501.001.502.002.50

3.003.504.00

(2)Alicesdemand

(3)Brucesdemand

(2)Cathysdemand

(3)Marketdemand

98765

432

65432

100

11000

000

16141197

532

ABCDE

FGH Cathy Bruce Alice

D

A

C

EF

G

Quantity of cassettes demanded per week

2

$4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0

Pric

epercassette(indolla

rs)

4 6 8 10 12 14 16

B

Market demand

McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.


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Changes in Demandand Quantity Demanded

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

Change in Demand - shift in entiredemand curve in response to a change

in a determinant of demand (a ceterisparibus variable)


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Demand Concepts

The demand function for X:QD = f(PX, Ps, Pc, I, T&P, Pop)

Where:QD = quantity demandedPX = Xs pricePs = the price of substitutes

Pc = the price of complementsI=incomeT&P=tastes and preferences

Pop=population in market or market size


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Supply Model

UNIT 3


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Supply

Individuals control the factors of production inputs, or resources,necessary to produce goods.

Individuals supply factors ofproduction tointermediaries or firms.


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Supply

The analysis of the supply of producedgoods has two parts:

An analysis of the supply of the factors of production to households and firms.

An analysis of why firms transform thosefactors ofproduction into usable goods and

services.


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The Law ofSupply

There is a direct relationship betweenprice and quantity supplied.

Quantity supplied rises as price rises, otherthings constant.

Quantity supplied falls as price falls, otherthings constant.


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Law ofSupply

Law ofSupply As the price of a product rises,producers will be willing to supply more.

The height of the supply curve at anyquantity shows the minimum price

necessary to induce producers tosupplythat next unit to market.


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The Law ofSupply

The law of supply is accounted for by twofactors:

When prices rise, firms substituteproduction of one good for another.

Assuming firms costs are constant, ahigherprice means higherprofits.


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The Supply Curve

The supply curve is the graphicrepresentation of the law of supply.

The supply curve slopes upward to theright.

The slope tells us that the quantitysupplied varies directly in the same

direction with the price.


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S

A

Quantity supplied (perunit of time)

0

Price(per

unit)

PA

QA

A Sample Supply Curve


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Supply Curve DVDs


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Shifts in Supply Versus MovementsAlong a Supply Curve

Supply refers to a schedule of quantities aseller is willing to sell per unit of time atvarious prices, other things constant.


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Quantity supplied refers to a specific

amount that will be supplied at a specificprice.



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Changes in price causes changes in

quantity supplied represented by amovement along a supply curve.



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A movement along a supply curve the

graphic representation of the effect of achange in price on the quantity supplied.

Shifts in Supply Versus Movements

Along a Supply Curve


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If the amount supplied is affected by

anything other than a change in price,there will be a shift in supply.



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Shift in supply the graphic

representation of the effect of a change ina factor other than price on supply.



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Change in quantitysupplied (a movementalong the curve)

Change in Quantity Supplied

Price(per

unit)


S0

$15A

1,250 1,500

B


quantity supply

$20


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Change in quantitysupplied (a movementalong the curve)

Change in Quantity Supplied

Price(per

unit)


S0

$15B

1,250 1,500

A

Specifically decrease

in quantity supply

$20


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Shift in Supply

Price(per

unit)


S0

Shift in Supply

(a shift of the curve)

S1

$15A B

1,250 1,500


supply


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Shift in Supply

Price(per

unit)


S1

Shift in Supply

(a shift of the curve)

S0

$15B A

1,250 1,500

Specifically decrease

in supply


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Factors that Shift Supply

Prices of Related

Goods and Services

Number

Of

Producers

Expectations

Of

Producers

TechnologyAnd

Productivity

Resource

Prices

Supply


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Price of Inputs (Resource Prices)

When costs go up, profits go down, so thatthe incentive t o supply also goes down.


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Technology

Advances in technology reduce thenumber of inputs needed to produce agiven supply of goods.

Costs go down, profits go up, leading toincreased supply.


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Expectations

If suppliers expect prices to rise in thefuture, they may store today's supply toreap higherprofits later.


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Number ofSuppliers

As more people decide to supply a goodthe market supply increases (RightwardShift).

Ch i S l


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Change in Supply vs.a Change in the Quantity Supplied


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Individual and Market SupplyCurves

The market supply curve is derived byhorizontally adding the individual supplycurves of each supplier.

From Individual Supplies to a Market


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From Individual Supplies to a MarketSupply

QuantitiesSupplied

AB

C

D

E

FG

H

I

(1)

Price(per DVD)

(2)

Ann'sSupply

(5)

MarketSupply

(4)

Charlie'sSupply

$0.000.501.001.502.00

2.503.003.504.00

0

1

2

3

4

56

7

8

0

0

1

2

3

45

5

5

0

0

0

0

0

00

2

2

0

1

3

5

7

911

14

15

(3)

Barry'sSupply

F I di id l S li t M k t


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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

From Individual Supplies to a MarketSupply

PriceperDVD

Charlie Barry Ann

Quantity of DVDs supplied (per week)

$4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0

I

H

G

F

E

D

C

BA

Market Supply

CA


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Price of Related Goods orServices

The opportunity cost of producing andselling any good is the forgone opportunityto produce another good.

If the price of alternate good changes thenthe opportunity cost ofproducing changestoo!

Example Mc Donald selling burgers vs.nuggets.


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Price of Related Goods orServices

If the price of good x increases and thesuppliers increase its production, thesupply of good y will also increase as the

goods x and y are complementary goods.

Example Meat and Leather goods


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Taxes and Subsidies

When taxes go up, costs go up, and profitsgo down, leading suppliers to reduceoutput.

When government subsidies go up, costsgo down, and profits go up, leadingsuppliers to increase output.


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EquilibriumEffects of shift in Demand andsupply on Market Equilibrium

UNIT 4


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Equilibrium

Equilibrium is a concept in which opposingdynamic forces cancel each other out.

In a free market, the forces of supply anddemand interact to determine equilibriumquantity and equilibrium price.

Equilibrium isnt inherently good or bad, it

is simply a state in which dynamicpressures offset each other.


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Equilibrium

Equilibrium pr ice the price towardwhich the invisible hand drives the market.

Equilibrium quantity the amountbought and sold at the equilibrium price.


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What Equilibrium Isnt

When the market is not in equilibrium, youget either excess supply or excessdemand, and a tendency for price to

change.


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Excess Supply

Excess supply a surplus, the quantitysupplied is greater than quantitydemanded

Prices tend to fall.


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Excess Demand

Excess demand a shortage, thequantity demanded is greater than quantitysupplied

Prices tend to rise.


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Price Adjusts

The greater the difference betweenquantity supplied and quantity demanded,the more pressure there is for prices to

rise or fall.

When quantity demanded equals quantitysupplied, prices have no tendency to

change ~ Equilibrium


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The Graphical Interaction ofSupply and Demand

Price (perDVD) Quantity

Supplied QuantityDemanded

Surplus (+)Shortage (-)

$3.50 7 3 +4

$2.50 5 5 0

$1.50 3 7 -4

The Graphical Interaction of


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A

The Graphical Interaction ofSupply and Demand

PriceperDVD

$5.00

4.00

3.50

3.00

2.50

2.00

1.50

1.00

S

D

Quantity of DVDs supplied and demanded

C

Excess demand

1 2 3 4 5 6 7 8 9 10 11 12

Excess supply

E


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Equilibrium (Graph)


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Shifts in Supply and Demand

Shifts in either supply or demand changeequilibrium price and quantity.


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Increase in Demand

An increase in demand createsexcess demand at the original

equilibrium price. The excess demand pushes priceupward until a new higherprice and

quantity are reached.

Effect of Shift in Demand on


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A

S0

Quantity of DVDs (per week)

$2.502.25

0 98 10

Excess demand

D1

Effect ofShift in Demand onEquilibrium

D0

B

The Effects of a Shift


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The Effects of a Shiftof the Demand Curve


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Decrease in Supply

A decrease in supply creates excess

demand at the original equilibri

umprice.

The excess demand pushes priceupward until a new higherprice andlower quantity are reached.

Effect of Shift in Supply on


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A

Effect ofShift in Supply onEquilibrium

Quantity of DVDs (per week)

$2.502.25

0 98 10

D0

S1

S0C

B Excess demand

Q.1. Change in Quantity Supplied versus


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Q.1. Change in Quantity Supplied versus

Change in Supply (movement along the

curve or shift of the curve)? Variables that Affect A change in this variable

quantity supplied

Technology

Price of inputs

Expectations

Price

Number of suppliers

Price of related goods Govt. policies

Documents

Demand Model & Supply Model