Demand, Supply, & Market Equilibrium

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Demand, Supply, & Market Equilibrium. Chapter 3. Demand. A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time - PowerPoint PPT Presentation

Text of Demand, Supply, & Market Equilibrium

  • Demand, Supply, & Market EquilibriumChapter 3

  • DemandA schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of timeA statement of a buyers plans, or intentions, with respect to the purchase of a product

  • Law of DemandOther-Things-Equal AssumptionAs the Price (P) falls, the Quantity Demanded (QD) rises. (P QD )As the Price (P) rises, the Quantity Demanded (QD) falls. (P QD )Thus, there is an inverse (or negative) relationship between Price and Quantity Demanded.

  • Law of Demand Common SensePeople do buy more at low pricesSales!!!Diminishing Marginal UtilityEach additional unit of the product produces less satisfaction (or benefit, or utility)Income EffectLower prices increase the purchasing power of a buyers incomeSubstitution EffectLower prices give buyers the incentive to substitute similar products

  • Individual DemandPQd$543211020355580IndividualDemandPQD

  • Determinants of DemandTastesFavorable change in consumer tastes (preferences) = More Demanded at each price Number of BuyersIncrease in number of buyers = Increase in DemandIncomeNormal (Superior) Goods Demand Varies Directly with Income Inferior Goods Demand Varies Inversely with IncomePrices of Related GoodsSubstitutes: Used in place of another good Example: Leather vs. Cloth CoatsComplements: Used together with another good Example: Computers & Software Unrelated Goods: Not related at allExample: Potatoes & AutomobilesConsumer Expectations

  • Determinants of DemandTherefore, an Increase in Demand may be caused by:A favorable change in consumer tastes/preferencesAn increase in the number of buyersRising incomes if the product is a normal goodFalling incomes if the product is an inferior goodAn increase in the price of a substitute goodA decrease in the price of a complimentary goodA new consumer expectation that either prices or income will be higher in the future

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    0Quantity Demanded (bushels per week)Price (per bushel)PQd$543211020355580IndividualDemandPQD12 4 6 8 10 12 14 16 18 Demand Can Increase or DecreaseIncrease in DemandDecrease in DemandD2D3

  • Changes in Quantity DemandedNot to be confused with Change in DemandA shift of the demand curve to the right (increase in demand) or to the left (decrease in demand)Cause: A change in one or more determinants of demandChange in Quantity DemandedA movement from one point to another point from one price/quantity combination to another on a fixed demand schedule/curveCause: An increase or decrease in the price of the product under consideration

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    0Quantity Demanded (bushels per week)Price (per bushel)PQd$543211020355580IndividualDemandPQD12 4 6 8 10 12 14 16 18Demand Can Increase or DecreaseDecrease in DemandD2D3An Increase in DemandMeans a Movementof the LineA Movement BetweenAny Two Points on aDemand Curve is Called a Change in QuantityDemanded

  • SupplyA schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period

  • Law of SupplyAs the Price (P) falls, the Quantity Supplied (Qs) falls. (P Qs )As the Price (P) rises, the Quantity Supplied (Qs) rises. (P Qs )Thus, there is a direct (or positive) relationship between Price and Quantity Supplied. Remember, the supplier is on the receiving end of the products price. Therefore, higher prices dont pose the same obstacle on the supply side as they do on the demand side.

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    0Quantity Supplied (bushels per week)Price (per bushel)PQs$54321605035205IndividualSupplyPQS110 20 30 40 50 60 70

  • Determinants of SupplyResource PricesHigher Resource Prices raise production costs & squeeze profitsLower Resource Prices reduce production costs & increase profits TechnologyImprovements in technology enable firms to produce units of output with fewer resourcesTaxes & SubsidiesBusinesses treat most taxes as costs. Increase in sales or property taxes will increase production costs & reduce supplySubsidies are considered taxes in reverseThus, lower production costs/increase in supply

  • Determinants of SupplyPrices of other GoodsSubstitution in ProductionExample: Producing basketballs instead of soccer balls results in a decline in the supply of soccer balls Producer ExpectationsFuture Prices of ProductsNumber of Sellers in the MarketOther things equal, the larger the number of suppliers, the greater the market supply As more firms enter the industry, the supply curve shifts to the rightThe smaller the number of suppliers, the less the market supplyAs more firms leave the industry, the supply curve shifts to the left

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    0Quantity Supplied (bushels per week)Price (per bushel)PQs$54321605035205IndividualSupplyPQS1 Supply Can Increase or DecreaseS2S32 4 6 8 10 12 14

  • Changes in Quantity SuppliedNot to be confused with Change in SupplyA change in the schedule & shift of the curveAn increase in supply shifts curve to the rightA decrease in supply shifts curve to the leftCause: A change in one or more of the determinants of supplyChange in Quantity Supplied A movement from one point to another on a fixed supply curveCause: A change in the price of the specific product being considered

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    0Quantity Supplied (bushels per week)Price (per bushel)PQs$54321605035205IndividualSupplyPQS1 Supply Can Increase or DecreaseS2S3An Increase in SupplyMeans a Movementof the LineA Movement BetweenAny Two Points on aSupply Curve is Called a Change in QuantitySupplied2 4 6 8 10 12 14

  • Market EquilibriumEquilibrium Price (PE) Market Clearing PriceThe price where the intentions of buyers & sellers matchQD = QSEquilibrium QuantityThe quantity demanded & supplied at the equilibrium price in a competitive marketCompetition among buyers & sellers drives the price to equilibriumSurplus: Excess SupplyShortage: Excess Demand

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    02 4 6 8 10 12 14 16 18Bushels of Corn (thousands per week)Price (per bushel)PQd$543212,0004,0007,00011,00016,000MarketDemand200 BuyersPQs$5432112,00010,0007,0004,0001,000MarketSupply200 Sellers 200 Buyers & 200 Sellers73DS$4 Price Floor6,000 BushelSurplus$2 Price Ceiling7,000 BushelShortage

  • Government-Set PricesPrice CeilingsThe maximum legal price a seller may charge for a product or servicePrices at or below the ceiling are legalPrices above are notExamples: Rent ControlsSometimes leads to black markets & political pressure to lower pricesPrice FloorsA minimum price fixed by the government A price at or above the floor are legalPrices below are notDistort resource allocation

  • Efficient AllocationProductive EfficiencyThe production of any particular good in the least costly way Example: Have $100 worth of resourcesCan produce a bushel of corn using either $5 or $3 of those resources, leaving either $95 or $97 remaining for alternative usesWhich is better?Allocative EfficiencyThe particular mix of goods & services most highly valued by society (minimum cost production assumed)Society wants iPods instead of cassette tapes However, society also wants cell phonesCompetitive markets help assign allocative efficiency

  • Equilibrium Price & QuantityIn competitive markets, produces an assignment of resources that is right from an economic perspectiveDemand reflects MB based on utility receivedSupply reflects MC of producing goodRemember:MB>MC Expand OutputMB
  • Changes in Supply, Demand, & EquilibriumChanges in DemandSupply Constant, Demand IncreasesRaises PE and QE See pg 57, Figure 3.7 aSupply Constant, Demand DecreasesReduces PE and QE See pg 57, Figure 3.7bChanges in SupplyDemand Constant, Supply IncreasesReduces PE, Increases QE See pg 57, Figure 3.7cDemand Constant, Supply DecreasesIncreases PE, Reduces QE See pg 57, Figure 3,7d

  • Changes in Supply, Demand, & EquilibriumComplex Cases: (See pg. 57, Table 3.7)Supply Demand PE QE ?Supply Demand PE QE ? Supply Demand PE ? QE Supply Demand PE ? QE