Supply, Demand and Market Equilibrium.pdf

8/9/2019 Supply, Demand and Market Equilibrium.pdf

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Supply Demand and

Market Equilibrium


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Introduction to Demand

The forces of supply and demand work together to set prices. Demand is the desire, willingness, and ability to buy a good or

service.

Supply can refer to one individual consumer or to the total demand

of all consumers in the market (market demand). Based on that definition, which of the following do you have a

demand for?


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A demand schedule is a table that lists the variousquantities of a product or service that someone is willing to

buy over a range of possible prices.

Price per Widget ($) Quantity Demanded of

Widget per day

$5 2$4 4

$3 6

$2 8

$1 10


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A demand schedule can be shown as points on a graph.

The graph lists prices on the vertical axis and

quantitiesdemanded on the horizontal axis.

Each point on the graph shows how many units of theproduct or service an individual will buy at a particularprice.

The demand curve is the line that connects these points.


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$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget

Quantity Demanded of Widgets

Demand Curve for Widgets


What do you notice about the demandcurve?

How would you describe the slope of thedemand curve?

Do you think that price and quantitydemanded tend to have this relationship?


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Introduction to Demand The demand curve slopes downward.

This shows that people are normally willing to buy less of aproduct at a high price and more at a low price.

According to the law of demand, quantity demanded andprice move in opposite directions.

$0

$1

$2

$3

$4$5

$6

0 2 4 6 8 10 12

PriceperWidget





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Introduction to Demand We buy products for their utility- the pleasure, usefulness, or

satisfaction they give us. What is your utility for the following products? (Measure your

utility by the maximum amount you would be willing to payfor this product)

Do we have the same utility for these goods?


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One reason the demand curve slopes downward is due todiminish marginal utility

The principle of diminishing marginal utility saysthat our additional satisfaction tends to go down as we

consume more and more units.

To make a buying decision, we consider whether thesatisfaction we expect to gain is worth the money we mustgive up.


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Changes in Demand Change in the quantity demanded due to a price change occurs

ALONG the demand curve

$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget




At $3 per Widget, theQuantity demanded ofwidgets is 6.

An increase in the Price of

Widgets from $3 to $4 willlead to a decrease in theQuantity Demanded ofWidgets from 6 to 4.


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Changes in Demand

Demand Curves can also shift in response to the followingfactors:

Buyers (# of): changes in the number of consumers

Income: changes in consumers income Tastes: changes in preference or popularity of product/ service

Expectations: changes in what consumers expect to happen in thefuture

Related goods: compliments and substitutes BITER: factors that shift the demand curve


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Changes in Demand

Prices of related goods affect on demand Substitute goods a substitute is a product that can be used in the

place of another.

The price of the substitute good and demand for the other good are directly

related For example, Coke Price Pepsi Demand

Complementary goods a compliment is a good that goes wellwith another good.

When goods are complements, there is an inverse relationship between theprice of one and the demand for the other

For example, Peanut Butter Jam Demand


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Changes in Demand

$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget




$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12 14

PriceperWidget

Quantity Demanded of Widets

Increase in Demand

Orginal Demand Curve

New Demand Curve

Several factors willchange the demand forthe good (shift the entiredemand curve)

As an example, supposeconsumer incomeincreases. The demand forWidgets at all prices will

increase.


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Changes in Demand

$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget




$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget


Decrease in Demand

Original Demand Curve

New Demand Curve

As an example, supposeWidgets become lesspopular to own.

Demand will alsodecrease due to changesin factors other than price.


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Changes in Demand

Changes in any of the factors other than price causes thedemand curve to shift either:

Decrease in Demand shifts to the Left (Less demanded ateach price)

OR

Increase in Demand shifts to the Right (More demanded at

each price)


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Demand Practice


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1. The income of the Pago-Pagans declines

after a typhoon hits the island.

Quantity

Price

DD1

2 P P i d f h b if l


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2. Pago-Pagan is named on of the most beautiful

islands in the world and tourism to the island

doubles.

Quantity

Price

D

D1


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3. The price of Frisbees decreases. (Frisbees are a

substitute good for boomerangs)

Quantity

Price

DD1


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4. The price of boomerang t-shirts decreases, which I

assume all of you know are a complementary good.

Quantity

Price

D

D1

5 Th B M f t d id t dd


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5. The Boomerang Manufactures decide to add a money

back guarantee on their product, which increases the

popularity for them.

Quantity

Price

D

D1

6 M P b i t b li th t th


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6. Many Pago-pagans begin to believe that they

may lose their jobs in the near future. (Think

expectations!)

Quantity

Price

DD1


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7. Come up with your own story about boomerangs and the

Pago-Pagans. Write down the story, draw the change in

demand based on the story, and explain why demand

changed.

Quantity

Price

D


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Introduction to Supply

Supply refers to the various quantities of a good orservice that producers are willing to sell at all possiblemarket prices.

Supply can refer to the output of one producer or tothe total output of all producers in the market(market supply).


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A supply schedule is a table that shows the quantitiesproducers are willing to supply at various prices

Price per Widget ($) Quantity Supplied of Widget

per day

$5 10

$4 8$3 6

$2 4

$1 2


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A supply schedule can be shown as points on a graph.

The graph lists prices on the vertical axis and quantitiessupplied on the horizontal axis.

Each point on the graph shows how many units of theproduct or service a producer (or group of producers)would willing sell at a particular price.

The supply curve is the line that connects these points.

Supply Curve for Widgets


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What do you notice about the supply curve?

How would you describe the slope of the supplycurve?

Do you think that price and quantity suppliedtend to have this relationship?

$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget

Quantity Supplied of Widgets


Supply Curve


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Introduction to Supply As the price for a good rises, the quantity supplied rises and

the quantity demanded falls. As the price falls, the quantitysupplied falls and the quantity demanded rises.

The law of supply holds that producers will normally offermore for sale at higher prices and less at lower prices.

$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWi

dget



Supply Curve


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The reason the supply curve slopes upward is due to costs andprofit.

Producers purchase resources and use them to produce output.

Producers will incur costs as they bid resources away from theiralternative uses.


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Businesses provide goods and services hoping to make aprofit.

Profit is the money a business has left over after itcovers its costs.

Businesses try to sell at prices high enough to covertheir costs with some profit left over.

The higher the price for a good, the more profit abusiness will make after paying the cost for resources.


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Changes in Supply

$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget



Supply Curve

At $3 per Widget, theQuantity supplied ofwidgets is 6.

If the price of Widgets fellto $2, then the QuantitySupplied would fall to 4Widgets.

Change in the quantity supplied due to a price change

occurs ALONG the supply curve


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Changes in Supply

Supply Curves can also shift in response to the following factors: Subsidies and taxes: government subsides encourage production,

while taxes discourage production

Technology: improvements in production increase ability of firmsto supply

Other goods: businesses consider the price of goods they could beproducing

Number of sellers: how many firms are in the market

Expectations: businesses consider future prices and economicconditions

Resource costs: cost to purchase factors of production willinfluence business decisions

STONER: factors that shift the supply curve


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Changes in Supply

$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget



Supply Curve

$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12 14

PriceperWidget

Quantities Supplied of Widgets

Increase in Supply

Original Supply Curve

New Supply Curve

Several factors willchange the demand forthe good (shift the entiredemand curve)

As an example, supposethat there is animprovement in thetechnology used toproduce widgets.


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Changes in Supply

$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget



Supply Curve

$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget


Decrease in Supply

Original Supply Curve

New Supply Curve

Supply can also decrease

due to factors other thana change in price.

As an example, supposethat a large number ofWidget producers go outof business, decreasingthe number of suppliers.


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Changes in Supply

Changes in any of the factors other than price causes thesupply curve to shift either:

Decrease in Supply shifts to the Left (Less supplied at eachprice)

OR

Increase in Supply shifts to the Right (More supplied at each

price)


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Supply Practice


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Cost to Produce Amount of Supply Supply Curve Shifts

Cost of Resources Falls

Cost of Resources

Rises

Productivity Decreases

Productivity Increases

New Technology

Higher Taxes

Lower Taxes

Government Pays

Subsidy


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1. The government of Pago-Paga adds a

subsidy to boomerang production.

Quantity

Price

SS1


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2. Boomerang producers also produce Frisbees.

The price of Frisbees goes up.

Quantity

Price

S

S1


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3. The government of Pago-Paga adds a new

tax to boomerang production.

Quantity

Price

S

S1


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4. Boomerang producers expect an increase in

the popularity of boomerangs worldwide.

Quantity

Price

SS1


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5. The price of plastic, a major input in boomerang

production, increases.

Quantity

Price

S

S1

6. Pago-Pagan workers are introduced to coffee as Pago-


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6. Pago Pagan workers are introduced to coffee as Pago

Paga become integrated into the world market and their

productivity increases drastically.

Quantity

Price

SS1



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Pago-Pagans. Write down the story, draw the change in

supply based on the story, and explain why supply

changed.

Quantity

Price

S


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Supply and Demand at Work

Markets bring buyers and sellers together.

The forces of supply and demand work together inmarkets to establish prices.

In our economy, prices form the basis of economicdecisions.


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Supply and Demand Schedule can be combined into onechart.

Price per Widget ($) Quantity Demanded

of Widget per day

Quantity Supplied

of Widget per day

$5 2 10

$4 4 8

$3 6 6

$2 8 4

$1 10 2


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$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget

Quantity of Widgets

Supply and Demand for Widgets

Demand Curve

Supply Curve


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A surplus is the amount by which the quantitysupplied is higher than the quantity demanded.

A surplus signals that the price is too high.

At that price, consumers will not buy all of the productthat suppliers are willing to supply.

In a competitive market, a surplus will not last. Sellerswill lower their price to sell their goods.


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$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget

Quantit of Wid ets


Demand Curve

Supply Curve

Suppose that the price inthe Widget market is $4.

At $4, Quantitydemanded will be 4Widgets

At $4, Quantity suppliedwill be 8 Widgets.

At $4, there will be asurplus of 4 Widgets.

Surplus


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A shortage is the amount by which the quantitydemanded is higher than the quantity supplied

A shortage signals that the price is too low.

At that price, suppliers will not supply all of the productthat consumers are willing to buy.

In a competitive market, a shortage will not last. Sellers

will raise their price.


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$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget


Demand Curve

Supply Curve


At $2, Quantity suppliedwill be 4 Widgets

At $2, Quantitydemanded will be 8Widgets.

At $2, there will be ashortage of 4 Widgets.

Shortage


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When operating without restriction, our marketeconomy eliminates shortages and surpluses.

Over time, a surplus forces the price down and a shortage forcesthe price up until supply and demand are balanced.

The point where they achieve balance is the equilibrium price.At this price, neither a surplus nor a shortage exists.

Once the market price reaches equilibrium, it tends to staythere until either supply or demand changes.

When that happens, a temporary surplus or shortage occurs until

the price adjusts to reach a new equilibrium price.


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$0

$1

$2

$3

$4

$5

$6

0 2 4 6 8 10 12

PriceperWidget

Quantity of Widgets


Demand Curve

Supply Curve


At $3, Quantity suppliedwill be 6 Widgets

At $3, Quantitydemanded will be 6Widgets.

At $3, there will beneither a surplus or a

shortage.


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Supply and Demand for Boomerangs


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$0

$2

$4

$6

$8

$10

$12

0 2 4 6 8 10 12

PriceperB

oomerang

Quantity of Boomerangs

Demand

Supply

Surplus



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$0

$2

$4

$6

$8

$10

$12

0 2 4 6 8 10 12

PriceperB

oomerang


Demand

Supply

Shortage



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6

$0

$2

$4

$6

$8

$10

$12

0 2 4 6 8 10 12

PriceperB

oomerang


Demand

Supply

Market Equilibrium

12



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$0

$2

$4

$6

$8

$10

$12

0 2 4 6 8 10 12 14 16

PriceperBoomerang


Original Demand

Supply

New Demand

1. The income of the Chapel Hill townies


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p

declines after an early loss during March

Madness.

Quantity

Price

D

S

D1

P1

Q1

P2

Q2

2. Chapel Hill is named one of the most


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p

beautiful towns in North Carolina and

tourism doubles

Quantity

Price

D

S

D1

P2

P1

Q1 Q2

3 Th i f bl ti d (Bl


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3. The price of blue ties decreases. (Blue

ties are a substitute good for purple ties)

Quantity

Price

D

S

D1

P1

Q1

P2

Q2

4. The Federal government has been warning the


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public about the possibility of a recession and job

loss in the RDU area. (Think expectations!)

Quantity

Price

D

S

D1

P1

Q1

P2

Q2


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5. The price of purple striped shirts decreases (Purple

striped shirts are a complement to purple ties)

Quantity

Price

D

S

D1

P1

Q1

P2

Q2

6 The price of silk increases (ties are made


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6. The price of silk increases (ties are made

with silk).

Quantity

Price

D

S

P2

S1

P1

Q2 Q1

7 Th g t dd b id t ti


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7. The government adds a subsidy to tie

production.

Quantity

Price

D

S

S1

P1

Q1

P2

Q2

8. After the release ofAlan Greenspans first jazzfl t lb l ti d ti


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flute album, purple tie producers are expecting a

huge increase in demand and thus an increase in

the price.

Quantity

Price

D

SS1

P1

Q1

P2

Q2

9 Congress enacts new tax on the production of


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9. Congress enacts new tax on the production of

purple ties.

Quantity

Price

D

S

S1

P1

Q1

P2

Q2

10. As the popularity of purple ties sweeps the

O C d


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greater Orange County area, new producers

enter the purple tie market.

Quantity

Price

D

S

S1

P1

Q1

P2

Q2

11. Purple ties are named by GQ magazine as a must


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have for all young professionals. At the same time, a

new textile machine decreases the cost of producing

purple ties.

Quantity

Price

D

S S1

D1

P1

Q1 Q2

12. The price of pink ties (a related good that most purple tie producers also

produce) rises as spring approaches Tie consumers in Chapel Hill begin to


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produce) rises as spring approaches. Tie consumers in Chapel Hill begin to

expect purple ties to be put on sale since spring is coming, so they put off

purchasing.

Quantity

Price

D

S

S1

D1

P1

Q1Q2


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Disequilibrium

Describes a market that is not in equilibrium:

the quantity supplied is not equal to the quantity

demanded at the actual price.


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Elasticity

A measure of the relationship between a change in the quantitydemanded of a particular good and a change in its price. Priceelasticity of demand is a term in economics often used whendiscussing price sensitivity.


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If a small change in price is accompanied by a large change in

quantity demanded, the product is said to be elastic (orresponsive to price changes). Conversely, a product is inelasticif a large change in price is accompanied by a small amount ofchange in quantity demanded.


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Factors ffecting Demand

Price of the Product

There is an inverse (negative) relationship between the price ofa product and the amount of that product consumers arewilling and able to buy. Consumers want to buy more of aproduct at a low price and less of a product at a high price. Thisinverse relationship between price and the amount consumersare willing and able to buy is often referred to as The Law ofDemand

.


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The Consumer's Income

The effect that income has on the amount of a product that

consumers are willing and able to buy depends on the type ofgood we're talking about. For most goods, there is a positive(direct) relationship between a consumer's income and theamount of the good that one is willing and able to buy. In other

words, for these goods when income rises the demand for theproduct will increase; when income falls, the demand for theproduct will decrease. We call these types of goods normalgoods.

The Price of Related Goods


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The Price of Related Goods

As with income, the effect that this has on the amount that oneis willing and able to buy depends on the type of good we'retalking about. Think about two goods that are typicallyconsumed together. For example, bagels and cream cheese. Wecall these types of goods compliments. If the price of a bagelgoes up, the Law of Demand tells us that we will be

willing/able to buy fewer bagels. But if we want fewer bagels,we will also want to use less cream cheese (since we typicallyuse them together). Therefore, an increase in the price of bagelsmeans we want to purchase less cream cheese. We can

summarize this by saying that when two goods arecomplements, there is an inverse relationship between the priceof one good and the demand for the other good.


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The Tastes and Preferences of Consumers

This is a less tangible item that still can have a big impact on

demand. There are all kinds of things that can change one's tastesor preferences that cause people to want to buy more or less of aproduct. For example, if a celebrity endorses a new product, thismay increase the demand for a product. On the other hand, if a

new health study comes out saying something is bad for yourhealth, this may decrease the demand for the product. Anotherexample is that a person may have a higher demand for anumbrella on a rainy day than on a sunny day.


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The Consumer's Expectations

It doesn't just matter what is currently going on - one'sexpectations for the future can also affect how much of aproduct one is willing and able to buy. For example, if you hear

that Apple will soon introduce a new iPod that has morememory and longer battery life, you (and other consumers)may decide to wait to buy an iPod until the new product comesout. When people decide to wait, they are decreasing the

current demand for iPods because of what they expect tohappen in the future.


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The Number of Consumers in the Market

As more or fewer consumers enter the market this has a directeffect on the amount of a product that consumers (in general)are willing and able to buy. For example, a pizza shop located

near a University will have more demand and thus higher salesduring the fall and spring semesters. In the summers, when lessstudents are taking classes, the demand for their product willdecrease because the number of consumers in the area has

significantly decreased.


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Production Cost

A cost incurred by a business when manufacturing a good orproducing a service. Production costs combine raw materialand labor. To figure out the cost of production per unit, the costof production is divided by the number of units produced. A

company that knows how much it will cost to produce an item,or produce a service, will have a clearer picture of how to

better price the item or service and what will be the total costto the company.


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Businesses that know their production costs know the total

expense to the production line, or how much the entire processwill cost to produce the item. If costs are too high, these can bedecreased or possibly eliminated. Production costs can be usedto compare the expenses of different activities within the

company. In production, there are direct costs and indirectcosts. For example, direct costs for manufacturing anautomobile are materials such as the plastic, metal or laborincurred to produce such an item. Indirect costs include

overhead such as rent, salaries or utility expense.

Market supply


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Supply is the quantity of a good or service that a producer iswilling and able to supply onto the market at a given price in agiven time period. Normally as the market price of acommodity rises, producers will expand their supply onto the

market.

There are three main reasons why supply curves for most


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There are three main reasons why supply curves for mostproducts slope upwards from left to right giving a positiverelationship between the market price and quantity supplied

When the market price rises (for example following anincrease in consumer demand), it becomes more profitable for

businesses to increase their output. Higher prices send signalsto firms that they can increase their profits by satisfying demand

in the market. When output rises, a firm's costs may rise,therefore a higher price is needed to justify the extra outputand cover these extra costs of production. Higher prices makesit more profitable for other firms to start producing that

product so we may see new firms entering the market leadingto an increase in supply available for consumers to buy Forthese reasons we find that more is supplied at a higher priceh l

Documents

Supply, Demand and Market Equilibrium.pdf