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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