Transcript
microfoundations
Demand, Supply and Market Equilibrium
OUTPUT
MARKETS
FACTOR
MARKETS
HouseholdsFirms
(Goods and services)
(Land, Labor and Capital)
On Demand...
• The price of the product.
• The household’s income and wealth.
• The price of available alternatives.
• Tastes and preferences
• Expectations about future prices, income and wealth.
What factors affect demand and quantity demanded?
Some Distinctions
• Quantity Demanded (or Supplied)
• Refers to the amount of a specific good that you are
willing to buy (or supply) at a given price.
• Demand (or Supply)
• Pertains to the general relationship between price and
quantities demanded (or supplied), for all prices.
Before getting into demand and supply analysis.
A Demand ScheduleQuantity demanded for varying prices.
DEMAND SCHEDULE FOR PHONE CALLS
Price Per Call Qty. of Calls Demanded
$0 30
0.50 25
3.50 7
7.00 3
10.00 1
15.00 0
$0
$2.5
$5.0
$7.5
$10.0
$12.5
$15.0
0 1 3 7 25 30
Demand Curve for Phone Calls
p
q
Demand Curves in GeneralSome notes on demand curves.
PRICE (p)
QUANTITY (q)
d
Demand: Beyond Price
• Given a demand curve, when prices change we merely
move along the demand curve to ascertain quantity
demanded.
• That is, the demand curve stays in place.
• If anything else other than price changes, then what occurs
is a shift of the demand curve.
• In such a situation, the entire demand curve will change
position.
What happens if we consider the other factors that affect demand?
Shifting Demand Curves
• Household Income and Wealth
• Income: a measure of a household’s earnings in a given
period (a flow variable).
• Wealth: the total of what a household owns less what it
owes (a stock variable).
• If the good is normal, the household will buy more of it as
income/wealth rises, and less if it falls.
• If the good is inferior, the household will buy less of it as
income/wealth rises, but more if it falls.
The demand curve shifts depending upon what factor affecting demand changes.
PRICE (p)
QUANTITY (q)
d
Given: Demand Curve
PRICE (p)
QUANTITY (q)
d
If the good is normal, an increase in income shifts the curve outward.
d’
PRICE (p)
QUANTITY (q)
d
If the good is normal, an increase in income shifts the curve outward.
d’
If the good is inferior, an increase in income shifts the curve inward.
Shifting Demand Curves
• The prices of alternative (related) products
• Substitutes: Goods that can replace the good in
question.
• Complements: Goods that we typically buy together with
the good under consideration.
• As the price of substitutes increase, we will buy more of our
product.
• As the price of complementary goods increase, we will buy
less of our product.
PRICE (p)
QUANTITY (q)
d
Given: Demand Curve
PRICE (p)
QUANTITY (q)
d
If the price of substitutes go up, it makes more sense to stick with the current good, hence the demand curve shifts outwards.
d’
PRICE (p)
QUANTITY (q)
d
If the price of substitutes go up, it makes more sense to stick with the current good, hence the demand curve shifts outwards.
d’
If the price of complementary goods go up, we have less to spend on the current good matching it, hence the demand curve shifts inwards.
Shifting Demand Curves
• Tastes and preferences
• These will affect the demand curve depending on
whether they favor the good or not.
• Examples: fashion trends, peak season travel, dietary
fads.
• Expectations of future prices, income and wealth
Shorthand SummaryShifts in the demand curve at-a-glance.
If the following changes:The shift in the demand
curve will be...
Price of substitutes Same direction
Price of complements Opposite direction
Income and wealth, and the good is normal
Same direction
Income and wealth, and the good is inferior
Opposite direction
Tastes, preferences and future expectations
Depends
Individual vs. Market DemandGetting to the bigger picture.
$1.00
$1.50
$2.00
a
4
2
1
b
3
2
1
c
6
5
2
TOTAL
13
10
4
P
Q
D
Market Demand Curve
In Supply...
• The possible selling price (revenue and profit potential).
• The marginal cost of production.
• Price of required inputs.
• Technology.
• Price of related products.
What factors affect supply and quantity supplies?
A Supply ScheduleQuantity supplied at varying prices.
SUPPLY SCHEDULE FOR SOYBEANS
Price Per Bushel Qty. Supplied Per Year
$1.50 0
1.75 10,000
2.25 20,000
3.00 30,000
4.00 45,000
5.00 45,000
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
0 10,000 20,000 30,000 45,000
Supply Curve for Soybeans
p
q
Supply Curves in GeneralSome notes on demand curves.
PRICE (p)
QUANTITY (q)
s
Supply: Beyond Price
• Given a supply curve, when prices change we merely move
along the supply curve to ascertain quantity supplied.
• That is, the supply curve stays in place.
• If anything else other than price changes, then what occurs
is a shift of the supply curve.
• In such a situation, the entire supply curve will change
position.
What happens if we consider the other factors that affect supply?
Shifting Supply Curves
• Cost of production
• If input costs suddenly rise, less of a product can be
produced.
• If production technologies improve, more of a product
can be supplied.
• Price of related goods
The supply curve shifts depending upon what factor affecting supply changes.
PRICE (p)
QUANTITY (q)
s
Given: Supply Curve
PRICE (p)
QUANTITY (q)
s
When the cost of production rises, the supply curve shifts inward.
s’
PRICE (p)
QUANTITY (q)
s
When the cost of production rises, the supply curve shifts inward.
If production technologies improve, the supply curve shifts outward.
s’
Shorthand SummaryShifts in the supply curve at-a-glance.
If the following changes:The shift in the supply
curve will be...
Cost of inputs Opposite direction
Technology Same direction
Price of related goods Depends
Individual vs. Market SupplyGetting to the bigger picture.
$1.00
$1.50
$2.00
x
20
31
50
y
33
46
61
z
18
27
39
TOTAL
71
104
150
P
Q
S
Market Supply Curve
P
Q
Market Equilibrium:Where Quantity Demanded equals Quantity Supplied.
Qs
Qd
P
Q
Market Equilibrium:Where Quantity Demanded equals Quantity Supplied.
E
Qs
Qd
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