Microeconomics Chapter 4 The Market Forces of Supply and Demand
101 lecture 4 supply and demand
Jun 10, 2015
Supply and Demand
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Microeconomics Chapter 4
!
The Market Forces of Supply and Demand
market competitive market quantity demanded law of demand demand schedule demand curve normal good inferior good substitutes complements
Key Termsquantity supplied law of supply supply schedule supply curve equilibrium equilibrium price equilibrium quantity surplus shortage law of supply and demand
Number
1
2
3
4
5
Number
1
2
3
4
5
Total Utility
10
15
19
23
25
Number
1
2
3
4
5
Total Utility
10
15
19
23
25
Marginal Utility Change in Total
Utility
10
5
4
4
2
Number
1
2
3
4
5
Total Utility
10
15
19
23
25
Marginal Utility Change in Total
Utility
10
5
4
4
2
Average Utility Total Utility ÷
Number
10.00
7.50
6.33
5.75
5.00
Market
Marketwhere
buyers and sellers interact
Supply and Demand
Supply and Demand
sellers supply buyers demand
Competitive Market
Competitive Market
many buyers and sellers no one has power to
change price
Ceteris Paribus
Ceteris Paribus
“all else equal”
Quantity Demanded QD
Quantity Demanded QD
amount people are willing and able
to buy
Law of Demand
Law of Demandwhen price goes up
quantity demand goes down
Law of Demandwhen price goes up
quantity demand goes down
when price goes down quantity demand goes up
Law of Demand
Law of Demandinverse relationship
!
price up - QD down price down - QD up
Demand Schedule
Demand Schedule
Price
90
80
70
60
50
40
30
20
10
Demand Schedule
Price
90
80
70
60
50
40
30
20
10
Quantity
1
2
3
4
5
6
7
8
9
Demand Schedule
Price
90
80
70
60
50
40
30
20
10
Quantity
1
2
3
4
5
6
7
8
9
Demand Schedule
Demand Curve
Price
90
80
70
60
50
40
30
20
10
Quantity
1
2
3
4
5
6
7
8
9
Price
Demand Schedule
Demand Curve
Price
90
80
70
60
50
40
30
20
10
Quantity
1
2
3
4
5
6
7
8
9
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
70
60
50
40
30
20
10
Quantity
1
2
3
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8
90
10
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
70
60
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20
10
Quantity
1
2
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6
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8
90
10
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
70
60
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30
20
10
Quantity
1
2
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8
90
10
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
70
60
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30
20
10
Quantity
1
2
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5
6
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90
10
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
70
60
50
40
30
20
10
Quantity
1
2
3
4
5
6
7
8
90
10
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
70
60
50
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30
20
10
Quantity
1
2
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90
10
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90
100
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Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
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30
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Quantity
1
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90
10
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
70
60
50
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30
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10
Quantity
1
2
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90
10
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
70
60
50
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30
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10
Quantity
1
2
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90
10
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30
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
70
60
50
40
30
20
10
Quantity
1
2
3
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5
6
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8
90
10
20
30
40
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
70
60
50
40
30
20
10
Quantity
1
2
3
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5
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90
10
20
30
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50
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90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
Price
90
80
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60
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10
Quantity
1
2
3
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5
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90
10
20
30
40
50
60
70
80
90
100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Demand Schedule
Demand Curve
If I have a schedule I can make a curve
!If I have a curve I
can make a schedule
Individual Demand Market Demand
Individual Demand Market Demand
add up all of the individual demand curves
0
10
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Price
Quantity
Movement along the Demand Curve
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Quantity
Movement along the Demand Curve
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Movement along the Demand Curve
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Quantity
Movement along the Demand Curve
Price changes !
demand curve does not change
!quantity demanded
changes
0
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Quantity
Shift in the Demand Curve
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Quantity
Shift in the Demand CurvePrice does not
change !
demand curve shifts !
quantity demanded changes
Shift in Demand
Shift in DemandIncome
Prices of Related Goods Tastes
Population & Demographics Expected Future Prices
Why does the demand curve slope
downwards?
Why does the demand curve slope
downwards?
Substitution Effect Income Effect
Substitution Effect
Substitution Effect
the good is more or less expensive relative to other goods that are
substitutes.
Income Effect
Income Effect
the effect of a price change on consumer’s
purchasing power.
Complements
Complementsgoods or services
that are used together
Complements
Complements
Complements
Substitutes
Substitutes
goods or services that can be used for the same purpose
Normal Good
Normal Good
Demand increases as income rises and
decreases as income falls
Inferior Good
Inferior Good
Demand decreases as income rises and
increases as income falls
Quantity Supplied QS
Quantity Supplied QS
amount people are willing and able
to sell
Law of Supply
Law of Supplywhen price goes up
quantity supplied goes up
Law of Supplywhen price goes up
quantity supplied goes up
when price goes down quantity supplied goes down
Law of Supply
Law of Supplydirect relationship
!
price up - QS up price down - QS down
Supply Schedule
Supply Schedule
Price
90
80
70
60
50
40
30
20
10
Supply Schedule
Price
90
80
70
60
50
40
30
20
10
Quantity
9
8
7
6
5
4
3
2
1
Supply Schedule
Price
90
80
70
60
50
40
30
20
10
Quantity
9
8
7
6
5
4
3
2
1
Supply Schedule
Supply Curve
Price
90
80
70
60
50
40
30
20
10
Quantity
9
8
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6
5
4
3
2
1
Price
Supply Schedule
Supply Curve
Price
90
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60
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Quantity
9
8
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5
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3
2
1
Price
Quantity
Supply Schedule
Supply Curve
Price
90
80
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Quantity
9
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3
2
10
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Quantity
Supply Schedule
Supply Curve
Price
90
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Quantity
9
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Quantity
Supply Schedule
Supply Curve
Price
90
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Quantity
9
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2
10
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Quantity
Supply Schedule
Supply Curve
Price
90
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Quantity
9
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10
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Quantity
Supply Schedule
Supply Curve
Price
90
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Quantity
9
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Supply Schedule
Supply Curve
Price
90
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Quantity
9
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Supply Schedule
Supply Curve
Price
90
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Supply Schedule
Supply Curve
Price
90
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Supply Schedule
Supply Curve
Price
90
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Supply Curve
Price
90
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Supply Curve
Price
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Supply Curve
Price
90
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Supply Curve
Price
90
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9
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10
10
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100
0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Supply Schedule
Supply Curve
If I have a schedule I can make a curve If I have a curve I
can make a schedule
Individual Supply Market Supply
Individual Supply Market Supply
add up all of the individual supply curves
0
10
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Quantity
Movement along the Supply Curve
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Movement along the Supply Curve
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Movement along the Supply Curve
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Movement along the Supply Curve
Price changes !
supply curve does not change
!quantity supplied
changes
Shift in Supply
Shift in SupplyInput prices Technology
Number of Sellers Expected Future Prices
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Shift in the Supply Curve
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Shift in the Supply Curve
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Shift in the Supply Curve
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Shift in the Supply Curve
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Equilibrium
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Equilibrium
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Equilibrium
Demand
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Equilibrium
Demand
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Equilibrium
Supply
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Equilibrium
Supply
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Equilibrium
Supply
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Equilibrium
Supply
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Equilibrium
Supply
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Equilibrium
Supply
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0
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0 1 2 3 4 5 6 7 8 9 10
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Equilibriumwhere market price is at a level where
Quantity Demanded = Quantity Supplied
Supply
Demand
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Demand
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Supply
Demand
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0 1 2 3 4 5 6 7 8 9 10
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Quantity
Supply
Demand
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Quantity
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Quantity
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Quantity
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Quantity
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Supply
Demand
0
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Quantity
Supply
Demand
QD
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Quantity
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QD
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QD
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QD
0
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Demand
QD QS
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Surplus
Supply
Demand
QD QS
0
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Surpluswhere market price is above equilibrium price
Quantity Demanded < Quantity Supplied
Supply
Demand
QD QS
0
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Price
Quantity
Surpluswhere market price is above equilibrium price
Quantity Demanded < Quantity Supplied
Supply
Demand
QD QS
QS - QD = 7 - 3 = 4
0
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Price
Quantity
Surpluswhere market price is above equilibrium price
Quantity Demanded < Quantity Supplied
Supply
Demand
QD QS
QS - QD = 7 - 3 = 4
Price is too high too many pizzas
0
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Surpluswhere market price is above equilibrium price
Quantity Demanded < Quantity Supplied
Supply
Demand
QD QS
QS - QD = 7 - 3 = 4
Price is too high too many pizzas
lower price
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Supply
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QS
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QS
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Quantity
Supply
Demand
QS
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Quantity
Supply
Demand
QS
0
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Quantity
Supply
Demand
QS QD
0
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shortage
Supply
Demand
QS QD
0
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shortagewhere market price is below equilibrium price
Quantity Demanded > Quantity Supplied
Supply
Demand
QS QD
0
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shortagewhere market price is below equilibrium price
Quantity Demanded > Quantity Supplied
Supply
Demand
QS QD
QS - QD = 2 - 8 = -6
0
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shortagewhere market price is below equilibrium price
Quantity Demanded > Quantity Supplied
Supply
Demand
QS QD
QS - QD = 2 - 8 = -6
Price is too low not enough pizzas
0
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0 1 2 3 4 5 6 7 8 9 10
Price
Quantity
Shortagewhere market price is below equilibrium price
Quantity Demanded > Quantity Supplied
Supply
Demand
QS QD
QS - QD = 2 - 8 = -6
Price is too low not enough pizzas
raise price
Three Steps
Three Steps1. Does the event shift supply or demand or both? !
2. Which direction is the shift? !
3. Diagram new equilibrium
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