Ch 04 demand, supply, and markets micro econ 4

Chapter 4 ECON4 William A. McEachern

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Demand,

Supply,

and Markets

2

Demand

• Demand

– The quantity consumers are willing and

able to buy at each possible price during

a given time period, other things constant

– Amounts purchased per period

• at each possible price

– Willing and able

– Specific period

– Other things constant

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as


3

Law of Demand

• Law of demand

– Quantity demanded varies inversely with

price, other things constant

– Higher price: lower quantity demanded

• Consumer Demand

– Not ‘consumer wants’

– Not ‘consumer needs’



4

Law of Demand

• Substitution effect of a price change

– When the price of a good falls

• That good becomes cheaper compared to

other goods

• Consumers tend to substitute that good for

other goods

– Relative price

• Price of a good relative to the prices of other

goods



5

Law of Demand

• Income effect of a price change

– A fall in the price of a good increases

consumers’ real income

– Consumers more able to purchase goods

– Normal good: quantity demanded

increases



6

Law of Demand

• Money income

– Number of dollars a person receives per

period

• Real income

– Measured in terms of what it can buy

– Purchasing power

– Changes when price changes



7

Demand

• Demand schedule

– Possible prices

– Quantity demanded at each price

– Law of demand

• Demand curve

– Possible prices

– Quantity demanded at each price

– Downward slope

– Law of demand© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as


8

Demand

• Demand

– Entire relationship between price and quantity demanded

• Quantity demanded

– Amount of a good consumers are willing

and able to buy

• Per period

• At a particular price

– A point on the demand curve



9

Demand

• Movement along the demand curve

– Change in quantity demanded

– Due to a change in price

• Individual demand

– Relation between the price of a good and

the quantity purchased

– By an individual consumer

– Per period




Exhibit 1

10

The Demand Schedule and Demand Curve for Pizza

D

a

b

c

d

e

Price

per

pizza

Quantity

Demanded

Per week

(millions)

a

b

c

d

e

$15

12

9

6

3

8

14

20

26

32

2620148

Millions of pizzas per week

320

9

6

3

12

Price

per

piz

za

$15

The market demand D shows the

quantity of pizza demanded, at various

prices, by all consumers. Price and

quantity demanded are inversely related.



11

Demand

• Market demand


the quantity purchased

– By all consumers in the market

– During a given period


– Sum of the individual demands in the

market



12

Shifts of the Demand Curve

1. Money income of consumers

2. Prices of other goods

3. Consumer expectations

4. The number or composition of

consumers in the market

5. Consumer tastes



13

Changes in Consumer Income

• Increase in consumer income

– Willing and able to buy more at each

price

– Increase in demand

– Demand curve shifts rightward

• Normal good

– Demand increases as income increases

• Inferior good

– Demand decreases as income increases© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as


Exhibit 2

14

An Increase in the Market Demand for Pizza

D’

D

b f

2620148


320

9

6

3

12

Price p

er

piz

za

$15An increase in the demand for

pizza is shown by a rightward

shift of the demand curve, so

the quantity demanded

increases at each price. For

example, the quantity of pizza

demanded at a price of $12

increases from 14 million (point

b) to 20 million (point f).



15

Changes in Prices of Other Goods

• Substitutes

– An increase in the price of one good

• Increases the demand for the other

• Rightward shift

• Complements - used in combination

– An increase in the price of one

• Decreases the demand for the other

• Leftward shift

• Unrelated



16

Changes in Consumer Expectations

• Income expectations

– Future income increase

• Increase the current demand

• Price expectations

– Future price increases

• Increase current demand



17

Number or Composition of Consumers

• Increase in number of consumers

– Increases demand

– Right shift

• Composition of the population

– Shift the demand



18

Changes in Consumer Tastes

• Tastes

– Likes and dislikes in consumption

– Assumed to remain constant along a

given demand curve

• Change in tastes

– May shift the demand



19

Demand

• Quantity demanded

• Demand

• Movement along the demand curve

• Shift in the demand curve

– Movement of a demand curve right or left

– Resulting from a change in one of the

determinants of demand

• Other than the price of the good



20

Supply

• Supply

– How much producers are willing and able

to offer for sale per period at each

possible price, other things constant

– Willing and able

– Specific period




21

Law of Supply

• Law of supply

– Quantity supplied is directly related to its

price, other things constant

– Higher price: higher quantity supplied

• Higher reward, profit

– More willing to increase quantity supplied;

• Can afford to cover the marginal costs

– Increasing opportunity cost

– More able to increase quantity supplied



22

Supply

• Supply schedule

– Possible prices

– Quantity supplied at each price

– Law of supply

• Supply curve

– Possible prices

– Quantity supplied at each price

– Upward slope

– Law of supply© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as


Exhibit 3

23

The Supply Schedule and Supply Curve for Pizza

SPrice

per

pizza

Quantity

Supplied

Per week

(millions)

$15

12

9

6

3

28

24

20

16

12

24201612


280

9

6

3

12

Price p

er

piz

za

$15

Market supply curve S shows the

quantity of pizza supplied, at various

prices, by all pizza makers. Price

and quantity supplied are directly

related.



24

Supply

• Supply

– Entire relationship between price and quantity supplied

• Quantity supplied

– Amount offered for sale

– Per period

– At a particular price

– A point on the supply curve



25

Supply

• Movement along the supply curve

– Change in quantity supplied

– Due to a change in price

• Individual supply


the quantity

– An individual producer is willing and able

to sell

– Per period, other things constant



26

Supply

• Market supply


the quantity

– All producers are willing and able to sell

– Per period




27

Shifts of the Supply Curve

1. State of technology

2. Prices of relevant resources

3. Prices of alternative goods

4. Producer expectations

5. Number of producers in the market



28

Changes in Technology

• Better technology

– Production costs decrease

– Increase quantity supplied at each price

– Increase supply

– Rightward shift



Exhibit 4

29

An Increase in the Supply of Pizza

S’S

24201612


280

9

6

3

12

Price p

er

piz

za

$15 An increase in the supply of

pizza is reflected by a rightward

shift of the supply curve, from S

to S’. Quantity supplied

increases at each price level.

For example, at a price of $12,

the quantity of pizza supplied

increases from 24 million pizzas

(point g) to 28 million pizzas

(point h).

g

h



30

Prices of Relevant Resources

• Relevant resources

– Employed in the production

• Decrease in price of relevant resources

– Production costs decrease

– Increase supply

– Rightward shift



31

Prices of Alternative Goods

• Resources

– Alternative uses

• Alternative goods

– Use some resources employed to

produce the good

• Decrease in price of alternative goods

– Increase supply

– Rightward shift



32

Changes in Producer Expectations

• Higher prices in the future

– Future profits

– May increase the current supply

– Easily stored goods

• Reduce current supply



33

Changes in Number of Producers

• Market supply

– Amount supplied

– At each price

– By all producers

• Number of producers increase

– Increase supply

– Rightward shift



34

Supply

• Quantity supplied

• Supply

• Movement along the supply curve

• Shift in the supply curve

– Movement of a supply curve left or right

– Resulting from a change in one of the

determinants of supply

• Other than the price of the good



35

Demand & Supply Create a Market

• Markets

– Sort out differences between demanders

and suppliers

– Reduce transaction costs

• Transaction costs

– Costs of time and information required to

carry out market exchange

• Adam Smith

– The “invisible hand”© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as


36

Market Equilibrium

• Surplus: excess quantity supplied

– Amount by which quantity supplied

exceeds quantity demanded

• At a given price

– Downward pressure on price

• Decrease quantity supplied

• Increase quantity demanded



37

Market Equilibrium

• Shortage: excess quantity demanded

– Amount by which quantity demanded

exceeds quantity supplied

• At a given price

– Upward pressure on price

• Increase quantity supplied

• Decrease quantity demanded



38

Market Equilibrium

• Quantity demanded = Quantity supplied

• Plans of buyers and sellers match

• Equilibrium point

• Equilibrium quantity

• Equilibrium price

• Market clears

• No pressure on price

• ‘X marks the spot’



Exhibit 5

39

Equilibrium in the Pizza Market (a)



Exhibit 5

40

Equilibrium in the Pizza Market (b)

S

24201614


260

9

6

3

12

Price p

er

piz

za

$15

D

c

Shortage

Surplus

Market equilibrium occurs at

the price where quantity

demanded equals quantity

supplied. This is shown at

point c.

Above the equilibrium price,

quantity supplied exceeds

quantity demanded. This

creates a surplus, which

puts downward pressure on

the price.

Below the equilibrium price,

quantity demanded exceeds

quantity supplied. The

resulting shortage puts

upward pressure on the

price.



41


Determinants of demand

1. Money income of consumers

2. Price of a substitute or a complement

3. Consumer expectations

4. Number of consumers

5. Consumer tastes



42


• Increase in demand

– Rightward shift of D curve

– Shortage; Upward pressure on P

– QD decreases; QS increases

– New equilibrium: Increase in P and Q

• Decrease in demand

– Surplus; Downward pressure on P

– New equilibrium: Decrease in P and Q



Exhibit 6

43

Effects of an Increase in Demand

S

2420


300

9

$12

Price p

er

piz

za

D

c

D’

g

An increase in demand is

shown by a shift of the

demand curve rightward

from D to D’. Quantity

demanded exceeds quantity

supplied at the original price

of $9 per pizza, putting

upward pressure on the

price. As the price rises,

quantity supplied increases

along supply curve S, and

quantity demanded

decreases along demand

curve D’. When the new

equilibrium price of $12 is

reached at point g, quantity

demanded once again

equals quantity supplied.



44

Shifts in the Supply Curve

Determinants of supply

1. Technological change

2. Price of a relevant resource

3. Price of an alternative good

4. Producers expectations

5. Number of producers



45

Shifts in the Supply Curve

• Increase in supply

– Rightward shift of S curve

– Surplus; Downward pressure on P

– QD increases; QS decreases

– New equilibrium:

• P decreases; Q increases

• Decrease in supply

– New equilibrium:

• P increases; Q decreases



Exhibit 7

46

Effects of an Increase in Supply

S

2620


300

$9

6

Price p

er

piz

za

D

c S’

d

An increase in supply is shown by a

shift of the supply curve rightward,

from S to S’. Quantity supplied

exceeds quantity demanded at the

original price of $9 per pizza, putting

downward pressure on the price. As

the price falls, quantity supplied

decreases along supply curve S’,

and quantity demanded increases

along demand curve D. When the

new equilibrium price of $6 is

reached at point d, quantity

demanded once again equals

quantity supplied



47

Simultaneous Shifts

• Both S and D increase:

– Q increases

– D shifts more: P increases

– S shifts more: P decreases

• Both S and D decrease:

– Q decreases

– D shifts more: P decreases

– S shifts more: P increases



Exhibit 8

48

Indeterminate effect of an increase in both demand and supply

S

p’

p

Price

D

S’

a

D’

b

Q’QUnits per

period0

S

p’’

p

Price

D

S’’

a

D’’

c

Q’’QUnits per

period0

When both demand and supply increase, the equilibrium quantity also increases. The effect

on price depends on which curve shifts more. In panel (a), the demand curve shifts more,

so the price rises. In panel (b), the supply curve shifts more, so the price falls.



Simultaneous Shifts

• S increases; D decreases

– P decreases

– D shifts more: Q decreases

– S shifts more: Q increases

• S decreases; D increases

– P increases

– D shifts more: Q increases

– S shifts more: Q decreases



Exhibit 9

50

Effects of Shifts of Both Demand and Supply

When the demand

and supply curves

shift in the same

direction, equilibrium

quantity also shifts in

that direction. The

effect on equilibrium

price depends on

which curve shifts

more. If the curves

shift in opposite

directions, equilibrium

price will move in the

same direction as

demand. The effect

on equilibrium

quantity depends on

which curve shifts

more.



Disequilibrium

• Disequilibrium

– Plans of buyers do not match those of

sellers

– Temporary mismatch between quantity

supplied and quantity demanded

• As the market seeks equilibrium

– Can last a while

• Result of government intervention

– Price floors

– Price ceilings



Disequilibrium

• Price Floors

– Minimum legal price below which a

product cannot be sold

– To have an impact, it must be set above

the equilibrium price

– Surplus

– Distort markets

– Reduce economic welfare



Disequilibrium

• Price Ceilings

– Maximum legal price above which a

product cannot be sold

– To have an impact, it must be set below

the equilibrium price

– Shortage

– Distort markets

– Reduce economic welfare



Exhibit 11

54

Price Floors and Price Ceilings

S

D

$2.50

1.90

Price p

er

gallo

n

1914

Millions of gallons per month0 24

S

D

$1,000

600

Mo

nth

ly r

enta

l price

5040

Thousands of rental units per month0 60

Surplus

Shortage

A price floor set above the equilibrium price results in a surplus, as shown in panel (a).

A price floor set at or below the equilibrium price has no effect.

A price ceiling set below the equilibrium price results in a shortage, as shown in panel

(b). A price ceiling set at or above the equilibrium price has no effect.© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as


Ch 04 demand, supply, and markets micro econ 4

Economy & Finance

classroom use

passwordprotected website

cengage learning

certain product

good consumers

price changewhen

price changes

good fallsthat good