CH 4 Supply Demand

8/12/2019 CH 4 Supply Demand

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Chapter 4: Demand,

Supply, and MarketEquilibrium

Dr. Shereef Ellaboudy 2014


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Markets

! Markets bring together buyers(demanders) and sellers (suppliers).

! Some markets are local while others arenational or international.

! Markets help to determine prices andquantities bought and sold of millions ofgoods and services.


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Demand

Demandis a schedule or curve that

shows various amounts of a product that

consumers will buy at each of a series ofpossible prices during a specific period.

! Law of Demandstates that, all elseequal, as price falls, quantity demandedrises, and vice versa.


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Demand

A curve illustrating inverse relationship

between price of a product and quantity

demanded of it, or things equal, isdemand curve.

! It slopes downward to reflect Law of Demand.


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Demand


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Demand

! Individual demandis demand schedule orcurve of a single consumer.

! Market demandis sum of all individualdemands.

! By adding individual quantities demanded byall consumers at each of various possible

prices, we get market demand.


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Demand


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Demand

! When a demand curve is drawn, orfactors, called determinants of demand,

are held constant.

! Determinants of demand are factors or thanprice that locate position of a demand curve.

! se include: (1) tastes, (2) number of buyers,(3) income, (4) prices of related goods, and (5)expected prices.


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Change in Demand

A change in one or more of determinants

will change underlying demand data and

location of demand curve.


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Change in Income

! effects of changes in income varydepending on type of product demanded.

! When income rises, all else equal,demand for normal goodsincreases,

while demand for inferior goods

decreases.


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Change in Income

! Most goods are normal goods, or superiorgoods. demand for superior increases or

decreases directlywith changes in

income.

! demand for inferior goods increases ordecreases inverselywith money income.


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Change in Income

Price Price

Quantity Quantity

If income rises, demand for a normal good increases anddemand for an inferior good decreases.

D1 D

1

S

S

NORMALGOOD INFERIOR

GOOD

D2

D2

P1P2

P2

P1

Q1Q2 Q2Q1


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Prices of Related Goods

! When two goods are related (assubstitutes or complements), a change in

price of one good may eir increase or

decrease demand for or product.

!A substitute goodis one that can be used inplace of anor good.

!A complementary goodis one that is usedtoger with anor good.


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Prices of Related Goods

! If two goods are substitutes, an increase in priceof one will increase demand for or.

! If two goods are complements, an increase inprice of one will decrease demand for or.

! Most goods are unrelated to one anor. For seindependent goods, a change in price of one will

have virtually no effect on demand for or.


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Changes in

Quantity Demanded

A change in quantity demanded is a

movement from one point to anothr point

on a fixed demand curve.

! cause of such change is an increase ordecrease in price of product under

consideration.


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Changes in Demand

A change in demand is a shift of demand

curve to right (an increase in demand), or

to left (a decrease in demand).

! Shifts are cause by a change in one or moreof determinants of demand.


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Supply

Supplyis a schedule or curve showing

amounts of a product that producers will

make available for sale at each of a series

of possible prices during a specific period.

! Law of Supplystates that, all elseequal, as price rises, quantity suppliedrises, and vice versa.


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Supply

A curve illustrating positive, or direct

relationship between price of a product

and quantity supplied of it, or things

equal, is supply curve.

! It slopes downward to reflect Law of Demand.


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Supply


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Supply

! Market supplyis derived from individualsupply by horizontally adding supplycurves of individual producers.

! Determinants of supplyare those factorsthat cause supply to change.

! basic determinants of supply are (1)resources prices, (2) technology, (3) taxes andsubsidies, (4) price of or goods, (5) expectedprices, and (6) number of sellers in market.


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Changes in

Quantity Supplied

A change in quantity supplied is a

movement from one point to another point

on a fixed supply curve.

! cause of such a movement is a change inprice of product being considered.


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Changes in Supply

Because supply is a schedule or curve, a

change in supply means a change in

schedule and a shift of supply curve.

! Shifts are cause by a change in one or more ofdeterminants of supply.


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Market Equilibrium

In competitive markets, buyers and sellers

have no control over prices. When buyers

and sellers interact in a free competitive

market, equilibrium price and equilibrium

quantity is determined by intersection of

demand and supply curves.


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Market Equilibrium

! equilibrium price, or market-clearing price,is price at which intentions of buyers and

sellers match.

! equilibrium quantityis quantity demandedand quantity supplied that occurs at

equilibrium price in a competitive market.


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Market Equilibrium

!Any price above equilibrium price wouldcreate a surplus, or excess supply;

quantity supplied exceeds quantity

demanded.

! Surpluses drive prices down to equilibrium.!As prices fall, incentive to produce declines

and incentive for consumers to buy increases.


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Market Equilibrium

!Any price below equilibrium price wouldcreate a shortage, or excess demand;

quantity demanded exceeds quantity

supplied.

! Shortages push prices up equilibrium.!As prices rise, incentive to produce increases

and incentive for consumers to buy

decreases.


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Market Equilibrium


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Changes in Demand,

Supply, and Equilibrium

Changes in Demand

When supply is constant, an increase in

demand will result in a higher equilibriumprice and quantity. If demand falls,

equilibrium price and quantity decrease.


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Changes in Demand,


Changes in Supply

With a constant demand, if supply

increases, equilibrium price falls whileequilibrium quantity rises. If supply

decreases, equilibrium price rises, and

equilibrium quantity falls.


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Changes in Demand,



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Changes in Demand,


Complex Cases

When both supply and demand change,effect is a combination of individualeffects.

relative sizes of change in demand andsupply will determine effect on equilibrium

price and quantity.! In some cases, effect is certain; in ors effect

depends on size of shifts.


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Changes in Demand,


Example: Supply Increases, Demand Decreases

CASE 1 CASE 2S1

D1 D2

S1S2S2

D1

D2

P1

P2

P1

P2

Q1Q2Q2Q1Price decreases, quantity decreases Price decreases, quantity increases


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Changes in Demand,


Example: Supply Increases, Demand Decreases

CASE 3

If shift in supply curve to right (an increase) is

equal to shift in demand curve to left (adecrease), n equilibrium price will decrease and

equilibrium quantity will not change.


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Changes in Demand,


Change in

Supply

Change in

Demand

Change in

Price

Change in

Quantity

Increases Decreases !", !, or no

change

Decreases Increases "", !, or no

change

Increases Increases", !, or no

change "

Decreases Decreases", !, or no

change!


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Government-Set Prices

! In most markets, prices are free to rise orfall with changes in demand and supply.

!However, sometimes resulting price in amarket is too highor too low.

! Government may place legal limits on howhigh or how low a price or prices may go.

! High prices may be unfair to buyers whereaslow prices may be unfair to sellers.


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Price Ceiling

! If price of a product is unfairly high,government can set a price ceiling, or alegal maximum price a seller may charge

for a product.! This purportedly enables consumers to

obtain some essentialgood or service

that y could not afford at equilibrium price;however, it also creates a shortageofgood.


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Price Ceiling Example


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Price Floor

! When price of a good or service is toolow, government can set a price floor, ora minimum fixed price that sellers can

charge.! goal is to provide a sufficient income for

certain groups of resource suppliers, or

producers who would otherwise receivevery low incomes at equilibrium price.However, a surplusof good is created.


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Price Floor Example

CH 4 Supply Demand

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