Demand, Supply, and Markets 1.The demand curve 2.The supply curve 3.Market equilibrium and disequilibrium 4.Comparative statics 5.Price floors 6.Price ceilings
Demand, Supply, and Markets
Feb 22, 2016
Demand, Supply, and Markets. The demand curve The supply curve Market equilibrium and disequilibrium Comparative statics Price floors Price ceilings . Demand and the Law of Demand. - PowerPoint PPT Presentation
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Demand, Supply, and Markets
1. The demand curve2. The supply curve3. Market equilibrium and
disequilibrium4. Comparative statics5. Price floors6. Price ceilings
Demand and the Law of Demand
Demand is the relation between the price of a good and the
quantity that consumers are willing and able to buy per period, other
things constant.
Law of demand: The quantity of a good that consumers are willing and able to buy per period relates inversely, or negatively, to the price, other things constant.
Substitution effect of a price changeWhen the price of a good falls, that good becomes cheaper relative to (related) goods, so consumers tend to substitute that good for other goods.
I’m taking the subway more because cab
fares have gone up
Income effect of a price change
A fall in the price of a good increases consumers’ real income .
The spike in gas prices has generated a negative income effect.
6
Priceper
pizza
Quantity DemandedPer week (millions)
abcde
$1512963
814202632
D
a
b
c
d
e
The demand schedule and demand curve for pizza
2620148Millions of pizzas per week
32 0
9
6
3
12
Pric
e pe
r pizz
a
$15
The market demand D shows the quantity of pizza demanded, at various prices, by all consumers. Price and quantity demanded are inversely related.
(a) Demand schedule (b) Demand curve
Demand versus quantity-demanded
Quantity-demanded is the amount of a good buyers are willing and able to but at a specific price, other things constant.
Millions of pizzas
Pric
e pe
r pizz
a
$12
14
Demand
0
Quantity-demanded at a price of $12 is 14 million pizzas per week
The demand for good X depends on
1. The price of good X2. The price of substitutes3. The price of complements4. Income5. Other factors
9
D’
D
b f
An increase in the market demand for pizza
2620148Millions of pizzas per week
32 0
9
6
3
12
Pric
e pe
r pizz
a
$15
An increase in the demand for pizza is shown by a rightward shift of the demand curve, so the quantity demanded increases at each price.
10
Priceper
pizza
Quantity SuppliedPer week (millions)
$1512963
2824201612
S
The supply schedule and supply curve for pizza
24201612Millions of pizzas per week
28 0
9
6
3
12
Pric
e pe
r pizz
a
$15
The market supply S shows the quantity of pizzasupplied, at various prices, by all pizza makers. Price and quantity supplied are directly related.
(a) Supply schedule (b) Supply curve
11
S’S
An increase in the supply of pizza
24201612Millions of pizzas per week
28 0
9
6
3
12
Pric
e pe
r pizz
a
$15An 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.
gh
12
Equilibrium in the pizza market
Millions of pizzas per week
Price perpizza
QuantityDemanded
QuantitySupplied
Surplus orShortage
Effect onPrice
$1512963
814202632
2824201612
Surplus of 20Surplus of 10EquilibriumShortage of 10Shortage of 20
FallsFallsRemains the sameRisesRises
(a) Market schedules
Equilibrium in the pizza market
(b) Market curves
S
24201614Millions of pizzas per week
26 0
9
6
3
12
Pric
e pe
r pizz
a
$15
D
c
Shortage
Surplus
Market equilibrium occurs at:Price where QD=QS; Point c
Above the equilibrium price:QS>QD; Surplus; Downward pressure on P
Below the equilibrium price:QD>QS; Shortage; Upward pressure on P
14
Effects of an increase in demand
S
2420Millions of pizzas per week
30 0
9
$12
Pric
e pe
r pizz
a
D
c
D’
g
Increase in demand:Rightward shift to D’At P=$9: QD>QS; shortageUpward pressure on PQD decreasesQS increases
New equilibrium gHigher PHigher Q
15
Effects of an increase in supply
S
2620Millions of pizzas per week
30 0
$9
6Pric
e pe
r pizz
a
D
c S’
d
Increase in supply:Rightward shift to S’At P=$9: QS>QD; surplusDownward pressure on PQD increasesQS decreases
New equilibrium dHigher QLower P
16
Indeterminate effect of an increase in both D and S
S
p’
p
Pric
e
D
S’
aD’
b
Q’QUnits per period
0
(a) Shift of D dominates
S
p’’
p
Pric
e
D
S’’
a
D’’
c
Q’’QUnits per period
0
(b) Shift of S dominates
17
Effects of both demand and supply
Demand increases
Demand decreases
SupplyIncreases
Equilibrium price change is indeterminate.
Equilibrium quantity increases.
Equilibrium price falls.
Equilibrium quantity change is indeterminate.
Supplydecreases
Equilibrium price rises.
Equilibrium quantity change is indeterminate.
Equilibrium price change is indeterminate.
Equilibrium quantity decreases.
Change in demandCh
ange
in su
pply
18
NBA pay leaps
100 200 300 400 450
Players per season
0
0.17
1.0
2.0
3.0
4.0
$4.9
Aver
age
pay
per s
easo
n (m
illio
ns)
S2007
D2007
D1980 S1980
S – relatively fixedBig jump in DAverage pay increased from $170,000 in 1980 to 4,900,000 in 2007.Number of teams in NBA increased Number of players increased from 300 to 450.
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