[Eng.economics] Lecture #4

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(ECEN 4503) Engineering EconomicsLecture #4:The Market Forces of Supply and DemandFrid. May 29th 2015Lecturer: Nguyen Minh Y, Ph.D.Thai Nguyen UniversityThai Nguyen University of TechnologyFaculty of International TrainingHomework #210/22/2015Department of Electrical Engineering taught in English2Ex4. American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.

For this situation, construct a table analogous to the table of Production opportunities (opportunity cost).Graph the production possibilities frontier of the American and Japanese economies.For the U.S., what is the opportunities cost of a car? Of grains? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table analogous to Table 1.Which country has an absolute advantage in producing cars? In producing grain?Without trade, half of each countrys workers produce cars and half produce grain. What quantities of cars and grain does each country produce?Starting from a position without trade, give an example in which trade makes each country better off.Homework #210/22/2015Department of Electrical Engineering taught in English3Ex5. Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year.

What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods.Draw Canadas production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade? Label this point on the production possibilities frontier.Now suppose that the U.S. offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal?Reviewing10/22/2015Department of Electrical Engineering taught in English4What are supply and demand?10/22/2015Department of Electrical Engineering taught in English5TerminologiesMarket a group of buyers and sellers of a particular goods and servicesThe buyers as a group determine the demand for the product.The sellers as a group determine the supply of the product.

The market forces of supply and demandHow the buyers and sellers behave and interact?How supply and demand determine the price in market?How price allocate the economys resources?1. Market and Competition10/22/2015Department of Electrical Engineering taught in English6Competitive marketsA market in which there are many buyers and sellers so that each has negligible impact on the market price.

Example:Market for ice cream in particular townBuyers: the population of the townSellers: the ice cream shops in the towneach buyer knows several ice cream shop to choose, and each seller is aware that his/her product is somehow similar to what offered by other sellers.If sellers sell ice cream at price lower than market price, they loose profitIf higher than market price, buyers will buy ice cream somewhere else.We will start the lecture with a story (tale) of the modern economics.61. Market ad Competition10/22/2015Department of Electrical Engineering taught in English7Competition: Perfect and otherwisePerfectly competitive market has two primary characteristics:The goods being offered for sale are all the sameThe buyers and sellers are so numerous that no single buyer or seller can influence the market price.

Example:Wheat marketsThousands of farmers selling wheatMillions of consumers using wheat and wheat productTake the price as given, i.e., price-takers

1. Market ad Competition10/22/2015Department of Electrical Engineering taught in English8Competition: Perfect and otherwiseMonopoly:Only one sellers who is able to set the market priceExample:Electric or water utility in a specific area

OligopolyFew sellers they do not compete aggressivelyExample:Airline industry:Few airlines in the same route do not compete rigorouslyTo keep the price high1. Market ad Competition10/22/2015Department of Electrical Engineering taught in English9Competition: Perfect and otherwiseMonopolistically competitiveMany sellersOffer slightly different productsExample:Software industryWord processing programMS WordLatexEtc.

2. Demand (behavior of buyers)10/22/2015Department of Electrical Engineering taught in English10Quantity demanded of a good is the amount of the good that buyers are willing and able to purchase.What determines the quantity an individual demands?Determinant #1: PriceIf the price of ice cream rose, you may buy less ice crease, instead, more yogurt.Law of demand the quantity demanded of a good falls when the price of the good rises.2. Demand10/22/2015Department of Electrical Engineering taught in English11What determines the quantity an individual demand?Determinant #2: IncomeLow income means you have less to spend in total, so you have to spend less on most goods.Normal good a good for which an increase in income leads an increase in demand.Example:Clothing, shoes, glass, etc.Beef, pork, seafood, etc.Inferior good a good for which an increase in income leads to a decrease in demand.Example:Bus rides vs. car2. Demand10/22/2015Department of Electrical Engineering taught in English12What determines the quantity an individual demand?Determinant #3: Prices of related goodsSuppose the price of frozen yogurt falls, you may consume it more, and less ice cream.Substitutes two goods for which an increase in the price of one good leads to an increase in the demand of the other.Example,Apple and pear; rice and bread, etc.Complements two goods for which an increase in the price of one leads to a decrease in the demand of the other.Example, Coffee and cream, sugar (milk)Gasoline and car2. Demand10/22/2015Department of Electrical Engineering taught in English13What determines the quantity an individual demand?Determinant #4: ExpectationYour expectation about future may affect your demand for a good or service today.

Example,Higher income next month, we are willing to spend more today.The price is expected to rise in future, we may decide to buy it now.A new technology comes soon, waiting to buy the product:I phone 6, etc.2. Demand10/22/2015Department of Electrical Engineering taught in English14The demand schedule and the demand curveHow the quantity demanded varies with the price, holding other factors constant.Demand schedule a table that shows the relationship between the price of a good and the quantity demanded.Example:The demand schedule of Catherine for ice cream:Price of Ice-cream Cone($/unit)Quantity of Cones Demanded(unit)0.000.501.001.502.002.503.001210864202. Demand10/22/2015Department of Electrical Engineering taught in English15The demand schedule and the demand curveDemand curve a graph of the relationship between the price of a good and the quantity demanded.Example:The quantity of ice cream demanded according to the price of ice cream.Horizontal axis:The quantityVertical axisThe price

2. Demand10/22/2015Department of Electrical Engineering taught in English16Market demand versus individual demandThe market demand of a particular good or service is the sum of all the individual demands for that good or service.Example:Market for ice cream consists of two buyersPrice of Ice-cream Cone ($/unit)Catherine+ Nicholas = Market0.000.501.001.502.002.503.001210864207654321191613107412. Demand10/22/2015Department of Electrical Engineering taught in English17Market demand versus individual demand

2. Demand10/22/201518Shift of the demand curveSuppose thatA new discovery of government health center: People who eat ice cream regularly live longer.Change peoples taster of ice cream: Increase the demand for ice cream at any price

2. Demand10/22/2015Department of Electrical Engineering taught in English19SummaryVariables that affect quantity demandedA change in this variablePriceIncomePrices of related goodsTastesExpectationsNumber of buyersA movement along the demand curveShift the demand curveShift the demand curveShift the demand curveShift the demand curveShift the demand curveCase study:10/22/2015Department of Electrical Engineering taught in English20How to reduce the quantity of smoking demand?Shift the demand curveHealth warning in on the cigarette packageCigarette advertising is prohibited on TV.Change the price10% increase in the price, 4% reduction in the quantityTeenage:10% increase in the price, 12% reduction in the quantityArgument:How the price of cigarette affect the demand of illicit drug: marijuana?Cigarette and marijuana are substitutes?3. Supply (behavior of sellers)10/22/2015Department of Electrical Engineering taught in English21Quantity supplied the amount of a good or service that sellers are willing and able to sell.What determines the quantity an individual supplies?Determinant #1: PriceWhen the price of ice cream is high, Selling ice cream is profitableIncrease the quantity of supply: work longer hours, buy new ice cream machine, hire more workers, etc.When the price of ice cream falls down,Selling ice cream is less profitableReduce the quantity of supplyLaw of supply the quantity supplied of a good rises when the price of the good rises.

3. Supply10/22/2015Department of Electrical Engineering taught in English22What determines the quantity an individual supplies?Determinant #2: Input priceTo produce ice cream, various inputs needed: Ice cream machine, labor, cream, sugar, flavoring, etc.If the price of these inputs rises,Selling ice cream is less profitableIf the price rises substantially, you may choose to shut down your firm.

The quantity supplied is negatively relative to the price of inputs to make the good!3. Supply10/22/2015Department of Electrical Engineering taught in English23What determines the quantity an individual supplies?Determinant #3: TechnologyTechnology can reduce the amount of inputs needed.For example:Labor needed for producing certain amount of ice creamReduce the firms costSelling ice cream is more profitable, etc.The advance in technology raises the quantity supplied!Determinant #4: ExpectationThe amount of your supply today may depend on your expectation in future.If you expect the price rises in future, you may produce more today and put them in storage.3. Supply10/22/2015Department of Electrical Engineering taught in English24Supply schedule and supply curveHow the quantity supplied varies with the price, holding other factors constant.Supply schedule a table that shows the relationship between the price of a good and the quantity supplied.Example:The supply schedule of Ben for ice cream

Price of Ice-cream Cone ($/unit)Quantity of Cones Demanded (unit)0.000.501.001.502.002.503.0000123453. Supply10/22/2015Department of Electrical Engineering taught in English25Supply demand and supply curveSupply curve a graph of the relationship between the price of a good and the quantity supplied.Example:The quantity that Ben supplies according to the priceHorizontal axisQuantity of ice creamVertical axisPrice of ice cream

3. Supply 10/22/2015Department of Electrical Engineering taught in English26Market supply versus individual supplyMarket supply is the sum of the supplies of all sellersExample:Market for ice cream consists of two sellersPrice of Ice-cream Cone ($/unit)Ben+ Jerry= Market0.000.501.001.502.002.503.00001234500024680014710133. Supply 10/22/2015Department of Electrical Engineering taught in English27Market supply versus individual supply

3. Supply 10/22/2015Department of Electrical Engineering taught in English28Shift in the supply curveSuppose thatThe price of sugar fallsCost of producing ice cream decreasesSelling ice cream is more profitableThe quantity supplied increase at any given price

3. Supply 10/22/2015Department of Electrical Engineering taught in English29Summary,Variables that affect quantity suppliedA change in this variablePriceInput pricesTechnology Expectation Number of buyersA movement along the supply curveShift the supply curveShift the supply curveShift the supply curveShift the supply curveReviewing10/22/2015Department of Electrical Engineering taught in English30MarketTypes of marketsDemandQuantity demanded of a good is the amount of the good that buyers are willing and able to purchase.Determinants of the demandPrice, income, price of related goods, expectation.Demand schedule and demand curveIndividual demand and market demandSupply Quantity supplied of a good is the amount of the good that sellers are willing and able to sellDeterminants of the supplyPrice, price of inputs, technology, expectation.Supply schedule and supply curveIndividual supply and market supply4. Supply and Demand Together10/22/2015Department of Electrical Engineering taught in English31We combine supply and demand to see how they determine the quantity of a good sold in a market and its price.EquilibriumEquilibrium a situation in which supply and demand has been brought into balance.

Equilibrium price the price that balances supply and demand.Equilibrium quantity the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand.4. Supply and Demand Together10/22/2015Department of Electrical Engineering taught in English32What happen when the price above or below equilibrium?Suppose the price is above the equilibrium priceSupply is unable to sell all they wantApplying law of demand, sellers need to reduce the priceIf the price is below the equilibrium priceDemand is unable to buy all they wantApplying law of supply, buyers offer to buy at higher price

Invisible hand!!!4. Supply and Demand Together10/22/2015Department of Electrical Engineering taught in English33EquilibriumInteractions of the many buyers and sellers automatically push the market price toward the equilibrium price. Once the market reaches its equilibrium, all buyers and sellers are satisfied.

Law of supply and demand the price of any good adjusted to bring the supply and demand for that good into balance.4. Supply and Demand Together10/22/2015Department of Electrical Engineering taught in English34How to determine the market equilibrium?Equilibrium point changes when demand and/or supply changes.

Three steps to analyze changes in equilibriumWhen some events, other than price change, occur, the demand and supply curve shift; consequently, the market equilibrium change

A three-step program for analyzing changes in equilibrium1. Decide whether the even shifts the supply curve or demand curve (or perhaps both).2. Decide which direction the curve shifts.3. Use the supply-and-demand diagram to see how the shift changes the equilibrium.Case study10/22/2015Department of Electrical Engineering taught in English35A change in demandSuppose that one summer is very hot, how does this event affect the market for ice cream?

Three steps:How the event affect the demand/supply?How the demand/supply curve shifts?The new market equilibrium?

Case study10/22/2015Department of Electrical Engineering taught in English36A change in supplySuppose that an earthquake that destroy several ice cream factories, how does this event affect the market for ice cream?

Three steps:How the event affect the demand/supply?How the demand/supply curve shifts?The new market equilibrium?

Case Study10/22/2015Department of Electrical Engineering taught in English37Changes in both supply and demandSuppose that two events occur at the same time

Three steps:How the event affect the demand/supply?How the demand/supply curve shifts?The new market equilibrium?

Change of Equilibrium Points10/22/2015Department of Electrical Engineering taught in English38No change in supplyAn increase in supplyA decrease in supplyNo change in demandP sameQ sameP downQ upP upQ downAn increase in demandP upQ upP ambiguousQ upP upQ ambiguousAn decrease in demandP downQ downP downQ ambiguousP ambiguousQ downSummary10/22/2015Department of Electrical Engineering taught in English39MarketDemandSupplyDeterminantsMarket vs. individualEquilibriumEquilibrium priceEquilibrium quantityShortageSurplusDetermine the new equilibrium with changes

Quiz #110/22/2015Department of Electrical Engineering taught in English40Ex1. What are the demand schedule and the demand curve and how are they related? Why does the demand curve slope downward?Ex2. Does a change in producers technology lead to a movement along the supply curve or a shift in the supply curve? Does a change in price lead to a movement along the supply curve or a shift in the supply curve?Ex3. Beer and pizza are complements because they are often enjoyed together. When the price of beer rise, what happens to the supply, demand, quantity supplies, quantity demanded, and the price in the market for pizza?Ex4. Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans.a. People decide to have more children.b. A strike by steelworkers raises steel prices.c. Engineers develop new automated machinery for the production of minivans.d. The price of sports utility vehicles rises.e. A stock market crash lowers peoples wealth.

Ex5. Using supply and demand diagrams show the effect of the following events on the market for sweatshirts.a. A hurricane in South Carolina damages the cotton crop.b. The price of leather jackets falls.c. All colleges require morning exercise in appropriate.d. New knitting machines are invented.Quiz #110/22/2015Department of Electrical Engineering taught in English41Ex6. The market for pizza has the following demand and supply schedules:Graph the demand and supply curves. What is the equilibrium price and quantity in this market?If the actual price in this market were above the equilibrium price, what would drive the market toward the equilibrium?If the actual price in this market were below the equilibrium price, what would drive the market toward the equilibrium?

PriceQuantity demandedQuantity supplied$456789135 pizzas1048168533926 pizzas538198110121