Econ 281 Chapter2a

# Econ 281 Chapter2a - Demand Supply in Perfect Competition...

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Unformatted text preview: Assume a large number of buyers and sellers of a good with full information No one buyer or seller has any market power; individuals are “price­takers” A supply and demand curve exists for every good in every location at one time Demand and Supply are most straightforward in a PC market 1 Demand & Supply in Perfect Competition Demand: Definition A schedule showing amounts of a product that consumers are willing and able to purchase at each specific price during some specified time period: everything else held constant. 2 Demand: Origin Demand for a good comes from two areas: 1) Dervived Demand – a good is desired to make another good (ie: iron is demanded to make cars) 2) Direct Demand – a good is desired to be used itself (ie: Pepsi lime is desired to be drank) 3 The Law of Demand There is an inverse relationship There between the quantity of anything that people will want to purchase and the price they must pay to obtain it: obtain ceteris paribus (all else held equal) This causes demand curves to be downward sloping When prices increase, people buy less When prices decrease, people buy more 4 The Individual’s Demand Schedule P rice/U nit \$ A B C D E 5 .00 4 .00 3 .00 2 .00 1 .00 Q n/ yr 20 30 40 60 50 Price of Diskette (\$) 5 4 3 A B C D E 2 Change in Price Movement along 1 the Demand 0 10 20 30 40 50 5 Number of Diskettes per Year We always graph P on vertical axis and Q on horizontal axis, but we write demand as Q as a function of P… If P is written as function of Q, it is called the inverse demand. Normal Form: Qd= 100­2P Inverse form: P = 50 ­ Qd/2 • Markets defined by commodity, geography, time. Note: 6 Movement Along Demand/ Changes in Quantity Demanded A change in a good’s own price – results in a change in quantity – the same thing as a movement along the same demand curve. 7 demanded A change in one or more of the non­ price determinants of demand (income, tastes, etc) – results in a change in demand * – also called a shift in demand* Shifts/Changes in Demand* *The whole demand schedule 8 A Shift in the Demand Suppose universities Curve outlaw the use of Suppose the federal personal computers 5 Price of Diskette (\$) Decrease in Demand 4 3 2 1 0 20 40 60 D3 government gives every student a personal computer that uses diskettes. Increase in Demand D1 D2 80 100 120 140 9 Quantity of Diskettes Demanded (millions of constant-quality units per year) “Everything Else” : The “Determinants”/ “Shifters” of “Demand” Factors other than Price which affect “Demand” : 1) Income, wealth 2) Tastes and preferences 3) The price of related goods – Complements – Substitutes 4) Expectations – Future prices – Income – Product availability 5) Population (market size) What movement would these factors cause? 10 10 Review of Demand Terminology Demand: a schedule of quantities that will be bought/unit of time, at various prices, ceteris paribus. Quantity Demanded: a specific amount that will be demanded /unit of time at a specific price, ceteris paribus. Distinguish between a change in the Quantity Demanded and a shift in Demand. 11 11 Shift vrs. Movement Price of Cigarettes, per pack Price of Cigarettes, per pack A policy to discourage smoking (no smoking in public buildings) shifts the demand curve left A tax raises the price of cigarettes, resulting in a movement along the demand curve \$4 \$2 D \$2 D 10 20 D’ 10 20 Number of Cigarettes smoked per day Number of Cigarettes smoked per day 12 12 Normal vrs. Inferior Goods For normal goods, Demand decreases With income Price of Chicken Price of Kraft Dinner For inferior goods, Demand increases When income decrease \$2 D \$2 D 10 20 30 D’ D’ 10 20 Chicken eaten in a month Kraft Dinner eaten in a month 13 13 Supply: Profit The Cost side of the profit equation depends on the Costs of Production which depend on the kinds of inputs (factors of production) used the amount of each input used prices of inputs used technology 14 14 Supply: Definition A schedule that shows how much of a product a firm will supply at alternative prices for a given time period “ceteris paribus”. 15 15 • The price of a product or service and The the quantity supplied are directly related: “ceteris paribus” related: • Causes an upward sloping supply curve • The higher the price of a good, the The more sellers will make available more • The lower the price of a good, the fewer The sellers will make available sellers • All else being equal The Law of Supply 16 16 The Individual Producer’s Supply Schedule Qnty of Price of Diskette (\$) Price / Diskette Diskettes Supplied (thousands / year) 5 4 3 2 1 J I H G F F G H I J \$5 4 3 2 1 550 400 350 250 200 Change in Price Movement along The Supply 0 100 200 300 400 500 600 Quantity of Diskettes Supplied (thousands of constant-quality units per year) 17 17 Movement Along Supply/ Changes in Quantity Supplied – A change in a good’s own price leads to a change in quantity supplied. that is, a movement along the supply curve. 18 18 Shifts/Changes in Supply A change in one or more of the non­ price determinants of supply leads to a – change in supply which is the same – shift of the supply curve. 19 19 thing as a A Shift in the Supply Curve 5 Price of Diskette (\$) When supply decreases the quantity supplied will be less at each price: eg, employees form a union and successfully negotiate higher wages. S2 S2 S 4 3 2 1 0 20 40 b a 1 d c d b When supply increases the quantity supplied will be greater at each price: eg, producer finds that she can use some cheaper materials due to a technology change. 60 80 100 120 140 20 20 Quantity of Diskettes Supplied (millions of constant-quality units per year) Factors other than Price that affect “Everything Else” : The “Determinants”/“Shifters” of Supply Supply – 1) Cost of inputs (price in factor markets) – 2) Technology and Productivity – 3) Taxes and Subsidies – 4) Price Expectations (in the product market) – 5) Number of firms in the industry How will these shift supply? 21 21 Market Equilibrium Price & Quantity Market: where prices tend toward equality through the continuous interaction of buyers and sellers: the market forces of demand and supply Single Equilibrium Price 22 22 Putting Demand and Supply Together: Finding Market Equilibrium (1) Price per Constant-Quality Diskette (2) Quantity Supplied (diskettes per year) (3) Quantity Demanded (diskettes per year) (4) Difference (2) - (3) (diskettes per year) (5) Condition Excess quantity supplied (surplus) Excess quantity supplied (surplus) \$5 4 3 2 1 100 million 80 million 60 million 40 million 20 million 20 million 40 million 60 million 80 million 100 million 80 million 40 million 0 -40 million -80 million Excess quantity demanded (shortage) Excess quantity demanded (shortage) 23 23 Market Equilibrium: Definition Excess quantity supplied at price \$5 5 Price pef Diskette (\$) 4 3 2 1 A Market clearing, or equilibrium, price E The condition in a S market when quantity supplied equals quantity demanded at a QD= Q S particular price; a point from where there tends to be B no movement D 24 24 Excess quantity demanded at price \$1 0 20 40 60 80 100 Quantity of Diskettes (millions of constant-quality units per year) The price of any good will adjust until the price is such that the quantity demanded is equal to the quantity supplied A high price will result in excess supply, pushing price down, and a low price will result in excess demand, pushing price up the market clears resulting in a single The Law of Supply & Demand market clearing or equilibrium price. 25 25 Qd = 500 – 4p QS = ­100 + 2p p = price of cranberries (dollars per barrel) Q = demand or supply in millions of barrels per year 26 26 a. The equilibrium price of cranberries is calculated by equating demand to supply: Qd = QS … or… 500 – 4p = ­100 + 2p … solving, p* = \$100 a. plug equilibrium price into either demand or supply to get equilibrium quantity: Qd = 500­4d Qd = 500­4(100) Qd = 100 27 27 Example: The Market For Cranberries Price 125 P*=100 50 Market Supply: P = 50 + QS/2 Market Demand: P = 125 - Qd/4 Quantity 28 28 Example: The Market For Cranberries Price 125 P*=100 50 Market Supply: P = 50 + QS/2 • Market Demand: P = 125 - Qd/4 Q* = 100 Quantity 29 29 Comparative Statics: Shifts in Demand &/or Supply •Suppose something in the demand &/or the supply ceteris paribus envelope(s) changes. •How is the MARKET affected? – 1.) Decide whether Demand &/or Supply is affected. – 2.) Decide in which direction the affected Demand &/or Supply will move. – 3.) Use a Demand and Supply diagram to determine the new equilibrium. 30 30 Comparative Statics: Gas Prices Summer: Gas prices at equilibrium at \$1.07 per liter Winter arrives and certain drivers limit or end their driving for the season (shift in demand) Cold Weather causes a decrease in gas prices 31 31 –The new market equilibrium is \$0.87 per liter Minivan Market Consider the market for minivans. 1. For each event identify whether demand or supply P2 is affected. P1 2. Determine the direction of change. 3. Draw a diagram to illustrate how equilibrium is changed. People Decide to Have More Children E2 E1 S D1 Q1 Q2 D2 32 32 Minivan Market Steelworkers Strike Raises Steel Prices S2 E2 P2 P1 E1 S1 D Q2 Q1 33 33 Minivan Market New Automated Machinery Introduced S1 P1 E1 E2 S2 P2 D Q1 Q2 34 34 Price of Station Wagons Rises E2 Minivan Market S P2 E1 P1 D1 Q1 Q2 D2 35 35 Minivan Market Stock Market Crash Lowers Wealth S P1 P2 E1 E2 D2 D1 Q2 Q1 36 36 Example of a double shift. Simultaneous Shifts – 2 events 1. 2. only supply ↓ Q. P, only demand P, Q. 37 37 supply demand Shifts in Demand and in Supply S1 S 2 P2 P1 E2 E1 D1 Q1 Q2 D2 38 38 Simultaneous Shifts S1 S2 P1 P2 E1 E2 D1 Q1 Q2 D2 39 39 Simultaneous Shifts Example of a double shift. second possibility – 2 events 1. 2. only supply P, Q. only ↓ demand P, Q 40 40 supply ↓ demand Shifts in Demand and in Supply S1 S2 E1 P1 P2 E2 D2 D1 Q1Q2 41 41 Shifts in Demand and in Supply S1 S2 E1 P1 P 2 E2 D2 Q2 Q1 D1 42 42 Qd = 500 – 4p QS = ­100 + 2p p = price of cranberries (dollars per barrel) Q = demand or supply in millions of barrels per year Assume that a plague reduced cranberry supply and fear of inflection likewise reduced cranberry demand so that: Qd = 400 – 4p QS = ­200 + 2p 43 43 a. The new equilibrium price of cranberries is calculated by equating demand to supply: Qd = QS … or… 400 – 4p = ­200 + 2p … solving, p* = \$100 a. plug equilibrium price into either demand or supply to get equilibrium quantity: Qd = 400­4d Qd = 400­4(100) Qd = 0 44 44 Example: The Market For Cranberries Price New Market Supply: P = 100 + QS/2 125 POLD=PNew 50 Old Market Supply: P = 50 + QS/2 • Old Market Demand: P = 125 - Qd/4 QNew QOLD Quantity New Market Demand: P = 100 - Qd/4 45 45 ...
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