Chapter 3 - Chapter 3 Supply and Demand: Theory Demand •...

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Unformatted text preview: Chapter 3 Supply and Demand: Theory Demand • Demand comes from the behavior of buyers. • The quantity demanded of any good is the amount of the good that buyers are willing and not just enough to have the money, able to purchase. but you need to be willing to buy it • Law of demand: the claim that the quantity demanded of a good falls when the price of the good rises, other things equal the law of demand is a negative relationship The Demand Schedule Demand schedule: A table that shows the relationship between the price of a good and the quantity demanded. Example: Helen’s demand for lattes. Notice that Helen’s preferences obey the Law of Demand. Price Quantity of of lattes lattes demanded $0.00 16 1.00 14 2.00 12 3.00 10 4.00 8 5.00 6 6.00 4 Demand Curve Price of Lattes price on the y axis and quantity on the x axis $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 0 5 10 Quantity 15 of Lattes Market Demand versus Individual Demand The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price. Price $0.00 1.00 2.00 3.00 4.00 5.00 6.00 Helen’s Qd 16 14 12 10 8 6 4 + + + + + + + Ken’s Qd 8 7 6 5 4 3 2 = = = = = = = Market Qd 24 21 18 15 12 9 6 The Market Demand Curve for Lattes P $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 0 5 10 15 20 25 P $0.00 1.00 2.00 3.00 4.00 5.00 6.00 Qd (Market) 24 21 18 15 12 9 6 Q any other changes that lie outside the price or quantity cannot be accounted for Change in Quantity Demanded Change in quantity demanded is caused only because of a change in price. It results in a movement along the demand curve. if something changes outside of the price or quantity changes the demand curve changes or shifts because of that change Change in Demand Change in demand is caused because of factors other than price. It results in a shift in the demand curve. price is the only thing that is a determinate of quantity demanded, whereas everything else is a determinate of quantity Variables That Affect Demand Variable Price No. of buyers Income Price of related goods Tastes Expectations A change in this variable… …causes a movement along the D curve …shifts the D curve …shifts the D curve …shifts the D curve …shifts the D curve …shifts the D curve Income Induced Changes in Demand income up, buy more income up, buy less • Normal Good: a good the demand for which rises (falls) as income rises (falls). • Inferior Good: a good the demand for which rises (falls) as income falls (rises). • Neutral Good: a good the demand for which does not change as income rises or falls. as income goes up nothing changes Price of Related Goods when one of the competing goods price drops, more people buy the lower priced product, and less of the higher priced good • Substitutes: If the price of good A increases, the quantity of good A decreases and the quantity of good B increases, then goods A and B are substitutes (Eg:Coke and Pepsi). • Complements: If the price of good A increases, the quantity of good A decreases and the quantity of good B decreases, then goods A and B are complements (Eg: Coffee and Coffee Creamer). as the price for coffee falls, more coffee is demanded so is creamer, therefore the goods are positivity related to each other Number of Buyers and Expectation of Future Price • Number of Buyers: More Buyers, More Demand; Fewer Buyers, Less Demand. • Price Expectations: – Expect higher price tomorrow, buy more today, increase in demand. – Expect lower price tomorrow, buy less today, decrease in demand. an increase in income will cause people to spend more now like they have more money, whereas if there going to be a drop then you will save more today Supply • Supply comes from the behavior of sellers. • The quantity supplied of any good is the amount that sellers are willing and able to sell. • Law of supply: the claim that the quantity supplied of a good rises when the price of the good rises, other things equal quantity supplied increases as there is a rise in price. as price to produce the good goes up the producer raises the price to make money The Supply Schedule • Supply schedule: A table that shows the relationship between the price of a good and the quantity supplied. • • Example: Starbucks’ supply of lattes. Price of lattes $0.00 1.00 2.00 3.00 4.00 5.00 6.00 Quantity of lattes supplied 0 3 6 9 12 15 18 • Notice that Starbucks’ supply schedule obeys the Law of Supply. Supply Curve P $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Q 0 5 10 15 Market Supply versus Individual Supply The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price. Price $0.00 1.00 2.00 3.00 4.00 5.00 6.00 Starbucks 0 3 6 9 12 15 18 + + + + + + + Jitters 0 2 4 6 8 10 12 = = = = = = = Market Qs 0 5 10 15 20 25 30 The Market Supply Curve P $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 0 5 10 15 20 25 30 35 P $0.00 1.00 2.00 3.00 4.00 5.00 6.00 Q QS (Market) 0 5 10 15 20 25 30 Change in Quantity Supplied Change in quantity supplied is caused only because of a change in price. It results in a movement along the supply curve. Change in Supply Change in supply is caused because of factors other than price. It results in a shift in the supply curve. input land labor capital management price rent wage interest profit all of these shift the curve, not cause a change Variables That Affect Supply Variable Price Input prices Technology No. of sellers Expectations A change in this variable… …causes a movement along the S curve …shifts the S curve …shifts the S curve …shifts the S curve …shifts the S curve if a firm thinks its profits are going to go up, they will spend more, whereas if they think they will make less, they will spend less Shift vs. Movement Along Curve • Change in supply: a shift in the S curve – occurs when a non-price determinant of supply changes (like technology or costs) • Change in the quantity supplied: a movement along a fixed S curve – occurs when P changes • Change in demand: a shift in the D curve – occurs when a non-price determinant of demand changes (like income or # of buyers) • Change in the quantity demanded: a movement along a fixed D curve – occurs when P changes Supply and Demand Together P $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 0 5 10 15 20 25 30 35 D S Equilibrium: quantity supplied equals quantity demanded Q Moving to Equilibrium for each of these, look at next page for examples Different kinds of shifts 1 2 3 4 5 6 7 8 • • • • • • • • Demand rises and supply is constant Demand falls, supply is constant Supply rises, demand is constant Supply falls, demand is constant Demand rises and supply falls by an equal amount Demand falls and supply rises by an equal amount Demand rises by a greater amount than supply falls Demand rises by a lesser amount than supply falls 1 2 3 4 5 6 7 8 measure of wellbeing or welfare on the consumers side of the coin Consumer Surplus Price A • Measures economic welfare from the buyer’s side • Consumer’s surplus is the buyer’s Consumer Surplus willingness to pay minus what he actually pays for the good C P1 B • The area below the demand curve Demand and above the price measures the consumer surplus in the market 0 Q1 Quantity 0 measure of wellbeing or welfare on the producers side of the coin Producer Surplus (a) Producer Surplus at a Price of P1 Price Supply • Measures economic welfare from the seller’s side • Producer’s surplus is the amount the seller is paid for the good minus the B P1 Producer surplus seller’s cost C • The area below the price and above the supply curve measures the producer surplus in the market A 0 Q1 Quantity 0 Consumer and Producer Surplus in the Market Equilibrium Price A Supply D Consumer surplus Equilibrium price Producer surplus E B C 0 Equilibrium quantity Demand Quantity rent control is a great example of price ceilings Price Ceilings • Price Ceiling: a government mandated maximum price above which legal trades cannot be made. the lowest price that is allow to be legally charged Price Floors a great example of this is minimum wage • Price Floor: a government mandated minimum price below which legal trades cannot be made. in the labor market *demand is consumer *supply is producer ...
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This note was uploaded on 11/28/2010 for the course ECON 201 taught by Professor Dr.sharma during the Spring '08 term at Ohio State.

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