Chapter 4 - CHAPTER 4 Demand Supply and Markets u Demand...

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Unformatted text preview: CHAPTER 4 Demand, Supply, and Markets u Demand Demand u Amounts purchased per period Willing and able Specific period Other things constant u u u Law of Demand u Law of demand u Higher price: u Consumer Demand Law of Demand u Subs?tu?on effect u Rela?ve price u Lower price u Lower rela?ve price Law of Demand u Income effect u u Money income Real income u Lower price u Greater real income Demand Schedule and Demand Curve u Demand schedule u Demand curve Demand u Demand u Quan?ty demanded at a par?cular price Demand u Movement along the demand curve u u Individual demand Market demand LO1 Exhibit 1 The Demand Schedule and Demand Curve for Pizza Price per pizza Quantity Demanded Per week (millions) 8 14 20 26 32 $15 12 9 6 3 a b c d e D 0 8 14 20 26 32 Millions of pizzas per week (a) Demand schedule Price per Pizza a b c d e $15 12 9 6 3 (b) Demand curve The market demand D shows the quantity of pizza demanded, at various prices, by all consumers. Price and quantity demanded are inversely related. Supply uSupply uWilling and able uSpecific period uOther things constant Law of Supply u Law of supply u Higher price: u Higher reward, profit u Can afford to cover the marginal costs u Increasing opportunity cost u More able to increase quan?ty supplied Supply Schedule and Supply Curve uSupply schedule uSupply curve LO2 Exhibit 3 The Supply Schedule and Supply Curve for Pizza (a) Supply schedule Price per pizza $15 12 9 6 3 Quantity Supplied Per week (millions) 28 24 20 16 12 (b) Supply curve The market supply S shows the quantity of pizza supplied, at various prices, by all pizza makers. Price and quantity supplied are directly related. Supply uSupply uQuan?ty supplied at a par?cular price uMovement along the supply curve uIndividual supply uMarket supply Demand and Supply Create a Market u Markets Market Equilibrium u Surplus: excess quan?ty supplied u Downward pressure on price u Decrease quan?ty supplied u Increase quan?ty demanded u Shortage: excess quan?ty demanded u Upward pressure on price u Increase quan?ty supplied u Decrease quan?ty demanded Market Equilibrium u u u u u u u u Quan?ty demanded = Quan?ty Supplied Plans of buyers and sellers match Equilibrium point Equilibrium quan?ty Equilibrium price Market clears No pressure on price X marks the spot LO3 Exhibit 5(a) Equilibrium in the Pizza Market (a) Market schedules Millions of pizzas per Week Price per Quantity pizza Demanded $15 12 9 6 3 8 14 20 26 32 Quantity Supplied 28 24 20 16 12 Surplus or Shortage Surplus of 20 Surplus of 10 Equilibrium Shortage of 10 Shortage of 20 Effect on Price Falls Falls Remains the same Rises Rises Shifts of the Demand Curve 1. 2. 3. 4. Money income of consumers Prices of other goods Consumer expecta?ons The number or composi?on of consumers in the market Consumer tastes 5. Changes in Consumer Income u Increase in consumer income u Normal good Inferior good u LO1 Exhibit 2 An Increase in the Market Demand for Pizza $15 Price per pizza 12 9 6 3 D 0 8 14 20 26 32 Millions of pizzas per week D b f 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. Changes in the Prices of Other Goods u Subs?tutes u Complements used in combina?on u Unrelated Changes in Consumer Expectations u Income expecta?ons u Price expecta?ons Number or Composition of Consumers u Increase in number of consumers u Composi?on of the popula?on Changes in Consumer Tastes u Tastes u Change in tastes Demand: Summary u u u u Quan?ty demanded Demand Movement along the demand curve ShiZ in the demand curve Shifts of the Supply Curve 1. State of technology 2. Prices of relevant resources 3. Prices of alterna?ve goods 4. Producer expecta?ons 5. Number of producers in the market Changes in Technology uBe\er technology u Produc?on costs decrease u Increase quan?ty supplied at each price u Increase supply u Rightward shiZ LO2 Exhibit 4 An Increase in the Supply of Pizza An 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. Prices of Relevant Resources uRelevant resources uDecrease in the produc?on of relevant resources Prices of Alternative Goods uResources uAlterna?ve goods uDecrease in price of alterna?ve goods Changes in Producer Expectations uHigher prices in the future u Future profits u May increase the current supply u Easily stored goods uReduce current supply Changes in the Number of Producers u Market supply u Amount supplied u At each price u By all producers u Number of producers increase u Increase supply u Rightward shiZ Supply: Summary uQuan?ty supplied uSupply uMovement along the supply curve uShiZ in the supply curve LO3 Exhibit 5(b) (b) Market curves Equilibrium in the S Pizza Market Market equilibrium occurs at: Price where QD=QS; Point c Above the equilibrium price: QS>QD; Surplus; Downward pressure on P D $15 Price per pizza 12 9 6 3 Surplus c Shortage 0 Below the equilibrium price: QD>QS; Shortage; 14 16 20 24 26 Upward pressure on P Millions of pizzas per week Shifts of the Demand Curve Determinants of demand 1. 2. 3. 4. 5. Money income of consumers Price of a subs?tute or a complement Consumer expecta?ons Number of consumers Consumer tastes Shifts of the Demand Curve u Increase in demand u Rightward shiZ of D curve u Shortage; Upward pressure on P u QD decreases; Qs increase u New equilibrium: Increase in P and Q u Decrease in demand u Surplus; Downward pressure on P u New equilibrium: Decrease in P and Q LO4 Exhibit 6 Price per pizza S $12 9 c g Effects of an Increase in Demand Increase in demand: Rightward shift to D At P=$9: QD>QS; shortage Upward pressure on P QD decreases QS increases New equilibrium g Higher P Higher Q D D 0 20 24 30 Millions of pizzas per week Shifts in the Supply Curve Determinants of supply 1. 2. 3. 4. 5. Technological change Price of a relevant resource Price of an alterna?ve good Producers expecta?ons Number of producers Shifts in the Supply Curve u Increase in supply u Rightward shiZ of S curve u Surplus; Downward pressure on P u QD increases; QS decreases u New equilibrium: u P decreases; Q increases u Decrease in supply u New equilibrium: u P increase; Q decreases LO4 Exhibit 7 Effects of an Increase in Supply Increase in supply: Rightward shift to S At P=$9: QS>QD; surplus Downward pressure on P QD increases QS decreases New equilibrium d Higher Q Lower P Simultaneous Shifts of D and S curves u Both S and D increase; u Q increases u D shiZs more: P increases u S shiZs more: P decreases u Both S and D decrease: u Q decreases u D shiZs more: P decreases u S ShiZs more: P increases LO4 Exhibit 8 Indeterminate Effect of an Increase in Both Demand and Supply Simultaneous Shifts of D and S curves u S increases; D decreases u P decreases u D shiZs more: Q decreases u S shiZs more: Q increases u S decreases; D increases u P increases u D shiZs more: Q increases u S shiZs more: Q decreases LO4 Exhibit 10 Average pay per season (millions) S2007 $4.9 4.0 D2007 3.0 2.0 1.0 0.17 100 200 300 400 450 NBA Pay Leaps S relatively fixed Big jump in D Average 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. D1980 S1980 Players per season Disequilibrium u Surplus u Shortage u Disequilibrium u Temporary, or u Result of government interven?on Disequilibrium u Price Floors u Set above equilibrium P u Minimum selling P u Surplus u Distort markets u Reduce economic welfare Disequilibrium u Price Ceilings u Set below the equilibrium P u Maximum selling P u Shortage u Distort markets u Reduce economic welfare LO5 Exhibit 11 Price Floors and Price Ceilings (a) Price Floors for Milk Surplus $2.50 1.90 Monthly rental price Price per gallon S (b) Price Ceilings for Rent S $1,000 600 Shortage D D 14 19 24 0 Millions of gallons per month No effect if price floor is set at or below equilibrium P 40 50 60 0 Thousands of rental units per month No effect if price ceiling is set at or above equilibrium P LO4 Exhibit 9 Effects of Shifts of Both Demand and Supply Change in demand Demand increases Equilibrium price change is indeterminate. Equilibrium quantity increases. Equilibrium price rises. Supply decreases Equilibrium quantity change is indeterminate. Demand decreases Equilibrium price falls. Equilibrium quantity change is indeterminate. Equilibrium price change is indeterminate. Equilibrium quantity decreases. Change in supply Supply Increases ...
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This note was uploaded on 10/05/2011 for the course ECON 2005 at Virginia Tech.

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