Transcript Slide 1

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Market
Demand, Supply and Equilibrium
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Markets and Competition
Market – a group of buyers and sellers of a good or service
• Can be highly organized (Corn, Wheat)
• Can be less organized (Television)
Competitive market
• Many buyers and many sellers
• Each has a negligible impact on market price
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Demand
Quantity demanded – the amount of a good buyers are
willing and able to purchase
Law of demand – other things equal, when the price of
the good rises the quantity demanded of a good falls
Demand schedule – a table illustrating the relationship
between a price of a good and quantity demanded
Demand curve – a graph illustrating the relationship
between price of a good and quantity demanded
Individual demand – Demand of one individual
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demand schedule – a table that shows
the quantity demanded at each price.
Price of
hamburgers
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Demand schedule and demand curve
Price
Quantity of
hamburgers
demanded
$3.00
12
10
8
6
4
2
0
$2.00
Hamburger Demand Curve
decrease
in price
$2.50
increases quantity
of hamburgers demanded.
$1.50
$1.00
Demand curve
$0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity
demand curve – illustrates how the quantity demanded of the good changes as its price
varies. Because a lower price increases the quantity demanded, the demand curve slopes
downward.
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Market Demand Schedule
Market demand – the sum of all individual demand
schedules for a good or service
Price of hamburger
Bob
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
12
10
8
6
4
2
0
Sam
+
7
6
5
4
3
2
1
Market
=
19
16
13
10
7
4
1
The quantity demanded in a market is the sum of the quantities demanded by all the
buyers at each price. Thus, the market demand curve is found by adding horizontally
the individual demand curves. At a price of $2.00 Bob demands 4 hamburgers, and
Sam demands 3. The quantity demanded in the market at this price is 7 hamburgers.
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Bob’s demand
+
Price
$3.00
DBob
Market Demand Curve
Sam’s demand
= Market demand
Price
Price
$3.00
$3.00
DSam
2.50
2.50
2.00
2.00
2.00
1.50
1.50
1.50
1.00
1.00
1.00
0.50
0.50
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity
0
2.50
1 2 3 4 5 6 7
Quantity
0
DMarket
2 4 6 8 10 12 14 16 18
Quantity
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Determinants of Demand
– Consumer Income
• Normal good – an increase in income will cause an increase in demand,
all else equal
• Inferior good – an increase in income a decrease in demand, all else equal
Hamburger Market
Hamburger? Inferior
Steak?
Price
Normal
For Hamburger
increase in income (D1)
decrease in income (D2)
P0
D0
D1
0
Q1
Q0
D2
Q2
Quantity
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Determinants of Demand
– Prices of related goods
• Substitutes an increase in the price of one leads to an increase in the demand
for the other
• Complements
an increase in the price of one leads to a decrease in the
demand for the other
Hamburger Market
Compliments
buns, cheese & soda
Price
Increase in bun price (D1)
Substitutes
chicken, steak & fish
P0
D0
D1
Increase in chicken price (D2)
0
Q1
Q0
D2
Q2
Quantity
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Determinants of Demand
– Tastes
• News story
• Advertisement
• Diets
Oprah “all burgers are evil”, Mad cow (D1)
Beef, It’s What’s for Dinner
Adkins Diet (D2)
Hamburger Market
Price
P0
D0
D1
0
Q1
Q0
D2
Q2
Quantity
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Determinants of Demand
– Expectations about future prices, quality and availability
• Leaner, healthier, meat announcement (D1)
• New tax on hamburgers next month to promote health (D2)
Hamburger Market
Price
P0
D0
D1
0
Q1
Q0
D2
Q2
Quantity
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Determinants of Demand
– Consumer Income
• Normal good – an increase in income will cause an increase in demand,
all else equal
• Inferior good – an increase in income causes a decrease in demand, all else
equal
– Prices of related goods
• Substitutes an increase in the price of one leads to an increase in the demand
for the other
• Complements
an increase in the price of one leads to a decrease in the
demand for the other
– Tastes
– Expectations about future prices, quality and availability
– Number of buyers
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Demand Terminology
Change in Demand is a shift in the
demand curve resulting from a change
in one of the determinants of demand
Price
Change in Quantity Demanded is a
movement along a given demand
curve caused by a change in own price
Price
$4.00
B
$2.00
$2.00
D0
D1
0
10
A
20
Quantity
As incomes increase, the demand curve for
hamburger shifts to the left. Note the left graph: the
demand curve shifts from D0 to D1. At price of $2.00,
the quantity demanded falls from 20 to 10
hamburgers.
D0
0
12
20
Quantity
An increase in the price of hamburgers causes a movement
to a different point on a given demand curve. Note the right
graph: when the price rises from $2.00 to $4.00, the quantity
demanded falls from 20 to 12 hamburgers, as reflected by
the movement from point A to point B.
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Demand Terminology
Increase in demand – any change that increases the quantity at every price
• Demand curve shifts right (D1)
Decrease in demand – any change that decreases the quantity at every price
• Demand curve shifts left (D1)
Price
Increase in
Demand
Decrease in
Demand
D0
D2
0
D1
Quantity
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Demand Review
Variable
A Change in This Variable . . .
Change in Quantity
Demanded
Price of the good itself
Movement along the demand curve
Change in Demand
Income
Prices of related goods
Tastes
Expectations
Number of buyers
Shift in demand curve
Shift in demand curve
Shift in demand curve
Shift in demand curve
Shift in demand curve
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Supply
Quantity supplied – the amount of a good sellers are
willing and able to sell
Law of supply – other things equal, when the price of
the good changes quantity supplied of a good moves in
the same direction
Increase in Supply – when the price of the good rises
quantity supplied of a good go up
Decrease in Supply – when the price of the good falls
quantity supplied of a good drops
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supply schedule – a table that shows
the quantity supplied at each price.
Supply schedule and supply curve
Price
Supply curve
$3.00
Price of
hamburger
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity of
hamburger
supplied
0
0
1
2
3
4
5
$2.50
increase
in price
$2.00
$1.50
$1.00
increases quantity
of hamburger supplied
$0.50
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity
supply curve – a graphic representation of the relationship between price of a good and
quantity supplied, higher price increases the quantity supplied, so the supply curve slopes
upward.
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Market Supply
Market supply – sum of the supply schedules of all
sellers for a good or service
Price of hamburger
Jan
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
0
0
1
2
3
4
5
Al
+
0
0
0
2
4
6
8
Market
=
0
0
1
4
7
10
13
The quantity supplied in a market is the sum of the quantities supplied by all the sellers
at each price. Thus, the market supply curve is found by adding horizontally the
individual supply curves. At a price of $2.00, Bob supplies 3 hamburgers, and Al
supplies 4 hamburgers. The quantity supplied in the market at this price is 7
hamburgers.
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Jan’s supply
Market supply
+
Price
Al’s supply
=
Market supply
Price
Price
$3.00
$3.00
$3.00
2.50
2.50
2.50
2.00
2.00
2.00
1.50
1.50
1.50
1.00
1.00
1.00
0.50
0.50
0.50
SJan
0
1 2 3 4 5 6 7 8 9 10 11 12
Quantity
0
SAl
1 2 3 4 5 6 7
Quantity
0
SMarket
2 4 6 8 10 12 14 16 18
Quantity
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Shifts in Supply
Shift in Supply or “Change in Supply”
– Increase in supply: any change that increases the
quantity supplied at every price
• Supply curve shifts right
– Decrease in supply: any change that decreases the
quantity supplied at every price
• Supply curve shifts left
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Price
Supply
curve, S2
Shifts in Supply
Supply
curve, S0
Supply
curve, S1
Decrease in
supply
`
0
Increase in
Supply
Quantity
Any change that raises the quantity that sellers wish to produce at any given price
shifts the supply curve to the right. Any change that lowers the quantity that sellers
wish to produce at any given price shifts the supply curve to the left.
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Determinants of Supply
Variables that can shift the supply curve
– Input Prices (negatively related to increased prices of inputs)
– Technology (positively related to improved technology)
– Expectations about future
– Price of other goods being produced (negatively related
to increased prices of other goods)
– Number of sellers
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Determinants of Demand
Variables that can shift the supply curve
– Input Prices (negatively related to increased prices of inputs)
Employees always want
a wage increase. How
will a wage increase
impact the market for
Hamburger? (S1)
Hamburger
Price
S1
S0
S2
P0
A wage decrease? (S2)
0
Q1
Q0
Q2
Quantity
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Determinants of Demand
Variables that can shift the supply curve
– Price of other goods being produced (negatively related
to increased prices of other goods)
In economic recession
households demand
more cats and fewer
dogs
― Cats (inferior goods)
Cat food prices increase
Dog Food
Price
S2
S0
P0
― Dogs (normal goods)
0
Q2
Q0
Quantity
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Supply Review
Variables that influence sellers
Variable
Change in Quantity
Supplied
of the good itself
Change in Supply
Input prices
Technology
Expectations
Number of sellers
A Change in This Variable . . .
movement along the supply curve
Shifts the supply curve
Shifts the supply curve
Shifts the supply curve
Shifts the supply curve
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Equilibrium
Equilibrium – where market price achieves the condition
quantity supplied equals quantity demand
Price
Supply
$3.00
2.50
Equilibrium
Equilibrium
price
2.00
1.50
Equilibrium price is
$2.00. At this price, 7
hamburgers are
supplied, and 7
hamburgers are
demanded.
1.00
Demand
0.50
0
1 2 3 4 5 6 7 8 9 10 11 12 Quantity
Equilibrium
quantity
25
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Equilibrium
Excess Supply
Excess Demand
Price
Price
Supply
Surplus
Supply
$2.50
$2.00
$2.00
Demand
$1.50
Demand
Shortage
0
4
7
10
Quantity
0
4
7
10
Quantity
Suppose market price is $2.50, the quantity supplied (10 burgers) exceeds the quantity demanded (4
burgers). Suppliers will increase sales by cutting the price which causes an increase in quantity demand
and moves the price toward its equilibrium level.
Suppose market price is $1.50, the quantity demanded (10 burgers) exceeds the quantity supplied (4
burgers). With more buyers and goods available, suppliers take advantage of the shortage by raising the
price. The price adjustment moves the market toward the equilibrium.
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Equilibrium
• Surplus (Excess supply)
– Quantity supplied > quantity demanded
– Downward pressure on price
• Shortage (Excess demand)
– Quantity demanded > quantity supplied
– Upward pressure on price
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Supply and Demand
Law of supply and demand – states that price of
any good adjusts bringing the quantity supplied
and the quantity demanded into balance
In most markets surpluses and shortages are
temporary
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Supply and Demand
Three steps to analyzing changes in equilibrium
1. Decide if the event shifts the supply curve, the
demand curve, or both curves
2. Decide if curve shifts to right or to left
3. Use supply-and-demand diagram
• Compare initial and new equilibrium
• How the shift affects equilibrium price and quantity
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Supply and Demand
Example: A change in market equilibrium due to
a shift in demand
A cool summer effect on the hamburger market
1. Cool weather - demand curve (tastes)
2. Demand curve shifts to the left (down)
3. Lower equilibrium price; lower equilibrium
quantity
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Supply and Demand
1. Cool weather
decreases the demand
for hamburger . . .
Price
Supply
2. resulting in
a lower price . . .
$2.50
New equilibrium
2.00
D0
D1
3. …and a lower quantity sold.
0
7
10
Quantity
An abnormally cool summer causes buyers to demand less hamburger (less grilling). The demand
curve shifts from D0 to D1, which causes the equilibrium price to lower from $2.50 to $2.00 and the
equilibrium quantity to lower from 10 to 7 hamburgers
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Supply and Demand
Example: A change in market equilibrium due to a
shift in supply
– Technology improves hamburger processing
1. Change in technology impacts the supply curve
2. Supply curve shifts to the right
3. Lower equilibrium price; higher equilibrium
quantity
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Supply and Demand
Price
1. an improvement in Technology
S0
2. results in
a lower price
S1
$2.50
2.00
New equilibrium
Demand
3. and a higher quantity sold
0
4
7
Quantity
A technology improvement causes sellers to supply more hamburger. The supply curve shifts from S0
to S1, which causes the equilibrium price of hamburger to lower from $2.50 to $2.00 and the
equilibrium quantity to increase from 4 to 7 hamburgers
33
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Supply and Demand
Example: A change in market equilibrium due to
a shift in supply
– Labor wages increase
– Effect on the market for hamburger?
1. Change in input price impacts the supply curve
2. Supply curve - shifts to the left
3. Higher equilibrium price; lower equilibrium
quantity
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Supply and Demand
Price
1. an increase in labor wages
S1
2. results in
a higher price
S0
$2.50
New equilibrium
2.00
Demand
3. a smaller quantity sold
0
4
7
Quantity
An increase in labor wages (an input price) causes sellers to supply less hamburger. The supply curve
shifts from S0 to S1, which causes the equilibrium price of hamburger to rise from $2.00 to $2.50 and
the equilibrium quantity to fall from 7 to 4 hamburgers
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Supply and Demand
Example: shifts in both supply and demand
– Increase in labor wages and increase in fish price
1. Higher fish price shifts demand curve for hamburger
to the right
2. Higher labor wages will shift supply to the left
3. Equilibrium price raises
4. Equilibrium quantity depends on relative shifts in
demand and supply
– If demand increases substantially while supply falls just a
little: equilibrium quantity rises
– If supply falls substantially while demand rises just a little:
equilibrium quantity falls
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Supply and Demand
Price Rises, Quantity Rises
Price
Large
increase
in demand
New
equilibrium
Price Rises, Quantity Falls
Price
Small
increase
in demand
S1 S
0
P1
S0
New
equilibrium
P1
Small
decrease
in supply
P0
D1
Large
decrease
in supply
P0
D1
D0
D0
0
S1
Q0
Q1
Quantity of
Hamburgers
0
Q1 Q 0
Quantity of
Hamburgers
Observe a simultaneous increase in demand and decrease in supply with two possibly outcomes.
• To the left, equilibrium price rises from P0 to P1, and the equilibrium quantity rises from Q0 to Q1.
• To the right, equilibrium price again rises from P0 to P1, but the equilibrium quantity falls from Q0 to Q1.
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Supply and Demand
What happens to price and quantity when supply or
demand shifts?
No change
In Supply
An increase
In Supply
A decrease
In supply
No change
In demand
P same
Q same
P down
Q up
P up
Q down
An increase
In demand
P up
Q up
P ambiguous
Q up
P up
Q ambiguous
A decrease
In demand
P down
Q down
P Down
Q ambiguous
P ambiguous
Q down
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