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Supply and Demand: Price and Quantity Determination in Competitive Markets

The Economics Department, UMR Presents:. Supply and Demand: Price and Quantity Determination in Competitive Markets. Starring. Demand Supply Equilibrium and Disequilibrium. Featuring. The Law of Demand D = D(PENTE) The Tendency of Supply S = S(PENT) Equilibrium/Disequilibrium.

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Supply and Demand: Price and Quantity Determination in Competitive Markets

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  1. The Economics Department, UMR Presents: Supply and Demand: Price and Quantity Determination in Competitive Markets

  2. Starring • Demand • Supply • Equilibrium and Disequilibrium

  3. Featuring The Law of Demand D = D(PENTE) The Tendency of Supply S = S(PENT) Equilibrium/Disequilibrium

  4. In Three Parts Demand Supply Equilibrium/Disequilibrium

  5. Part 1 What is Demand? • It is the relationship between quantity demanded and price, c.p., within a specific period • Or, it is the relationship between the maximum willingness to pay in return for something of value

  6. Individual vs.Market Demand • Market demand is the horizontal sum of individual demands • It is market demand that commands our interest

  7. But Start with Individual Demand • Consider your demand for peanuts per semester (This is called “Quantity Demanded, qd”) • We will first look at this information in a table called a “Demand Schedule”

  8. Your Demand Schedule Demand Schedule - a table showing the relationship between the price of a good and the quantity demanded per period of time, ceteris paribus. Peanuts are measured in pounds.

  9. Your Demand Schedule

  10. Your Demand Schedule

  11. Your Demand Schedule 10

  12. Law of Demand • The price (willingness to pay) of a product, service, or activity is inversely related to the quantity demanded, ceteris paribus. • Applies to Market Demand (but notice your demand for peanuts obeyed the law)

  13. Demand Schedules and Curves • Demand Curve - a graph of the demand schedule showing the relationship between the price of a good and the quantity demanded per period of time, ceteris paribus.

  14. Individual Demand Curve P($) Note: ALWAYS label your axes! qd per semester

  15. Individual Demand Curve P($) 2.00 1.50 1.00 0.50 qd per semester 0 5 10 15

  16. Individual Demand Curve P($) A 2.00 1.50 1.00 0.50 qd per semester 0 5 10 15

  17. Individual Demand Curve P($) A 2.00 B 1.50 1.00 0.50 qd per semester 0 5 10 15 7

  18. Individual Demand Curve P($) A 2.00 B 1.50 C 1.00 0.50 qd per semester 0 5 10 15 7

  19. Individual Demand Curve P($) A 2.00 B 1.50 C 1.00 d 0.50 qd per semester 0 5 7 10 15

  20. Market Demand Curve • The demand curve we just drew was the Demand for Peanuts by one person. • We want an aggregate measure of the price, quantity demanded relationship--a market demand

  21. Two Views of Demand • WTP - Maximum willingness to pay for a given unit of a good (marginal WTP) or for a number of units of a good • The Law of Demand - P, Qd relationship

  22. WTP and the Law of Demand The max. WTP for the 23rd unit is $1.50. The quantity demanded at $2.00 is 15 units per period P $2.00 $1.50 D Qd/t 15 23

  23. Market Demand Schedule • Market Demand Schedule - a table showing the relationship between the price of a good and the total quantity demanded by all consumers in the market per period of time, ceteris paribus.

  24. Market Demand Schedule • Market Demand is obtained by summing horizontally the quantity demanded by each person at each price

  25. Market Demand Schedule

  26. Market Demand Schedule

  27. Market Demand Schedule

  28. Market Demand Schedule

  29. Demand Curve P Note: the linear demand is used for convenience $15 $10 $5 D Qd/t 8 15 22

  30. Change in D vs. Change in Qd • Change in Demand - a change in a factor that effects demand other than the price of the good, thus there is a change in quantity demanded at EVERY price. • Change in Quantity Demanded - a movement along a given demand curve-due only to a change in the price of the good itself

  31. Change in Demand • Increase in demand - demand curve shifts to the right (or up - an increase in WTP) • Decrease in demand - demand curve shifts to the left (or down - a decrease in WTP)

  32. Increase in Demand P D’ D Qd/t

  33. Increase in Qd P($) A B D Qd/t

  34. Behind the Demand Curve • A demand curve is drawn under the assumption of ceteris paribus - all other important factors remaining unchanged • Factors to be considered may be remembered by D = D(PINTE)

  35. Factors affecting market demand, PINTE • P = Prices • I = income • N = number of buyers • T = tastes or preferences • E = expectations about future prices and market conditions

  36. Price of Other Goods • The price of substitutes • The price of complements

  37. Price of Substitutes • What would happen to the demand for Peanuts if the price of pretzels fell? • The demand for Peanuts would probably fall since people would buy pretzels instead. • There is a positive relationship between the demand for a good and the price of its substitutes

  38. Price of Substitutes • Thus an increase in the price of a substitute will increase the demand for the good • And a decrease in the price of a substitute will decrease the demand for the good

  39. Price of Complements • Complementary goods are goods used together • What if the price of beer goes up? What ought to happen to the demand for Peanuts? • It ought to go down, since people want beer to drink with Peanuts. If the price of beer rises, the demand for Peanuts will fall.

  40. Price of Complements • Thus an increase in the price of a complement will decrease the demand for the good • And a decrease in the price of a complement will increase the demand for the good

  41. Price of Other Goods -Summary • Thus, either of the following will increase Demand • Price of a substitute good increases • Price of a complement good decreases • And either of the following will decrease Demand • Price of a substitute good decreases • Price of a complement good increases

  42. Income • For most goods there is a positive relationship between income and demand. These are defined as normal goods. • For inferior goods, there is an inverse relationship between income and demand.

  43. Normal and Inferior Goods • Are Peanuts a normal good? Are they for you? If they are, upon graduation and a higher salary you would buy more peanuts. • The question is empirical - how do people react?

  44. Normal and Inferior Goods • What about Spam? Is the relationship between income and demand positive or negative, c.p.? • Cheaper food products are examples of inferior goods

  45. Number of Buyers • A positive relationship - the greater the number of buyers, the larger the total quantity demanded of the good at a given price. Demand increases, or the demand curve shifts to the right. • Likewise, if there are fewer buyers in the market there is less quantity demanded at every price, so demand has decreased.

  46. Tastes and Preferences • If we find out Peanuts improves our attractiveness to others, our willingness to pay for Peanuts would increase (an upward shift of the demand curve) • If we find out Peanuts are unhealthy the demand for the good decreases (a leftward shift of the curve)

  47. Expectations • If we were to hear a new story about how Peanut prices were going to go up would you stock up? • If you expect your employer to begin downsizing would you reduce your demand for goods now?

  48. Demand Reminders • Demand curves downward and to the right. • Changes in only the price of a good cause changes in the quantity demanded. • The only demand factor that cannot cause a change in the demand of a good is a change in its own price. • PINTE factors may alone or jointly change the demand for a good.

  49. The End Continue to: Supply

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