1 / 69

Demand, Supply & Market Equilibrium

Demand, Supply & Market Equilibrium. P. S. ECO 2013 Chapter 3 Prof M. Mari Fall 2007. D. Q. Demand. A relation between the price of a good and the quantity that consumers are willing and able to buy during a given period, other things constant.

carolos
Download Presentation

Demand, Supply & Market Equilibrium

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Demand, Supply & Market Equilibrium P S ECO 2013 Chapter 3 Prof M. Mari Fall 2007 D Q

  2. Demand • A relation between the price of a good and the quantity that consumers are willing and able to buy during a given period, other things constant. • Willing: you want to buy the product • Able: you can afford the buy the product

  3. Demand Schedule and Curve • Demand curve: • a curve showing the relation between the price of a good and quantity demanded during a given period, other things constant. • Suppose we are making pizza.

  4. Law of Demand • States that a quantity of a good demanded during a given period relates inversely to its price, other things constant. • Price increases  Quantity Demanded decreases • Price decreases  Quantity demanded increases • Creates a downward sloping demand curve

  5. Why? • Substitution Effect • Unlimited wants/scarce resources • When the price of a good falls, consumers substitute that good for other goods, which become relatively more expensive. • Reverse also holds true

  6. Why? • Income Effect • Money income: is simply the number of dollars received per period • Real income: your income measured in terms of what it can buy. • A fall in the price of a good increases consumers’ real income making consumers more able to purchase goods; for a normal good, the quantity demanded increases.

  7. Demand Curve A curve showing the relation between the price of a good and the quantity demanded. Price $6 $5 Point on the line that matches the schedule Every point on the line matches the schedule. It is a price/quantity demanded that consumers are willing and able to buy. $4 $3 Demand Quantity 0 200 150 50 75 100

  8. Movement Along the Demand Curve • Caused by a change in price • Only a change in price • Move from one point to another on the same graph • Called a • Change in quantity demanded.

  9. Movement along the Demand Curve Price B $6 $5 A Demand 0 Quantity 75 100

  10. Demand • Individual demand • The demand of an individual consumer • Market demand • Sum of individual demands of all consumers in the market

  11. Shifts in the Demand Curve • A demand curve isolates the relation between prices of a good and quantities demanded when other factors that could affect demand remain unchanged. • Factors called assumptions or determinants

  12. Determinants of Demand • Changes in consumer income • Changes in prices of related goods • Changes in consumer expectations • Changes in the number or composition of consumers • Changes in consumer tastes

  13. Changes in determinants • Results in changes to the RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED. • At each and every price a DIFFERENT quantity is demanded. • Results in a shift in the demand curve • New curve must be drawn

  14. Changes in Demand • Increase in demand • At each and every price MORE of the good is demanded • Shifts to the right Price A B $5 D2 D1 Quantity 100 150

  15. Causes of Increase in Demand • Increase in consumer income • Causes consumers to buy more of the product at each and every price. • Normal goods • Inferior goods

  16. Change in consumer income • Normal goods • A good for which demand increases as consumer income rise • Inferior goods • A good which demand increases as consumer income falls

  17. Changes in Price of Related Goods • Substitutes • Goods that are not consumed jointly • Goods that are related in such a way that an increase in the price of one shifts the demand curve for the other rightward. • Increase in price of Coke leads to increase in demand for Pepsi

  18. Changes in Price of Related Goods • Substitutes • Suppose that the price of Coke rises from $1 to $1.50, then the demand for Pepsi will decrease from 75 to 100. $1 D2 D1 100 75

  19. Changes in the price of related goods • Complements • Goods that are related in a such a way that an increase in the price of one shifts the demand of the other leftward • Two goods that are consumed jointly. • An decrease in the price of one will increase demand for the other

  20. Changes in Price of Related Goods • Complements • An decrease in the price of DVD players, increases the demand for DVDs • Suppose that DVD players decrease in price from $145 to $100, now the demand for DVDs will decrease from 750 at $20 to 900. $20 D2 D 900 750

  21. Changes in Consumer Expectations • Such as expectations in • Prices and income • Affect how consumers spend their money and their demand • If product cheaper today than tomorrow, then increase in demand

  22. Changes in consumer tastes • Consumer preferences likes and dislikes in consumption assumed to be constant along a given demand curve assumed constant along a given demand curve • Changes in taste will cause a shift in the demand curve as different quantities are demanded at each and every price.

  23. Changes in taste • Consumers prefer platform shoes. • At $50, demand increases from 100 to 200. $50 D2 D 100 200

  24. Change in the number and composition of consumers • The market demand curve is the sum of the individual demand curves. • If the number of consumers falls then the sum will be smaller thus shifting the demand curve

  25. Changes in Demand • Decrease in demand • At each and every price Less of the good is demanded • Shifts to the Left Price B $5 A D1 D2 Quantity 90 100

  26. Causes of Decrease in Demand • Decrease in consumer income • Causes consumers to buy less of the product at each and every price.

  27. Changes in Price of Related Goods • Substitutes • Goods that are not consumed jointly • Goods that are related in such a way that an increase in the price of one shifts the demand curve for the other rightward. • Decrease in price of Coke leads to Decrease in demand for Pepsi

  28. Changes in Price of Related Goods • Substitutes • Suppose that the price of Coke drops from $1 to $0.50, then the demand for Pepsi will decrease from 100 to 75. $1 D D2 100 75

  29. Changes in the price of related goods • Complements • Goods that are related in a such a way that an increase in the price of one shifts the demand of the other leftward • Two goods that are consumed jointly. • An increase in the price of one will decrease demand for the other

  30. Changes in Price of Related Goods • Complements • An decrease in the price of DVD players, increases the demand for DVDs • Suppose that DVD players increase in price from $100 to $145, now the demand for DVDs will decrease from 900 at $20 to 750. $20 D1 D2 900 750

  31. Changes in Consumer Expectations • Such as expectations in • Prices and income • Affect how consumers spend their money and their demand • If product more expensive today than tomorrow, then decrease in demand

  32. Changes in consumer tastes • Consumer preferences likes and dislikes in consumption assumed to be constant along a given demand curve assumed constant along a given demand curve • Changes in taste will cause a shift in the demand curve as different quantities are demanded at each and every price.

  33. Change in the number and composition of consumers • The market demand curve is the sum of the individual demand curves. • If the number of consumers falls then the sum will be smaller thus shifting the demand curve

  34. Review of Demand • A change in quantity demanded is not a change in demand • Change in quantity demanded is caused by a change in price • Change in quantity demanded is a movement along the demand curve • Change is demand is caused by a change in the determinants • Change in demand shifts the demand curve

  35. Supply • Producer’s side • A relation between the price of a good and the quantity that the producers are willing and able to offer for sale during a given period, other things constant.

  36. Law of Supply • The quantity of a good supplied during a given period is usually directlyrelated to the price of the good • Increase in price leads to increase in quantity supplied • Decrease in price leads to decrease in quantity supplied. • Creates upward sloping supply curve

  37. Supply Curve Price 6 Supply 5 Quantity

  38. Movement along the supply curve • A change in price and only in price • Causes a movement along the supply curve • Called a Change in Quantity Supplied Supply $6 B $4 A 100 150

  39. Supply • Individual supply • The supply of an individual producer • Market supply • The sum of individual supplies of all producers in the market

  40. Determinants for the Supply Curve • Changes in technology • Changes in prices of relevant resources • Changes in the prices of alternative goods • Changes in Producer Expectations • Changes in the number of producers

  41. Changes in Supply • Caused by changes in the determinants to the supply curve • Results in changes to the relationship between the price and quantity supplied • At each and every price a different quantity is supplied • New supply curve - shift in supply

  42. Increase in Supply • At each and every price more of the good is supplied S1 S2 $6 300 400

  43. Causes of increase in Supply • Improvements in Technology • Changes in relevant resources • Decrease in the price of resources • Lowers costs • Changes in price of alternative goods • If price of alternative good increases, supply of the good increases • Changes in producers expectations

  44. Changes in technology • Technology is the economy’s stock of knowledge about how to combine resources efficiently

  45. Changes in Technology • Improvements in technology • Causes an increase in supply • More of the product is available at all prices S1 S2 $6 300 400

  46. Changes in Relevant Resources • Decrease in resource prices • Increases the supply of the good at each and every price. S1 S2 $6 300 400

  47. Changes in prices of Alternative Goods • Alternative goods • Other goods that use some or all of the same resources as the good in question • Beef and leather. • If the price of beef increases, producers will supply more beef thus increasing the supply of leather. Price S1 S2 $6 Q Leather 300 400 Above is the market for the supply of leather

  48. Changes in Producers Expectations • Expectation of future prices of resources or their own product can cause producers to change what they offer at each individual price

  49. Changes in the Number of Producers • As the number of producers change so does the supply of the product • A decrease in the number of producers will lead to a decrease in supply

  50. Decrease in Supply • At each and every price LESS of the good is supplied 5 S1 S2 400 600

More Related