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Market Demand, Supply and Equilibrium

Market Demand, Supply and Equilibrium

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Market Demand, Supply and Equilibrium

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  1. Market Demand, Supply and Equilibrium

  2. Markets and Competition Market –agroup 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

  3. 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

  4. Demand schedule and demand curve Hamburger Demand Curve demand schedule – a table that shows the quantity demanded at each price. Price increases quantity of hamburgers demanded. decrease in price $3.00 $0.50 $2.50 $1.00 $1.50 $2.00 Demand curve 0 11 10 12 4 7 8 3 2 1 9 5 6 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.

  5. Market demand – the sum of all individual demand schedules for a good or service Market Demand Schedule 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.

  6. Market Demand Curve + = Bob’s demand Sam’s demand Price Market demand Price Price DBob DSam $3.00 $3.00 $3.00 0.50 2.00 2.50 1.50 2.50 1.00 2.00 0.50 0.50 1.00 2.00 1.50 1.00 1.50 2.50 DMarket 10 12 11 10 1 7 5 4 3 6 8 7 6 4 3 5 9 2 18 2 8 16 6 4 12 1 14 2 0 0 0 Quantity Quantity Quantity

  7. Determinants of Demand Price • 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? Normal D1 D2 D0 P0 For Hamburger increase in income (D1) 0 Quantity decrease in income (D2) Q0 Q1 Q2

  8. Determinants of Demand Price • 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 Increase in bun price (D1) D1 D2 D0 P0 Substitutes chicken, steak & fish 0 Quantity Increase in chicken price (D2) Q0 Q1 Q2

  9. Determinants of Demand Price • News story Oprah “all burgers are evil”, Mad cow (D1) • Tastes • Advertisement Beef, It’s What’s for Dinner • Diets Adkins Diet (D2) Hamburger Market D1 D2 D0 P0 0 Quantity Q0 Q1 Q2

  10. Determinants of Demand • Expectations about future prices, quality and availability Price • Leaner, healthier,meat announcement (D1) • New tax on hamburgers next month to promote health (D2) Hamburger Market D1 D2 D0 P0 0 Quantity Q0 Q1 Q2

  11. 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 • Tastes • 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 • Expectations about future prices, quality and availability • Number of buyers

  12. Demand Terminology Change in Demand is a shift in the demand curve resulting from a change in one of the determinants of demand Change in Quantity Demanded is a movement along a given demand curve caused by a change in own price Price Price $4.00 $2.00 $2.00 B A D1 D0 D0 10 12 20 20 Quantity Quantity 0 0 As incomes increase, the demand curve for hamburger shifts to the left. Note the left graph:the demand curve shifts from D0to D1. At price of $2.00, the quantity demanded falls from 20 to 10 hamburgers. • 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.

  13. Increase in demand – any change that increases the quantity at every price Demand curve shifts right (D1) Demand Terminology Price Increase in Demand Decrease in demand – any change that decreases the quantity at every price • Demand curve shifts left (D1) Decrease in Demand D1 D2 D0 0 Quantity

  14. Demand Review

  15. 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

  16. Supply schedule and supply curve supply schedule – a table that shows the quantity supplied at each price. Supply curve Price $1.00 $1.50 $2.00 $0.50 $2.50 $3.00 increases quantity of hamburger supplied increase in price 0 11 12 10 7 6 8 5 4 3 2 1 9 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.

  17. Market supply – sum of the supply schedules of all sellers for a good or service Market Supply 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.

  18. Market supply + Jan’s supply Al’ssupply = Market supply Price Price Price SJan SMarket SAl $3.00 $3.00 $3.00 0.50 0.50 1.00 1.50 2.50 2.00 1.50 2.00 1.00 2.00 2.50 0.50 1.00 1.50 2.50 12 11 10 10 8 7 3 2 6 9 1 2 3 4 6 5 4 4 2 8 1 18 12 6 16 5 7 14 0 0 0 Quantity Quantity Quantity

  19. 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

  20. Shifts in Supply Supply curve, S1 Supply curve, S2 Price ` Increase in Supply Supply curve, S0 Decrease in supply 0 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.

  21. 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

  22. Determinants of Demand Price S1 Variables that can shift the supply curve • Input Prices (negatively related to increased prices of inputs) S2 S0 Hamburger Employees always want a wage increase. How will a wage increase impact the market for Hamburger? (S1) P0 A wage decrease? (S2) 0 Quantity Q2 Q0 Q1

  23. Determinants of Demand Price S2 Variables that can shift the supply curve • Price of other goods being produced (negatively related to increased prices of other goods) S0 Dog Food In economic recession households demand more cats and fewer dogs • Cats (inferior goods) Cat food prices increase • Dogs (normal goods) P0 0 Quantity Q0 Q2

  24. Supply Review Variables that influence sellers

  25. Equilibrium Equilibrium – where market price achieves the condition quantity supplied equals quantity demand Price Equilibrium Supply $3.00 2.50 0.50 1.00 1.50 2.00 Equilibrium price is $2.00. At this price, 7 hamburgers are supplied, and 7 hamburgers are demanded. Equilibrium price Demand 0 12 10 11 9 7 6 5 4 3 2 1 8 Quantity Equilibrium quantity

  26. Equilibrium Excess Supply Excess Demand Price Price Supply Surplus $2.00 $2.50 $2.00 $1.50 Demand Shortage Demand Supply 4 10 0 Quantity 7 7 4 10 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. 0 Quantity • 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.

  27. Equilibrium • Surplus (Excess supply) • Quantity supplied > quantity demanded • Downward pressure on price • Shortage (Excess demand) • Quantity demanded > quantity supplied • Upward pressure on price

  28. 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

  29. Supply and Demand Three steps to analyzing changes in equilibrium • Decide if the event shifts the supply curve, the demand curve, or both curves • Decide if curve shifts to right or to left • Use supply-and-demand diagram • Compare initial and new equilibrium • How the shift affects equilibrium price and quantity

  30. Supply and Demand Example: A change in market equilibrium due to a shift in demand A cool summer effect on the hamburger market • Cool weather - demand curve (tastes) • Demand curve shifts to the left (down) • Lower equilibrium price; lower equilibrium quantity

  31. 2. resulting in a lower price . . . 3. …and a lower quantity sold. Supply and Demand New equilibrium 1. Cool weather decreases the demand for hamburger . . . Price Supply $2.50 2.00 D0 D1 7 10 Quantity 0 An abnormally cool summer causes buyers to demand less hamburger (less grilling). The demand curve shifts from D0to 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

  32. Supply and Demand Example: A change in market equilibrium due to a shift in supply • Technology improves hamburger processing • Change in technology impacts the supply curve • Supply curve shifts to the right • Lower equilibrium price; higher equilibrium quantity

  33. 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 Quantity 4 7 0 A technology improvement causes sellers to supply more hamburger. The supply curve shifts from S0to 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

  34. Supply and Demand Example: A change in market equilibrium due to a shift in supply • Labor wages increase • Effect on the market for hamburger? • Change in input price impacts the supply curve • Supply curve - shifts to the left • Higher equilibrium price; lower equilibrium quantity

  35. 2. results in a higher price 3. a smaller quantity sold Supply and Demand Price New equilibrium 1. an increase in labor wages S1 S0 $2.50 2.00 Demand 7 4 Quantity 0 An increase in labor wages (an input price) causes sellers to supply less hamburger. The supply curve shifts from S0to 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

  36. Supply and Demand Example: shifts in both supply and demand • Increase in labor wages and increase in fish price • Higher fish price shifts demand curve for hamburger to the right • Higher labor wages will shift supply to the left • Equilibrium price raises • 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

  37. Supply and Demand Price Rises, Quantity Rises Price Rises, Quantity Falls Price Price New equilibrium Small increase in demand New equilibrium Large decrease in supply Large increase in demand Small decrease in supply P0 P0 P1 P1 S0 S1 S0 S1 D1 D1 D0 D0 Q0 Q0 Q1 Q1 0 0 Quantity of Hamburgers Quantity of Hamburgers • Observe a simultaneous increase in demand and decrease in supply with two possibly outcomes. • To the left, equilibrium price rises from P0to P1, and the equilibrium quantity rises from Q0to Q1. • To the right, equilibrium price again rises from P0to P1, but the equilibrium quantity falls from Q0 to Q1.

  38. Supply and Demand What happens to price and quantity when supply or demand shifts?