Post on 07-Apr-2015
Microeconomics (ECON 1111)
Lecturer: Dr B. M. Nowbutsing
Topic Three : Demand, Supply, and the Market
1. Demand
A table showing the relationship between price and quantity of a product demanded is known as
a demand scheduleQuantity demanded:
The quantity of a good
or service that a
consumer is willing to
buy at a given price
Price Quantity
0 200
0.10 160
0.20 120
0.30 80
0.40 40
0.50 0
2. Demand Curve
The Demand curve shows the relation between price and quantity demanded holding other things constant (ceteris paribus
Write the equation!D
Quantity
Price
3. Market Demand
Market demand shows the demand for a product by all consumers for a given area/ country
Price Quantity
0 200
0.10 160
0.20 120
0.30 80
0.40 40
0.50 0
Price Quantity
0 100
0.10 80
0.20 60
0.30 40
0.40 20
0.50 0
3. Market demand
Market demand curve is obtained by horizontal summation along the demand curve
Write the
equation !
Price Quantity
0 300
0.10 240
0.20 180
0.30 120
0.40 60
0.50 0
4. Law of Demand
Holding everything else constant, when price of a product falls, the quantity demanded for the product will increase (vice versa)
This law is the result of the:
– substitution effect is the change is quantity demanded that result from a change in price which make the product more or less expensive relative to substitute
– income effect is the change in quantity demanded of a good that result from the effect of a change in the price on purchasing power
5. Ceteris Paribus
Ceteris Paribus: The requirement that when analysing the relationship between the two variables such as price and quantity – other variables must be held constant.
If other things held constant, there is a shift in the demand curve.
Variables that shift the demand curve are also known as conditions of demand
6. Shift in the Demand Curve Price of related goods – substitutes: goods and services that can be used for the
same purpose – complements: goods and services that should be used
together Income – Normal goods: goods for which demand increases as
income increases – Inferior goods: goods for which demand decreases as
income increases Tastes Population and Demographics Expected Future Price
6. Shift in the Demand Curve
Price
Quantity
6. Shift in the Demand Curve
Price
Quantity
7. Increase in Demand: Two Ways
(1) A movement along the demand curve from A to B
represents consumer reaction to a price changeA
B
P0
P1
Q0 Q1Quantity
Price
D
7. Increase in Demand: Two Ways
(2) A movement of the demand curve from D0 to D1
leads to an increase in demand at each price
e.g. at P0 quantity demanded increases from Q0 to Q1
A
B
P0
Q0 Q1
C
D0
D1
Quantity
Price
8. Supply
A table showing the relationship between price and quantity of a product supplied is known as a
supply scheduleQuantity Supplied:
The quantity of a good
or service that a
consumer is willing to
supply at a given price
Price Quantity
0 0
0.10 0
0.20 40
0.30 80
0.40 120
0.50 160
9. The Supply Curve
The Supply curve shows the relation between price and quantity supplied holding other things constant
Write the equation!
Quantity
Price S
10. Market Supply
Market supply shows the supply for a product by all producers for a given area/ country
Price Quantity
0 0
0.10 0
0.20 40
0.30 80
0.40 120
0.50 160
Price Quantity
0 0
0.10 0
0.20 20
0.30 40
0.40 60
0.50 80
10. Market Supply
Market supply curve is obtained by horizontal summation along the supply curve
Write the
equation !
Price Quantity
0 0
0.10 0
0.20 60
0.30 120
0.40 180
0.50 240
11. Law of Supply
Holding everything else constant, when price of a product rises, the quantity supplied for the product will increase (vice versa)
12. Shift in the Supply Curve
Price of Inputs Technological Change – A positive or negative change in the ability of a
firm to produce a given level of output with a given amount of inputs.
Price of substitutes in production Expected Future Price Number of Firms in Market
13. Shift in the Supply Curve
Price
Quantity
13. Shift in the Supply Curve
Quantity
Price
14. Movement vs. Shift
A/B to C: Shift in the supply curve (change in supply)
A to B: Movement along the demand curve (change in quantity supplied)
S
Quantity
Price S1
C
A
B
15. Market Equilibrium
Market equilibrium is at E0 where quantity demanded equals quantity supplied
– with price P0 and quantity Q0
D0
D0
S
S
Q0
P0 E0
Price
Quantity
15. Market equilibrium
If price were above P0 there would be excess supply
– producers wish to supply more than consumers wish to demand
If price were below P0 there would be excess demand
– consumers wish to demand more than producers wish to supplyD0
D0
S
S
Q0
P0 E0
Price
Quantity
16. A shift in demand
D0
D0
S
S
Q0
P0 E0
Price
Quantity
If the price of a substitute good increases ...
more will be demanded ateach price
D1
D1
The demand curve shiftsfrom D0D0 to D1D1.
E1
Q1
P1
The market moves to a new equilibrium at E1.
17. A shift in supply
D
D
Q0
P0 E0
Price
Quantity
Suppose safety regulations are tightened, increasing producers’ costs
S0
S0
S1
S1
The supply curve shifts to S1S1
If price stayed at P0 there would be excess demand
Q1
P1
E2
So the market moves to a new equilibrium at E2.
18. What, How and For Whom
The market:– decides how much of a good should be produced
• by finding the price at which the quantity demanded equals the quantity supplied
– tells us for whom the goods are produced• those consumers willing to pay the equilibrium price
– determines what goods are being produced• there may be goods for which no consumer is prepared to pay a
price at which firms would be willing to supply
19. Price Controls
Price controls are government rules of laws that forbid the adjustment of prices to clear
Price controls may be floor prices (minimum prices) or ceiling prices (maximum prices)
20. Price Ceiling
Price ceiling is the maximum price at which a commodity can be sold
The immediate effect is to create a shortage (quantity demanded > quantity supplied)
P0
Pc
QdQs
S
S
D
D
PM
20. Price Ceiling
Possible consequences of imposing a maximum price:
- goods will be supplied on a first come and first serve basis
- base on seller’s preference
- emergence of black market while consumers are willing to pay more than the regulated price in order to obtain the commodity
21. Price Floor
Price ceiling is the minimum price at which a commodity can be sold
The immediate effect is to create a surplus (quantity supplied > quantity demand)
P0
PF
Qd Qs
S
S
D
D
22. Effect of a Per Unit Tax
The effect of the tax is to shift the supply curve parallel upwards
The perpendicular distance between the two supply is the amount of the tax
P0
P1
Q1Q0
S
S
D
D
S1
S1
C
Area C is awelfare loss.
B
Area B is borne by producers
A
Area A is borne by consumers
23. Who pays a commodity tax?
DS
S
S'
Q1Q0
P0
P1
S' The incidence of thetax depends upon theelasticities of demandand supply.
24. Effect of a Per Unit Tax
By how much price will increase will depend on the slope of the demand curve
Steeper demand curve: higher price increase – burden more on the consumer
Flatter demand curve: lesser price increase – burden more on the supplier
25. Questions
D = 50 – 0.5 P and S = 20 + 0.25 P
D: Demand; S: Supply and P: Price
a) Calculate quantity demanded when price is Rs 10
b) Calculate quantity demanded when price is Rs 20
c) Calculate equilibrium price and quantity
d) Calculate the shortage/surplus if government imposes a regulatory price of Rs 60. Is this a floor or ceiling?
e) If demand shift to 100 – 0.25 P, calculate new equilibrium price and quantity.
f) Sketch both new and old demand and supply curve, illustrating the equilibrium conditions
25. Questions
D = 100 – 0.25 P and S = 40 + 0.75 P
a) Calculate equilibrium price and quantity
b) If a maximum price of Rs 48 was imposed, what is the resulting shortage?
c) Calculate the amount that the government will receive when imposing such a price?
d) Estimate the extra revenue that can be generated from black market.
e) Calculate the new equilibrium if supply changes to s = 60 + 0.25 P
f) Interpret what has happened to the original supply curve.