CH 4 Supply Demand
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Transcript of CH 4 Supply Demand
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Chapter 4: Demand,
Supply, and MarketEquilibrium
Dr. Shereef Ellaboudy 2014
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Markets
! Markets bring together buyers(demanders) and sellers (suppliers).
! Some markets are local while others arenational or international.
! Markets help to determine prices andquantities bought and sold of millions ofgoods and services.
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Demand
Demandis a schedule or curve that
shows various amounts of a product that
consumers will buy at each of a series ofpossible prices during a specific period.
! Law of Demandstates that, all elseequal, as price falls, quantity demandedrises, and vice versa.
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Demand
A curve illustrating inverse relationship
between price of a product and quantity
demanded of it, or things equal, isdemand curve.
! It slopes downward to reflect Law of Demand.
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Demand
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Demand
! Individual demandis demand schedule orcurve of a single consumer.
! Market demandis sum of all individualdemands.
! By adding individual quantities demanded byall consumers at each of various possible
prices, we get market demand.
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Demand
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Demand
! When a demand curve is drawn, orfactors, called determinants of demand,
are held constant.
! Determinants of demand are factors or thanprice that locate position of a demand curve.
! se include: (1) tastes, (2) number of buyers,(3) income, (4) prices of related goods, and (5)expected prices.
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Change in Demand
A change in one or more of determinants
will change underlying demand data and
location of demand curve.
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Change in Income
! effects of changes in income varydepending on type of product demanded.
! When income rises, all else equal,demand for normal goodsincreases,
while demand for inferior goods
decreases.
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Change in Income
! Most goods are normal goods, or superiorgoods. demand for superior increases or
decreases directlywith changes in
income.
! demand for inferior goods increases ordecreases inverselywith money income.
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Change in Income
Price Price
Quantity Quantity
If income rises, demand for a normal good increases anddemand for an inferior good decreases.
D1 D
1
S
S
NORMALGOOD INFERIOR
GOOD
D2
D2
P1P2
P2
P1
Q1Q2 Q2Q1
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Prices of Related Goods
! When two goods are related (assubstitutes or complements), a change in
price of one good may eir increase or
decrease demand for or product.
!A substitute goodis one that can be used inplace of anor good.
!A complementary goodis one that is usedtoger with anor good.
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Prices of Related Goods
! If two goods are substitutes, an increase in priceof one will increase demand for or.
! If two goods are complements, an increase inprice of one will decrease demand for or.
! Most goods are unrelated to one anor. For seindependent goods, a change in price of one will
have virtually no effect on demand for or.
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Changes in
Quantity Demanded
A change in quantity demanded is a
movement from one point to anothr point
on a fixed demand curve.
! cause of such change is an increase ordecrease in price of product under
consideration.
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Changes in Demand
A change in demand is a shift of demand
curve to right (an increase in demand), or
to left (a decrease in demand).
! Shifts are cause by a change in one or moreof determinants of demand.
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Supply
Supplyis a schedule or curve showing
amounts of a product that producers will
make available for sale at each of a series
of possible prices during a specific period.
! Law of Supplystates that, all elseequal, as price rises, quantity suppliedrises, and vice versa.
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Supply
A curve illustrating positive, or direct
relationship between price of a product
and quantity supplied of it, or things
equal, is supply curve.
! It slopes downward to reflect Law of Demand.
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Supply
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Supply
! Market supplyis derived from individualsupply by horizontally adding supplycurves of individual producers.
! Determinants of supplyare those factorsthat cause supply to change.
! basic determinants of supply are (1)resources prices, (2) technology, (3) taxes andsubsidies, (4) price of or goods, (5) expectedprices, and (6) number of sellers in market.
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Changes in
Quantity Supplied
A change in quantity supplied is a
movement from one point to another point
on a fixed supply curve.
! cause of such a movement is a change inprice of product being considered.
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Changes in Supply
Because supply is a schedule or curve, a
change in supply means a change in
schedule and a shift of supply curve.
! Shifts are cause by a change in one or more ofdeterminants of supply.
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Market Equilibrium
In competitive markets, buyers and sellers
have no control over prices. When buyers
and sellers interact in a free competitive
market, equilibrium price and equilibrium
quantity is determined by intersection of
demand and supply curves.
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Market Equilibrium
! equilibrium price, or market-clearing price,is price at which intentions of buyers and
sellers match.
! equilibrium quantityis quantity demandedand quantity supplied that occurs at
equilibrium price in a competitive market.
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Market Equilibrium
!Any price above equilibrium price wouldcreate a surplus, or excess supply;
quantity supplied exceeds quantity
demanded.
! Surpluses drive prices down to equilibrium.!As prices fall, incentive to produce declines
and incentive for consumers to buy increases.
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Market Equilibrium
!Any price below equilibrium price wouldcreate a shortage, or excess demand;
quantity demanded exceeds quantity
supplied.
! Shortages push prices up equilibrium.!As prices rise, incentive to produce increases
and incentive for consumers to buy
decreases.
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Market Equilibrium
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Changes in Demand,
Supply, and Equilibrium
Changes in Demand
When supply is constant, an increase in
demand will result in a higher equilibriumprice and quantity. If demand falls,
equilibrium price and quantity decrease.
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Changes in Demand,
Supply, and Equilibrium
Changes in Supply
With a constant demand, if supply
increases, equilibrium price falls whileequilibrium quantity rises. If supply
decreases, equilibrium price rises, and
equilibrium quantity falls.
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Changes in Demand,
Supply, and Equilibrium
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Changes in Demand,
Supply, and Equilibrium
Complex Cases
When both supply and demand change,effect is a combination of individualeffects.
relative sizes of change in demand andsupply will determine effect on equilibrium
price and quantity.! In some cases, effect is certain; in ors effect
depends on size of shifts.
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Changes in Demand,
Supply, and Equilibrium
Example: Supply Increases, Demand Decreases
CASE 1 CASE 2S1
D1 D2
S1S2S2
D1
D2
P1
P2
P1
P2
Q1Q2Q2Q1Price decreases, quantity decreases Price decreases, quantity increases
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Changes in Demand,
Supply, and Equilibrium
Example: Supply Increases, Demand Decreases
CASE 3
If shift in supply curve to right (an increase) is
equal to shift in demand curve to left (adecrease), n equilibrium price will decrease and
equilibrium quantity will not change.
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Changes in Demand,
Supply, and Equilibrium
Change in
Supply
Change in
Demand
Change in
Price
Change in
Quantity
Increases Decreases !", !, or no
change
Decreases Increases "", !, or no
change
Increases Increases", !, or no
change "
Decreases Decreases", !, or no
change!
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Government-Set Prices
! In most markets, prices are free to rise orfall with changes in demand and supply.
!However, sometimes resulting price in amarket is too highor too low.
! Government may place legal limits on howhigh or how low a price or prices may go.
! High prices may be unfair to buyers whereaslow prices may be unfair to sellers.
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Price Ceiling
! If price of a product is unfairly high,government can set a price ceiling, or alegal maximum price a seller may charge
for a product.! This purportedly enables consumers to
obtain some essentialgood or service
that y could not afford at equilibrium price;however, it also creates a shortageofgood.
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Price Ceiling Example
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Price Floor
! When price of a good or service is toolow, government can set a price floor, ora minimum fixed price that sellers can
charge.! goal is to provide a sufficient income for
certain groups of resource suppliers, or
producers who would otherwise receivevery low incomes at equilibrium price.However, a surplusof good is created.
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Price Floor Example