Chapter 3 Supply and Demand. Chapter Objectives Define and explain demand in a product or service...
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Transcript of Chapter 3 Supply and Demand. Chapter Objectives Define and explain demand in a product or service...
Chapter 3
Supply and Demand
Chapter Objectives
• Define and explain demand in a product or service market
• Define and explain supply
• Determine the equilibrium point in the market for a specific good, given data on supply and demand at different price levels
Chapter Objectives
• Understand what causes shifts in demand and supply
• Understand how price ceilings cause shortages
• Understand how price floors cause surpluses
• The schedule of quantities of a good or service that people are willing and able to buy at different prices– Sometimes a schedule is also called
a table
Demand
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
$500
450
400
350
300
250
200
150
100
50
10 20 30 40 50 60 70Quantity (in thousands)
D
Figure 1
Price and Quantity Demanded are inversely related
Quantity Demanded is a point on the Demand Curve
Supply• Is the “schedule” of quantities of a
good or service that people are willing to sell at different prices
$500
450
400
350
300
250
200
150
100
50
10 20 30 40 50 60 70Quantity (in thousands)
SPrice QS $500 62,000 $450 59,000 $400 54,000 $350 48,000 $300 40,000 $250 30,000 $200 16,000 $150 7,000 $100 2,000
Quantity Supplied is a point on the curve
Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000
$500
450
400
350
300
250
200
150
100
50
10 20 30 40 50 60 70Quantity (in thousands)
S
D
Demand and Supply Curves
Equilibrium price is the price where QD = QS
We can find equilibrium price and quantity by seeing where the supply and demand curves cross
Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000
$500
450
400
350
300
250
200
150
100
50
10 20 30 40 50 60 70Quantity (in thousands)
S
D
Demand and Supply Curves
Equilibrium price = EP Market price = MP
MP > EP there is a surplus
Surpluses and Shortages
54,000-7,000 = 47,000
Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000
$500
450
400
350
300
250
200
150
100
50
10 20 30 40 50 60 70Quantity (in thousands)
S
D
Demand and Supply Curves
Equilibrium price = EP Market price = MP
Surpluses and Shortages
54,000-7,000 = 44,000
A surplus would force sellers to lower their prices. Eventually, prices would fall back to the equilibrium price
Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000
$500
450
400
350
300
250
200
150
100
50
10 20 30 40 50 60 70Quantity (in thousands)
S
D
Demand and Supply Curves
Equilibrium price = EP Market price = MP
Surpluses and Shortages
57,000-7,000 = 50,000
MP < EP here is a shortage
Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000
$500
450
400
350
300
250
200
150
100
50
10 20 30 40 50 60 70Quantity (in thousands)
S
D
Demand and Supply Curves
Equilibrium price = EP Market price = MP
Surpluses and Shortages
57,000-7,000 = 50,000
A shortage would allow sellers to raise their prices. As prices increased people would buy less. Eventually, prices would move back to the equilibrium price
$500
450
400
350
300
250
200
150
100
50
10 20 30 40 50 60 70Quantity (in thousands)
S
D1D2
Table 4
Price QD1 QD2
$500 1,000 12,000
450 3,000 15,000
400 7,000 21,000
350 12,000 30,000
300 19,000 40,000
250 30,000 55,000
200 45,000 63,000
150 57,000 75,000
100 67,000 88,000
The schedule changes from QD2 to QD1
The demand curve shifts to the left from D2 to D1
This is a decrease in demand
Price
Quantity (in thousands)
50
100
150
200
250
300
350
400
450
500
10 20 30 40 50 60 70
S
D
Shifts in Supply and Demand
If the schedule changes the Supply curve shifts
Supply decreases . . . the curve shifts to the left
S
Price
Quantity (in thousands)
50
100
150
200
250
300
350
400
450
500
10 20 30 40 50 60 70
S1
D
Shifts in Supply and Demand
If the Supply curve is S1
what is the equilibrium price and quantity?
The equilibrium price is approximately 262 or 263
S2
The equilibrium quantity is approximately 35,000
Price
Quantity (in thousands)
50
100
150
200
250
300
350
400
450
500
10 20 30 40 50 60 70
S1
D
Shifts in Supply and Demand
If the Supply curve changes to S2 what is the new equilibrium price and quantity?
The new equilibrium price is approximately 325
S2
The new equilibrium quantity is approximately 26,000
Price
Quantity (in thousands)
50
100
150
200
250
300
350
400
450
500
10 20 30 40 50 60 70
S1
D
Shifts in Supply and Demand
Is a shift from S1 to S2 an increase or decrease in Supply?
A decrease
S2
10
5
10
15
20
20 30 40 50 60 70
Quantity
S
Pricefloor
Surplus
25
D
Price Floors and Ceilings
The price can go no lower than the floor.
A price floor creates a permanent surplus
The surplus is the amount by which the quantity supplied is greater than the quantity demanded
Price Floors and Ceilings
The price can go no higher than the ceiling.
A price ceiling creates a permanent shortage
The shortage is the amount by which the quantity demanded is greater than the quantity supplied
10
10
20
30
40
20 30 40 50 60 70 80
Quantity
D
S
Price ceilingShortage
Applications of Supply and Demand
• Interest rates are set by– Supply and demand
• Wage rates are set by– Supply and demand
• Rents are determined by– Supply and demand
• The prices of nearly all goods are determined by– Supply and demand
• The prices of nearly all services are determined by– Supply and demand
Quantity of loanable funds (in billions of dollars)
20
18
16
14
12
10
8
6
4
2
S
D
100 200 300 400 500 600 700 8009001,000 1,100
Hypothetical Demand for and Supply of Loanable Funds
We can see that $600 billion is lent (or borrowed) at an interest rate of 6 percentWhat would happen if the supply of loanable funds increased?
Hypothetical Demand for and Supply of Loanable Funds
The interest rate would decrease to 4 percent and the amount of money borrowed would increase to $800 billion
Quantity of loanable funds (in billions of dollars)
20
18
16
14
12
10
8
6
4
2
S1
D
S2
200 400 600 800 1,000
Hypothetical Demand for and Supply of Loanable Funds
If the demand for loanable funds rises to D2 the interest rate would rise to 9 percent and the amount of money borrowed would rise to $700 billion
Quantity of loanable funds (in billions of dollars)
20
18
16
14
12
10
8
6
4
2
S
D2
D1
200 400 600 800 1,000
Last Word• Government sometimes interferes with the free operation
of the markets by– Imposing prices floors and price ceilings– This creates the problems of shortages and surpluses
• The government may also ensure the smooth operation of the markets by protecting property rights, guaranteeing enforcement of legal contracts, and issuing a supply of money that buyers and sellers readily accept– Property rights are essential to a free and prosperous
nation• While governmental interference with the market system
can have adverse affects, the government does have a substantial supportive role to play in a market economy.
