Demand, Supply, & Market Equilibrium. Bidding! How much will you pay for a 3 D Movie Theatre Ticket?
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Transcript of Demand, Supply, & Market Equilibrium. Bidding! How much will you pay for a 3 D Movie Theatre Ticket?
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Demand, Supply, & Market Equilibrium
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Bidding!How much will you pay for a 3 D Movie Theatre Ticket?
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Price : Market Forces ka Kamaal Hain
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DemandQuantity demanded (Qd)
Amount of a good or service consumers are willing & able to purchase during a given period of time
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DemandSix variables that influence Qd
Price of good or service (P)Incomes of consumers (M)Prices of related goods & services (PR)
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• Expected future price of product (Pe)
• Number of consumers in market (N)• Generalized demand function
• ( )Taste patterns of consumers • ( )Taste patterns of consumers
• ( , , , , , )d R eQ f P M P P N • ( , , , , , )d R eQ f P M P P N
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Competition in the market
Airtell Vs. Vodafone
How do you choose?- price- brand (quality)- distance- service
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Supply and DemandDEMAND - from consumer's point of view
SUPPLY - from producer's point of view
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DemandQuantity demanded: the amount of a good that households want to consume given their income and prices in a given time period
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QuestionHow does what we "demand" differ from
what we "want"?demand is what you are willing and able to buy
given your income and the price of the good (limited)
a want is a desire, but not necessarily something you have the resources to buy (unlimited)
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Generalized Demand Function
Inverse for complements
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Variable Relation to Qd
P
Pe
N
M
PR
Inverse
Direct
Direct
Direct
Direct for normal goodsInverse for inferior goods
Direct for substitutes
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The Law of DemandAs the price of a good increases, the
quantity demanded falls, holding all else constant, (ceteris paribus)Ceteris Paribus - holding all else constant in real world many variables change
simultaneouslyHowever, in order to understand the economy
we must first understand each variable separately.
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Graphing Demand CurvesChange in quantity demanded
Occurs when price changesMovement along demand curve
Change in demandOccurs when one of the other variables, or
determinants of demand, changesDemand curve shifts rightward or leftward
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The Demand CurveThe market demand curve (or just demand
curve) shows the relationship between the price of a good and the quantity demanded , holding constant all other variables that influence demandEach point on the curve shows the total buyers
would choose to buy at a specific priceLaw of demand tells us that demand curves
virtually always slope downward
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Number of Bottles per
Month
Price per
Bottle
A
B
$4.00
2.00
D40,000 60,000
At $2.00 per bottle, 60,000 bottles are demanded (point B).
When the price is $4.00 per bottle, 40,000 bottles are demanded (point A).
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B C$2.00
60,000 80,000
D1D2
An increase in income shifts the demand curve from D1 to D2.
Number of Bottles per
Month
Price per
Bottle
At each price, more bottles are demanded after the shift
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Income: Factors That Shift The Demand CurveAn increase in income has effect of shifting
demand for normal goods to the rightHowever, a rise in income shifts demand for
inferior goods to the leftA rise in income will increase the demand for
a normal good, and decrease the demand for an inferior good
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Wealth: Factors That Shift The Demand CurveYour wealth—at any point in time—is the total
value of everything you own minus the total dollar amount you owe
An increase in wealth willIncrease demand (shift the curve rightward)
for a normal goodDecrease demand (shift the curve leftward) for
an inferior good
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Prices of Related Goods: Factors that Shift the Demand CurveSubstitute—good that can be used in
place of some other good and that fulfills more or less the same purposeA rise in the price of a substitute increases the
demand for a good, shifting the demand curve to the right
Complement—used together with the good we are interested inA rise in the price of a complement decreases
the demand for a good, shifting the demand curve to the left
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Complements
V.S.
V.S.
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Other Factors That Shift the Demand CurvePopulation
As the population increases in an area Number of buyers will ordinarily increase Demand for a good will increase
TastesCombination of all the personal factors that go into
determining how a buyer feels about a goodWhen tastes change toward a good, demand
increases, and the demand curve shifts to the rightWhen tastes change away from a good, demand
decreases, and the demand curve shifts to the left
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Quantity
Price
D1D2
Entire demand curve shifts leftward when:• income or wealth ↓• price of substitute ↓• price of complement ↑• population ↓• expected price ↓• tastes shift toward good•Taxes ↑ or subsidies ↓
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SupplyQuantity supplied (Qs)
Amount of a good or service offered for sale during a given period of time
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SupplySix variables that influence Qs
Price of good or service (P)Input prices (PI )Prices of goods related in production (Pr)Technological advances (T)Expected future price of product (Pe)Number of firms producing product (F)
Generalized supply function
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( , , , , , )s I r eQ f P P P T P F
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Generalized Supply Function
Direct for complements
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Variable Relation to Qs
P
Pe
F
PI
Pr
Direct
Direct
Direct
Inverse
Inverse
Inverse for substitutes
T
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Supply FunctionSupply function, or supply, shows relation
between P & Qs when all other variables are held constant Qs = g(P)
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Graphing Supply CurvesA point on a supply curve shows either:
Maximum amount of a good that will be offered for sale at a given price
Minimum price necessary to induce producers to voluntarily offer a particular quantity for sale
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Graphing Supply CurvesChange in quantity supplied
Occurs when price changesMovement along supply curve
Change in supplyOccurs when one of the other variables, or
determinants of supply, changesSupply curve shifts rightward or leftward
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The Supply Schedule and The Supply Curve
Supply schedule—shows quantities of a good or service firms would choose to produce and sell at different prices, with all other variables held constant
Supply curve—graphical depiction of a supply scheduleShows quantity of a good or service supplied at
various prices, with all other variables held constant
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F
G
2.00
S
40,000 60,000
$4.00
At $4.00 per bottle, quantity supplied is 60,000 bottles (point G).
When the price is $2.00 per bottle, 40,000 bottles are supplied (point F).
Number of Bottles per
Month
Price per
Bottle
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Shifts vs. Movements Along the Supply Curve
A change in the price of a good causes a movement along the supply curveIn Figure 4
A rise (fall) in price would cause a rightward (leftward) movement along the supply curve
A drop in transportation costs will cause a shift in the supply curve itselfIn Figure 5
Supply curve has shifted to the right of the old curve (from Figure 4) as transportation costs have dropped
A change in any variable that affects supply—except for the good’s price—causes the supply curve to shift
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Factors That Shift the Supply CurveInput prices
A fall (rise) in the price of an input causes an increase (decrease) in supply, shifting the supply curve to the right (left)
Price of Related GoodsWhen the price of an alternate good falls(rises),
the supply curve for the good in question shifts rightward (leftward)
TechnologyCost-saving technological advances increase the
supply of a good, shifting the supply curve to the right
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Factors That Shift the Supply CurveNumber of Firms
An increase (decrease) in the number of sellers—with no other changes—shifts the supply curve to the right (left)
Expected PriceAn expectation of a future price increase
(decrease) shifts the current supply curve to the left (right)
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Factors That Shift the Supply CurveChanges in weather
Favorable weather Increases crop yields Causes a rightward shift of the supply curve for that
cropUnfavorable weather
Destroys crops Shrinks yields Shifts the supply curve leftward
Other unfavorable natural events may effect all firms in an areaCausing a leftward shift in the supply curve
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S2
G J
S1
60,000
$4.00
80,000
A decrease in transportation costs shifts the supply curve from S1 to S2.
Number of Bottles per
Month
Price per
BottleAt each price, more bottles are supplied after the shift
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P2
Q3 Q1 Q2
P1
P3
Quantity
Price Price increase moves us rightward along supply curve
S
Price increase moves us leftward along supply curve
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Quantity
PriceS2
S1Entire supply curve shifts rightward when:• price of input ↓• price of alternate good ↓• number of firms ↑• expected price • technological advance• favorable weather
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Quantity
Price
S1
S2Entire supply curve shifts rightward when:• price of input ↑• price of alternate good ↑• number of firms ↓• expected price ↑• unfavorable weather
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Market EquilibriumEquilibrium price & quantity are
determined by the intersection of demand & supply curvesAt the point of intersection, Qd = Qs
Consumers can purchase all they want & producers can sell all they want at the “market-clearing” price
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Market Equilibrium (Figure 2.5)P
39
S0
Qd , Qs0 1,10
0700100
Quantity
Price
(dol
lars
)
900300 500 1,500
1,300
10
20
30
40
50
60
70
80
D0
••
• ••
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ExerciseWrite down a list of 5 things you did
yesterday (e.g., had breakfast, attended Econ 110 lecture,
went to the gym, talked to friend X, wrote an essay, etc.). Next to each event, give examples of opportunity costs associated with doing it
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DiscussionDiscussion of Demand and Supply cases.
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