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Supply and Demand

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Daniel Kim

on 22 September 2016

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Transcript of Supply and Demand

Qd
Qs
Supply, Demand, and Equilibrium
individuals to markets
In our previous unit we were pretty much concerned with only one or two rational actors in our economy. We must now transition to imagining entire groups of buyers and sellers.
We call these Markets
So one of the primary functions of markets is to determine the prices of goods and services.
Price determination is contingent upon four main factors:
Demand
Supply
Price
Quantity
So we need to start with
Demand
Is shown as a schedule or a curve that represents the
willingness and ability
of all the
buyers
in a market to buy a particular good at a
range of prices
during a
particular period of time
.
Who's Tired?
How many of you would be both willing and able to purchase this cup of coffee for
$1.50?
Now what if there is a worldwide coffee bean shortage and the price increases to
$5.00?
Finally what if Starbucks is having a sale and the price falls to
$.50?
The demand for coffee should have represented the idea that at higher prices, consumers generally demand a lower quantity of a good and vice versa
This creates another inverse relationship which we call...
The Law of Demand
like most economic concepts can be represented mathematically
(y)
(x)
Demand
Price
Quantity Demanded
$4
300
$2
600
Notice that when the price is the only variable change, there is only movement
ALONG
the curve
Notice the negative (-) slope of the curve. Remember that represents an inverse relationship
There is a difference between QUANTITY demanded, and Demand itself. This is incredibly important!
Staying true to Ceteris Paribus, we assume that all the buyers that represent the curve all have the same purchasing power
(y)
(x)
Demand
Price
Quantity Demanded
What is a line?
Each "Dot" represents a single QUANTITY Demanded
Important
A couple important notes to know:
As far as economists are concerned a line is just an infinite string of points combined
.
P1
QD1
P2
QD2
Demand itself however is the entire curve, or all of the points of quantity demanded combined
If price is the only that changes, there is only movement ALONG the curve, which only changes the Quantity Demanded.
$
$
Anything else shifts the entire curve!
(y)
(x)
D
Price
Quantity Demanded
If Demand increases, the entire curve will shift to the right
D1
(y)
(x)
D
Price
Quantity Demanded
D1
D2
If Demand decreases, the entire curve will shift to the left
There are three reasons why the curve is downward sloping
Substitution Effect
Income Effect
Law of Diminishing Marginal Utility
The Substitution Effect
States that rational buyers will have the incentive to purchase substitute goods at a lower relative price
The Income Effect
States that changes in price affect the purchasing power of consumers' income
DC
Chargers
Jimmy
Nancy
Ok so imagine Jimmy and Nancy are on their way to Woodfield Mall. They're on a date with only $50 between them. They want to purchase books.
Depending on the price of the books, their purchasing power will either increase or decrease
Even this guy is limited by the Income Effect
He earned
$11.5 billion
this year which works out to be ~$33.3 million per day, $1.38 million per hour, or $23,148 per minute.
The Law of Diminishing Marginal Utility
Each additional consumption of a product will yield less and less marginal utility in a given time period
The Determinants of Demand
We all know that price($) is not the only thing that can change and affect a consumer's willingness and ability to purchase goods and services.
T
I
R
E
S
astes and preferences
ncome of consumers
elated goods
xpectations of consumers
ize of population of market
}
Changes here will SHIFT the entire Demand Curve. Every quantity at every price will change.
p
rice change
A change in price won't shift the curve, but cause a change in Quantity Demanded and movement ALONG the demand curve.
Tastes and Preferences
Income of Consumers
You would think that an increase in a consumer's income would increase their demand for all products. There are actually two types of products:
Normal Goods
Inferior Goods
Most products are considered Normal Goods. Things like steaks, cars, clothing, and computers are all goods consumers purchase more of with an increase in income.
Normal goods have a direct relationship with income
Some goods have the opposite effect. As income reaches a some point, certain products become less appealing like used clothing, Ramen noodles, and other cheaper goods
Inferior goods have an inverse relationship with income
Related Goods
A change in price of a related good can increase or decrease demand. There are typically two types of goods:
Substitute Goods
Complementary Goods
Can be used or purchased in place of another good
are goods that are often purchased and used together
Expectations of Consumers
Typically consumer expectations will change current demand
Rookie Football players will often splurge on luxury items when anticipating lucrative contracts
Unemployed workers will decrease consumption when losing their income
Size of Population of a Market
More Babies
=
Higher demand for diapers
And then these babies grow up and become consumers themselves which increases demand of all markets
Supply
Now on to
is shown as a schedule or curve showing the various amounts of a product that producers are
willing and able
to make available for sale at each of a
series of possible prices
during a specific period.
Congrats you're all painters!
You just painted this
How many here would be both willing and able to paint and sell this painting for
$100
?
Now you've gained popularity and demand has increased for your painting and the price increases to
$2,000
?
What if your market is made up of teenagers and they can only spend
$35
?
You painters should have just experienced the idea that as prices and quantity supplied have a positive relationship. This is called
The Law of supply
(y)
Price
Quantity Supplied
Supply
$2
10
$6
(x)
15
To the producer, price represents revenue. Revenue must at the very least cover costs.
Supply follows the same rules as demand. If price is the only changing variable, there is only a
change in Quantity Supplied
with movement
ALONG the supply curve
Any other changing variable will cause the ENTIRE supply curve to shift!
(y)
Price
Quantity Supplied
S
(x)
(y)
Price
Quantity Supplied
S
(x)
If Supply increases, the supply curve will increase or shift to the right
If Supply decreases, the supply curve will decrease or shift to the left
S1
S1
(y)
Price
Quantity Supplied
S
(x)
D
Now we've got Supply and Demand curves intersecting to represent a full market with buyers AND sellers
(y)
Price
Quantity Supplied
S
(x)
D
Now in a perfect world we would experience a market phenomenon known as Equilibrium. This situation occurs when the Quantity Supplied is equal to the Quantity Demanded.
Pe
Qe
(y)
Price
Quantity Supplied
S
(x)
D
Any change in supply or demand will also change the equilibrium price. Notice below what an increase in Supply will do to the equilibrium price.
S1
Pe1
Pe2
Qe1
Qe2
(y)
Price
Quantity Supplied
S
(x)
D
Sometimes the Government will intervene in the markets to force changes in the market.
These are called:

Price Ceilings
and
Price Floors
Left alone the markets will create its own equilibrium price, but to avoid unfairly high prices for buyers, and unfairly low prices for sellers, the Gov't will place legal limits on prices
sets the maximum legal price a seller may charge for a good or service. This allows consumers to obtain, "essential" goods or services that they could not afford at the equilibrium price
Pc
Qs
Qd
When Demand is larger than Supply, it creates excess demand which causes a Shortage!
Notice that a Price ceiling is only effective BENEATH the equilibrium price!
Shortage
While well-intentioned, ceilings create a situation called
disequilibrium
, where consumers are willing to pay more than the ceiling price. This often forces markets to
Ration
products, or create
Black Markets
(y)
Price
Quantity Supplied
S
(x)
D
Is a minimum price fixed by the government. These supported prices often protects producers by keeping prices from falling too low.
Pf
When Supply is larger than Demand it creates excess supply which causes a
Surplus
Again notice a Price Floor is only effective when set ABOVE the equilibrium price
Surplus
Surpluses obviously disrupt resource allocation. It keeps markets from achieving allocative efficiency. So the Government does two things to handle the surplus
They try to restrict supply or increase demand to reduce the size of the surplus
Or
The government will personally purchase the excess surplus that consumers are not willing to purchase
P
Q
The Determinants of Supply
Just like Demand, we know that price($) is not the only thing that can change and affect a firm's willingness and ability to produce goods and services.
T
I
G
E
r
Echnological change
nternational events/disasters
overnment intervention
xpectations of firms
esource cost change
}
Changes here will SHIFT the entire Supply Curve. Every quantity at every price will change.
p
rice change
A change in price won't shift the curve, but cause a change in Quantity Supplied and movement ALONG the supply curve.
S
ellers on the market
Technological Changes
Full transcript