Post on 30-Sep-2015
description
Basic Elements of Demand, Supply
Chapter 2
Remaining topics:
laissez-faire economy
Post hoc fallacy
Fallacy of composition
PPF
Visible hands of Government
Chapter Objectives
Demand and its determinantsSupply and its determinantsSupply, demand, & market equilibriumChanges in supply and demand Government-set prices3-*
A Market
Interaction between buyers and sellersBuyers demand goodsSellers supply goodsAssumptionsStandardized goodCompetitive market3-*
Demand
Schedule or curveAmount consumers willing and able to purchase at a given price in a specific timeOther things equalIndividual demand Market demand3-*
Law of Demand
Other things equal, as price falls quantity demanded risesExplanations:Diminishing marginal utilityIncome effectSubstitution effect3-*
Individual Demand
P
Qd
Rs.5
4
3
2
1
10
20
35
55
80
P
Q
D
3-*
6
5
4
3
2
1
0
10 20 30 40 50 60 70 80
Quantity Demanded (bushels per week)
Price (per bushel)
Determinants of Demand
Factors that shift the demand curveCause more or less to be bought at any possible priceIncrease or decrease in demandTastesNumber of buyers (Population)3-*
Determinants of Demand
IncomeNormal goodsInferior goodsPrice of related goodsSubstitute goodComplementary goodUnrelated goods3-*
Determinants of Demand
Tastes and preferencesExpectations of future pricesAdvertisingDistribution of incomeConsumer expectations3-*
Types of Goods
Normal goods are those goods whose demand goes up when the consumers income increases.Inferior goods are those goods whose demand falls when the consumers income increases. e.g. autotravel, PetrolGiffen goods are those goods whose demand moves in same direction as price (demand decreases when price decreases) the consumer spends saved amount on other goodsSnob or Veblen goods (position goods; like luxury cars, designers good) are those goods whose demand falls when price fallsBandwagon When individuals make rational choices based on the information they receive from others3-*
Individual Demand
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Price (per bushel)
P
Qd
$5
4
3
2
1
10
20
35
55
80
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
3-*
Individual Demand
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Price (per bushel)
P
Qd
Rs.5
4
3
2
1
10
20
35
55
80
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
Change in Demand
Change in Quantity Demanded
3-*
Supply
Schedule or curveAmount producers willing and able to sell at a given price in a specific timeIndividual supplyMarket supply3-*
Law of Supply
Other things equal, as price rises the quantity supplied risesExplanations:Revenue implications (effects)Marginal cost3-*
Individual Supply
6
5
4
3
2
1
0
Quantity Supplied (bushels per week)
Price (per bushel)
P
Qs
Rs.5
4
3
2
1
60
50
35
20
5
Individual
Supply
P
Q
S1
10 20 30 40 50 60 70
3-*
Determinants of Supply
Resource pricesTechnologyTaxes and subsidiesPrices of other goodsProducer expectationsNumber of sellers3-*
Individual Supply
6
5
4
3
2
1
0
Quantity Supplied (bushels per week)
Price (per bushel)
P
Qs
60
50
35
20
5
Individual
Supply
P
Q
S1
S2
S3
10 20 30 40 50 60 70
3-*
Rs.5
4
3
2
1
Individual Supply
6
5
4
3
2
1
0
Quantity Supplied (bushels per week)
Price (per bushel)
P
Qs
60
50
35
20
5
Individual
Supply
P
Q
S1
S2
S3
10 20 30 40 50 60 70
Change in Quantity Supplied
Change in Supply
3-*
Rs.5
4
3
2
1
Market Equilibrium
Equilibrium price and quantitySurplus and shortageRationing (Controlling) function of priceEfficient allocationProductive efficiencyAllocative efficiency3-*
Equilibrium in a Market
3-*
DemandPriceSupply800$3,0002,9001,150$2,5002,5501,500$2,0002,2001,850$1,5001,8502,200$1,0001,5002,550$5001,1502,900$00*
3-*
Alternative Price- Control Mechanisms
A price ceiling is a maximum price that sellers may charge for a good, usually set by government.Example: rent controlA price floor is a price above equilibrium price that the buyers have to pay.Example : agricultural support price, minimum wages*
Market Equilibrium
6
5
4
3
2
1
0
2 4 6 8 10 12 14 16 18
Bushels of Corn (thousands per week)
Price (per bushel)
P
Qd
Rs.5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
Market
Demand
200 Buyers
P
Qs
Rs.5
4
3
2
1
12,000
10,000
7,000
4,000
1,000
Market
Supply
200 Sellers
7
3
D
S
Rs.4 Price Floor
6,000 Bushel
Surplus
Rs.2 Price Ceiling
7,000 Bushel
Shortage
3-*
Market Equilibrium
Change in demandShift of the demand curveChange in supplyShift of the supply curveChange in equilibrium price and quantity3-*
Market Equilibrium
Supply increase; Demand decreaseSupply decrease; Demand increasePrice
Key Terms
demanddemand schedulelaw of demanddiminishing marginal utilityincome effectsubstitution effectdemand curvedeterminants of demandnormal goodsinferior goodssubstitute goodcomplementary goodchange in demandchange in quantity demandedsupplysupply schedulelaw of supplysupply curvedeterminants of supplychange in supplychange in quantity suppliedequilibrium priceequilibrium quantitysurplusshortageprice ceilingprice floor3-*