5. Demand and Supply Intro

7/29/2019 5. Demand and Supply Intro

1/9

Econ 101 M. Salemi

Introduction to Demand and Supply

Review

Reservation prices are the building blocks ofdemand and supply.

In a market economy, price acts as a rationingmechanism.

Demand Schedule summarizes buyer behavior.

Supply Schedule summarizes seller behavior.

The market equilibrium is the price andquantity such that demand equals supply.

What have we learned?

Econ 101 M. Salemi

Econ 101 M. Salemi

To Take Advantage of the Benefits ofSpecialization, People Must Trade.

Both Kansas and California can produce beef cattle andgrapes. Assume the value of labor and other neededinputs is the same per acre in each state and for eachproduct.

In Kansas an acre of land can be used to produce 300pounds of beef or 100 pounds of grapes.

In California, and acre of land can be used to produce 150

pounds of beef or 200 pounds of grapes

Econ 101 M. Salemi

Suppose the price of a lb. of grapes

is 1.5 lbs. of beef

The Effects of Specialization on Kansas

0

50

100

150

200

0 50 100 150 200 250 300

Lbs. of Beef per Acre

Lbs.ofGrapes

Kansas ProductionPossibilities

Kansas Opportunities if itSpecializes in Beef and

Trades for Grapes


2/9

Econ 101 M. Salemi

Despite the benefits,Free Trade is Controversial.

Reducing barriers to international tradeincreases the total value of goods andservices produced in each nation.

But

It does not guarantee that each individualcitizen does better when the barriers arereduced.

Econ 101 M. Salemi

Who wins and who loses when theU.S. Imports T Shirts from Vietnam?

Importing T Shirts from Vietnam will likelylower the price of T Shirts in the U.S.

Consumers win!

U.S. producers of T Shirts now receive alower price for their product.

The lower T Shirt price can translate into alower wage for T Shirt workers.

US Companies and their workers lose!

Econ 101 M. Salemi

Reservation Prices

A buyers reservation price is the largestdollar amount that the buyer would bewilling and able to pay for a unit of a well-defined good.

A sellers reservation price is the smallestdollar amount for which the seller wouldbe willing able to provide a unit of a well-

defined good.

Econ 101 M. Salemi

What is a well-defined good?

To define a good properly and completely,we must specify:

Quantity (Pound, Kilogram, Slice, etc.)

Quality

Time Frame (Per Week, Per Month, etc.)

Locale (The size of a market)


3/9

Econ 101 M. Salemi

Reservation Prices on EBay

EBay allows prospective buyers to enter amaximum bid. EBay keeps a prospectivebuyer in the auction until the current bidexceeds his maximum.

EBay allows prospective sellers to enter aminimum bid. Although the bidding maystart below the minimum, the seller is notobliged to sell unless the final bid exceedsher minimum.

Econ 101 M. Salemi

Econ 101 M. Salemi

UC-Santa Cruz T Shirt Auction

Econ 101 M. Salemi

UC-Santa Cruz T Shirt Auction

Use clickers to bid.

All bids are binding.

Bid only in multiples of ten cents.

The winner is the highest bidder. In case ofties, the winner will be chosen by randomdraw.

The winner will pay the second highest bid.

You should bid your reservation price.


4/9

What Do You Bid ForThe UC-SD T Shirt?

Enter your Bid with Your Clicker

...

And the Winning Bid Is

Econ 101 M. Salemi

Reservation Prices and Demand

Next Class, I will use your bids to derive theclass demand schedule for a UCSD T Shirt

For now, I will use some made up data toillustrate the concept of demand.

Econ 101 M. Salemi

Demand Schedule

A Demand Schedule shows the quantity of awell-defined good that buyers are willingand able to purchase at each possibleprice.

Consider the following demand schedule forslices of Pepperoni Pizza on Franklin Streeton a typical weekday when UNC is insession.

Econ 101 M. Salemi

Demand Schedule for a 10 ounce slice of pepperonipizza on a September weekday in Chapel Hill

Demand For Pizza

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

0 200 400 600 800 1000 1200 1400 1600

Slices of Pepperoni Pizza

DollarsperSlice


5/9

Econ 101 M. Salemi

Demand Schedule for Pizza

Suppose800slices areavailable.Whatpricerationsthe

available

slices?

Demand For Pizza

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

0 200 400 600 800 1000 1200 1400 1600


Dollars

perSlice

Econ 101 M. Salemi

Use Your Clickers To AnswerThe Following

Graded Question

Econ 101 M. Salemi

Which of the following best explains why thequantity demanded of a slice of pepperoni pizzafalls as the price of the slice rises? It fallsbecause

A. The opportunity cost of the slice growssmaller.

B. The opportunity cost of the slice growslarger.

C. Buyers have smaller effective incomeswhen the price of pizza rises.

D. Sellers have larger effective incomeswhen the price of pizza rises.

Econ 101 M. Salemi

Supply Schedule

A Supply Schedule shows the quantity of awell-defined good that sellers are willingand able to sell at each possible price.

Consider the following supply schedule forslices of Pepperoni Pizza on Franklin Streeton a typical weekday when UNC is in

session.


6/9

Econ 101 M. Salemi

Supply Schedule for a 10 ounce slice of pepperonipizza on a September weekday in Chapel Hill

Supply Schedule for Pizza

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

0 200 400 600 800 1000 1200 1400 1600


DollarsperSlice

Econ 101 M. Salemi


How muchpizza willsupplierssupply ata priceof $2.75perslice?


$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

0 200 400 600 800 1000 1200 1400 1600


Dollars

perSlice

Econ 101 M. Salemi

Market Price is a Rationing Mechanism

A good is scarce when there is an insufficientsupply of it relative to the desires of a groupof prospective consumers.

Some mechanism is required to allocate scarcegoods among prospective consumers.

In a market economy, price is the allocationmechanism.

Price separates prospective buyers into two

groups: those who get the good and thosewho do not.

Econ 101 M. Salemi

Market Equilibrium

A system is in equilibrium when there is notendency for it to change.

Can our pizza market be in equilibrium at aprice per slice of $2.00?

At a price of $2.00, pizza buyers want 800slices.

At a price of $2.00, pizza sellers will sell only400 slices.

What change do you predict will occur?


7/9

Econ 101 M. Salemi

At a price of $2.00,Consumers Want 800 slices.

Demand For Pizza

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

0 200 400 600 800 1000 1200 1400 1600


DollarsperSlice

Econ 101 M. Salemi

At a Price of $2.00,Suppliers will Supply 400 Slices.


$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

0 200 400 600 800 1000 1200 1400 1600


DollarsperSlice

Econ 101 M. Salemi

Market Equilibrium

A system is in equilibrium when there is notendency for it to change.

In a market, equilibrium price and quantityare the price and quantity for which thequantity demanded equals the quantitysupplied.

Market equilibrium is modeled as theintersection of the demand and supplyschedules.

Econ 101 M. Salemi

Market Equilibrium

Demand and Supply of Pizza

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

0 200 400 600 800 1000 1200 1400 1600


DollarsperSlice

DemandSupply

Equilibrium


8/9

Econ 101 M. Salemi


Graded Question

Econ 101 M. Salemi

As the price of a slice of pizza risesquantity demanded ____ andquantity supplied ______.

A. Rises, RisesB. Rises, FallsC. Falls, RisesD. Falls, Falls

Econ 101 M. Salemi


Non-Graded Question

Econ 101 M. Salemi

In equilibrium, the number of slices that will bedenied to consumers even though consumers have apositive reservation price for those slices is

A. 0

B. 600

C. 1000

D. 1600

Demand and Supply of Pizza

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

0 200 400 600 800 1000 1200 1400 1600


DollarsperSlice

DemandSupply

Equilibrium


9/9

Econ 101 M. Salemi

Assignment for Week 3 Recitation

Students will participate in a simulation of amarket. They will play the rolls of buyersand sellers of a product.

The top earning buyer and top earningseller from each recitation will be enteredin a lottery that awards a prize of $20.00.Two students will win a prize of $20.00.

Econ 101 M. Salemi

What Have We Learned?

Reservation Prices are the building blocks ofdemand and supply schedules.

Market Prices ration goods.

Demand Schedule summarizes the buyer side ofthe market

Supply Schedule summarizes the supply side ofthe market.

Market Equilibrium occurs at a price wherequantity demanded and supplied are equal.

5. Demand and Supply Intro

Documents

Transcript of 5. Demand and Supply Intro