Chapter The Market Forces of Supply and Demand 4.
Transcript of Chapter The Market Forces of Supply and Demand 4.
Chapter
The Market Forces of Supplyand Demand
4
Markets and Competition
• Market– A group of buyers and sellers of a particular
good or service• Can be highly organized
– E.g.: agricultural commodities
• Can be less organized– E.g.: ice cream, espresso carts, Freemont Sunday
market
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Markets and Competition• Market Types
– 1. Perfect Competition• No individual buyer/seller has a significant influence on
market price– 2. Monopoly
• Single producer of good; chooses output (quantity supplied) that max’es profit
– 3. Oligopoly• Small number of suppliers; may “collude” to set price like
a monopolist– 4. Monopolistic Competition
• Compete on both price and quality against several producers
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Markets and Competition• Perfectly competitive market
– Each buyer/seller has a negligible impact on market price
– Why? (Key assumptions)• Goods offered for sale - exactly the same• Buyers and sellers – numerous
– No single buyer or seller has any influence over the market price– Must accept the price determined in the market– Price takers
• At the market price– Buyers - buy all they want– Sellers - sell all they want
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Demand
• Basic Vocabulary– Quantity demanded
• Amount of a good purchased at a given price– A point on the demand curve
– Demand • The entire schedule (curve)
– Quantity demanded at various prices
– Difference between a change in quantity demanded and demand• Movement along the Demand Curve (change in
price) versus movement of the D Curve5
Demand
• Demand schedule - a table– Relationship between
• Price of a good• Quantity demanded
• Demand curve - a graph– Relationship between
• Price of a good• Quantity demanded
• Individual demand vs Market Demand– One individual vs all people in buying the good
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Demand curve
Catherine’s demand schedule and demand curve
1
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The demand schedule is a table that shows the quantity demanded at each price.The demand curve, which graphs the demand schedule, illustrates how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward.
Price ofIce-cream cone
Quantity ofCones demanded
$0.000.501.001.502.002.503.00
12 cones1086420
0 1210 1191 2 3 4 5 6 7 8Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice-Cream
Cones 1. A decreasein price . . .
2. . . . increases quantityof cones demanded.
Demand
• Variables that can shift the demand curve– Income– Prices of related goods– Tastes– Expectations– Number of buyers
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Appendix
FIGURE 1A-5
Showing Three Variables on a Graph
Graphs of Two Variables
Taking into Account More Than Two Variables on a Graph
Shifts in the demand curve
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10
Price of Ice-Cream
Cones
Quantity of Ice-Cream Cones 0
Demand curve, D1Demand
curve, D3
Demand curve, D2
Increase inDemand
Decrease inDemand
Any change that raises the quantity that buyers wish to purchase at any given price shifts the demand curve to the right. Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left.
Change/Shift in Demand
• Shifts in demand (not quantity demanded)– Increase in Demand
• Any change that increases the quantity demanded at every price
• Entire Demand curve shifts right
– Decrease in Demand• Any change that decreases the quantity
demanded at every price• Entire Demand curve shifts left
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Shifts versus Movement Along a Demand Curve – Change in Price of Related Goods
1. Along the demand curve: • price of hamburger rises, the quantity of hamburger demanded declines
2.Movement of the demand curve: (change in price of substitute or complement)• same price rise for hamburger shifts the demand for chicken (a substitute
for hamburger) to the right and the demand for ketchup (a complement to hamburger) to the left.
TABLE 3.2 Shift of Alex’s Demand Schedule Due to Increase in Income
Schedule D0 Schedule D1
Price(per
Gallon)
Quantity Demanded(Gallons per Week at an
Income of $500 per Week)
Quantity Demanded(Gallons per Week at
an Income of $700 per Week)
$ 8.00 0 3
7.00 2 5
6.00 3 7
5.00 5 10
4.00 7 12
3.00 10 15
2.00 14 19
1.00 20 24
0.00 26 30
Shift of a Demand Curve following a Rise in Income
Increase in income changes the relationship between price and quantity; there is a shift of the demand curve, in this case from D0 to D1. Gasoline is a normal good.
Shift of Demand versus Movement Along a Demand Curve
Demand
• Variables that can shift the demand curve– Income– Prices of related goods– Tastes– Expectations– Number of buyers
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Demand
• Market demand– Sum of all individual demands for a good or
service• Market demand curve
– Sum - individual demand curves horizontally– Total quantity demanded of a good varies
• As the price of the good varies• All other factors that affect how much consumers
want to buy are hold constant
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Figure
Market demand as the sum of individual demands(demand schedule)
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Price of ice-cream cone Catherine Nicholas Market
$0.000.501.001.502.002.503.00
121086420
+ 7654321
= 19161310741
The quantity demanded in a market is the sum of the quantities demanded by all thebuyers at each price. Thus, the market demand curve is found by adding horizontallythe individual demand curves. At a price of $2.00, Catherine demands 4 ice-creamcones, and Nicholas demands 3 ice-cream cones. The quantity demanded in themarket at this price is 7 cones.
Figure
Market demand as the sum of individual demands
2
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DCatherine
0 1210 1191 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Catherine’sdemand
DNicholas
0 1 2 3 4 5 6 7
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Nicholas’s demand+ =
DMarket
0 182 4 6 8 10 12 14 16
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Market demand
Figure Market Demand Curve
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Figure Sum of Individuals = Market Demand Curve
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Demand
• Income– Normal good
• Other things constant• An increase in income
– Increase in demand
– Inferior good• Other things constant• An increase in income
– Decrease in demand
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Demand • Prices of related goods
– Substitutes - two goods• An increase in the price of one• Leads to an increase in the demand for the other
– Complements – two goods• An increase in the price of one• Leads to a decrease in the demand for the other
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Price of Substitute Increases
Price of a Complement Decreases
Demand for Hot Dogs
Price of Buns
Demand
• Tastes– Change in tastes – changes the demand
• Expectations - about the future (income, prices)– Affect current demand
• Number of buyers – increase– Market demand - increases
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Table 4.1 Factors That Shift the Demand Curve
1. Shift the demand curve for cigarettes and other tobacco products – Public service announcements– Mandatory health warnings on cigarette packages– Prohibition of cigarette advertising on television
• If successful– Shift demand curve to the left
Two ways to reduce the quantity of smoking demanded
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2. Try to raise the price of cigarettes– Tax the manufacturer
• Much of tax – passed to consumers (high prices)
– Movement along demand curve• 10% increase in price → 4% decrease in smoking• Teenagers: 10% increase in price → 12% decrease
smoking
• Demand for cigarettes vs. demand for marijuana – Appear to be complements
Two ways to reduce the quantity of smoking demanded
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Supply
• Quantity supplied– Amount of a good– Sellers are willing and able to sell
• Law of supply– Other things equal– When the price of the good rises
• Quantity supplied of a good rises
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Supply
• Supply schedule - a table – Relationship between
• Price of a good• Quantity supplied
• Supply curve - a graph– Relationship between
• Price of a good • Quantity supplied
• Individual supply– Supply of one seller
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Figure
Ben’s supply schedule and supply curve
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Supply curve
The supply schedule is a table that shows the quantity supplied at each price. Thissupply curve, which graphs the supply schedule, illustrates how the quantity suppliedOf the good changes as its price varies. Because a higher price increases the quantity supplied, the supply curve slopes upward.
Price ofIce-cream cone
Quantity ofCones supplied
$0.000.501.001.502.002.503.00
0 cones012345
0 1210 1191 2 3 4 5 6 7 8Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice-Cream
Cones
1. An increasein price . . .
2. . . . increases quantityof cones supplied.
Supply
• Market supply– Sum of the supplies of all sellers for a good or
service• Market supply curve
– Sum - individual supply curves horizontally– Total quantity supplied of a good varies
• As the price of the good varies• All other factors that affect how much suppliers
want to sell are hold constant
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Figure
Market supply as the sum of individual supplies(supply schedule)
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Price of ice-cream cone Ben Jerry Market
$0.000.501.001.502.002.503.00
0012345
+ 0002468
= 00147
1013
The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. Thus, the market supply curve is found by adding horizontally the individual supply curves. At a price of $2.00, Ben supplies 3 ice-cream cones, and Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this price is 7 cones
Figure
Market supply as the sum of individual supplies
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SBen
0 1210 1191 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Ben’ssupply
SJerry
0 1 2 3 4 5 6 7
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Jerry’ssupply+ =
SMarket
0 182 4 6 8 10 12 14 16
Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice
CreamCones
Marketsupply
Supply
• Shifts in supply– Increase in supply
• Any change that increases the quantity supplied at every price
• Supply curve shifts right
– Decrease in supply• Any change that decreases the quantity supplied
at every price• Supply curve shifts left
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Figure
Shifts in the supply curve
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`
Price of Ice-Cream
Cones
Quantity of Ice-Cream Cones 0
Supply curve, S1
Supply curve, S3
Supply curve, S2
Increase inSupply
Decrease insupply
Any change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left.
Supply
• Variables that can shift the supply curve– Input Prices
• Supply – negatively related to prices of inputs
– Technology• Advance in technology – increase in supply
– Expectations about future • Affect current supply
– Number of sellers – increase• Market supply - increase
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Table
Variables that influence sellers
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Variable A Change in This Variable . . .
Price of the good itself Input prices Technology Expectations Number of sellers
Represents a movement along the supply curve
Shifts the supply curveShifts the supply curveShifts the supply curveShifts the supply curve
This table lists the variables that affect how much producers choose to sell of any good. Notice the special role that the price of the good plays: A change in the good’s price represents a movement along the supply curve, whereas a change in one of the other variables shifts the supply curve
Supply and Demand Together
• Equilibrium - a situation– Market price has reached the level :
• Quantity supplied = quantity demanded
• Equilibrium price - the price:– Balances quantity supplied and quantity
demanded• Equilibrium quantity
– Quantity supplied and the quantity demanded at the equilibrium price
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Figure
The equilibrium of supply and demand
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Supply
0 1210 1191 2 3 4 5 6 7 8Quantity of Ice-Cream Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of Ice-Cream
Cones
Equilibrium
Demand
Equilibriumprice
Equilibriumquantity
The equilibrium is found where the supply and demand curves intersect. At the equilibrium price, the quantity supplied equals the quantity demanded. Here the equilibrium price is $2.00: At this price, 7 ice-cream cones are supplied, and 7 ice-cream cones are demanded.
Supply and Demand Together
• Surplus– Quantity supplied > quantity demanded– Excess supply– Downward pressure on price
• Shortage– Quantity demanded > quantity supplied– Excess demand– Upward pressure on price
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Figure
Markets not in equilibrium
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Price ofIce
CreamCones
Quantity of Ice-Cream Cones 0
Demand
7
$2.50
(a) Excess Supply
In panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price, the quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level. In panel (b), there is a shortage. Because the market price of $1.50 is below the equilibrium price, the quantity demanded (10 cones) exceeds the quantity supplied (4 cones). With too many buyers chasing too few goods, suppliers can take advantage of the shortage by raising the price. Hence, in both cases, the price adjustment moves the market toward the equilibrium of supply and demand
(b) Excess demand
2.00
Supply Surplus
4
Quantitydemanded
10
Quantitysupplied
Price ofIce
CreamCones
Quantity of Ice-Cream Cones 0
Demand
7
1.50
$2.00
Supply
Shortage
4
Quantitysupplied
10
Quantitydemanded
Supply and Demand Together
• Law of supply and demand– The price of any good adjusts
• Bring the quantity supplied and the quantity demanded into balance
– In most markets• Surpluses and shortages are temporary
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Supply and Demand Together
• Three steps to analyzing changes in equilibrium1. Decide: the event shifts the supply curve,
the demand curve, or both curves2. Decide: curve shifts to right or to left3. Use supply-and-demand diagram
• Compare initial and new equilibrium• How the shift affects equilibrium price and
quantity
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Table
Three steps for analyzing changes in equilibrium
3
44
1. Decide whether the event shifts the supply or demand curve (or perhaps both).
2. Decide in which direction the curve shifts.
3. Use the supply-and demand diagram to see how the shift changes the equilibrium price and quantity.
Supply and Demand Together
• Example: A change in market equilibrium due to a shift in demand– One summer - very hot weather– Effect on the market for ice cream? 1.Hot weather - demand curve (tastes ) 2.Demand curve shifts to the right 3.Higher equilibrium price; higher equilibrium
quantity
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Figure
How an increase in demand affects the equilibrium
10
46
Supply
New equilibrium
D2
An event that raises quantity demanded at any given price shifts the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here an abnormally hot summer causes buyers to demand more ice cream. The demand curve shifts from D1 to D2, which causes the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10 cones
Price ofIce-Cream
Cones
Quantity of Ice-Cream Cones 0 7
$2.50
2.00
10
D1
Initial equilibrium
1. Hot weatherincreases the demandfor ice cream . . .
2. …resulting in a higher price . . .
3. …and a higher quantity sold.
Supply and Demand Together
• Shifts in curves versus movements along curves – Shift in the supply curve
• Change in supply
– Movement along a fixed supply curve• Change in the quantity supplied
– Shift in the demand curve• Change in demand
– Movement along a fixed demand curve• Change in the quantity demanded
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Supply and Demand Together
• Example: A change in market equilibrium due to a shift in supply– One summer - a hurricane destroys part of
the sugarcane crop• Price of sugar - increases
– Effect on the market for ice cream?1.Change in price of sugar - supply curve2.Supply curve - shifts to the left3.Higher equilibrium price; lower equilibrium
quantity48
Figure
How a decrease in supply affects the equilibrium
11
49
S1
New equilibrium
S2
An event that reduces quantity supplied at any given price shifts the supply curve to the left. The equilibrium price rises, and the equilibrium quantity falls. Here an increase in the price of sugar (an input) causes sellers to supply less ice cream. The supply curve shifts from S1 to S2, which causes the equilibrium price of ice cream to rise from $2.00 to $2.50 and the equilibrium quantity to fall from 7 to 4 cones
Price ofIce-Cream
Cones
Quantity of Ice-Cream Cones 0 7
$2.50
2.00
4
Demand
Initial equilibrium
1. An increase in theprice of sugar reducesthe supply of ice cream . . .
2. …resulting in a higher price . . .
3. …and a smaller quantity sold.
Supply and Demand Together
• Example: shifts in both supply and demand– One summer: hurricane and heat wave
1. Heat wave – shift demand curve; hurricane – shift supply curve
2. Demand curve shifts to the right; Supply curve shifts to the left
3. Equilibrium price raises– If demand increases substantially while supply falls
just a little: equilibrium quantity –rises– If supply falls substantially while demand rises just a
little: equilibrium quantity falls
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Figure
A shift in both supply and demand
12
51
Price ofIce
CreamCones
Quantity of Ice-Cream Cones
0
D1
P2
(a) Price Rises, Quantity Rises
Here we observe a simultaneous increase in demand and decrease in supply. Two outcomes are possible. In panel (a), the equilibrium price rises from P1 to P2, and the equilibrium quantity rises from Q1 to Q2. In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium quantity falls from Q1 to Q2.
(b) Price Rises, Quantity Falls
P1
S1
Q1 Q2
D2
S2
Initialequilibrium
New equilibrium
Smalldecreasein supply
Largeincreasein demand
Price ofIce
CreamCones
Quantity of Ice-Cream Cones
0
D1
P2
P1
S1
Q1Q2
D2
S2
Initialequilibrium
New equilibrium
Large decreasein supply
Small increasein demand
Table
What happens to price and quantity when supply or demand shifts?
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52
No change In Supply
An increaseIn Supply
A decreaseIn supply
No changeIn demand
An increaseIn demand
A decreaseIn demand
P sameQ same
P upQ up
P downQ down
P downQ up
P ambiguousQ up
P DownQ ambiguous
P upQ down
P upQ ambiguous
P ambiguousQ down