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Market Forces: Demand And Supply

Demand

• Market demand curve: a curve indicating the total quantity of a

good all consumers are willing and able to purchase at each possible price, holding the price of related goods, income, advertising, and other variables constant.

Demand (continued)

• Change in quantity demanded: changes in the price of a good lead to a

change in the quantity demanded of that good. This corresponds to a movement along a given demand curve.

Demand (continued)

• Change in demand: changes in variables other than the price

of a good, such as income or price of another good, lead to a change in demand. This corresponds to a shift of entire demand curve.

Demand Shifter:

Because:- Income,- Prices of related goods,- Advertising and consumer tastes,- Population,- Consumer expectations.

Demand Shifter (continued):Income:- Normal good: a good for which an increase (decrease) in income leads to an increase (decrease) in the demand for that good.- Inferior good: a good for which an increase (decrease) in income leads to a decrease (increase) in the demand for that good.

Demand Shifter (continued):Prices of related goods:- Substitutes: goods for which an increase (decrease) in the

price of one good leads to an increase (decrease) in the demand for the other good.

- Complements: goods for which an increase (decrease) in the

price of one good leads to a decrease (increase) in the demand for the other good.

The Demand Function

Qdx =f (Px, Py, M, H)Qdx : the quantity demanded of good Xf : functionPx: the price of good XPy: the price of a related goodM: incomeH: value of any other variable that affects demand

Linear Demand Function

Qdx = a0 + a1Px + a2Py + a3M + a4H

Case:Qdx = 12000 – 3 Px + 4 Py – 1 M + 2 AM: incomeA: advertisingPx = 200Py = 15A = 2000M = 10000

- How much of good X do consumers purchase?- Are good X and Y substitutes or complements?- Is good X a normal or an inferior good?

Case:

Qdx = 12000 – 3(200) + 4(15) – 1 (10000) + 2 (2000) = 5460

Consumer Surplus:

The value consumers get from a good but do not have to pay for.

Figure 2-5 Page 44.

Supply

• Market supply: a curve indicating the total quantity of a

good that all producers in a competitive market would produce at each price, holding input prices, technology, and other variables affecting supply constant.

Supply (continued)

• Change in quantity supplied: changes in the price of a good lead to a

change in the quantity supplied of that good. This corresponds to a movement along a given supply curve.

Supply (continued)

• Change in supply: changes in variables other than the price

of a good, such as input prices or technological advances, lead to a change in supply. This corresponds to a shift of the entire supply curve.

Supply Shifters

Affected by:- Input prices,- Technology or government regulations,- Number of firms,- Substitutes in production,- Taxes,- Producer expectations.

Supply Shifters (continued)

A per unit taxFigure 2-7 Page 48

The Supply Function

Qsx = f (Px, Pr, W, H)Qsx: the quantity supplied of a goodf: functionPx: price of the goodPr: price of technologically related goodsW: price of an inputH: the value of some other variable that affects

supply

Linear Supply Function

Qsx = b0 + b1 Px + b2 Pr + b3 W + b4 H

Producer Surplus:

The amount producers receive in excess of the amount necessary to induce them to produce the good.

Figure 2-9 Page 51

Market Equilibrium

Qd = Qs

Case:

Qd = 10 – 2PQs = 2 + 2PDetermine the competitive equilibrium?

Price Restrictions And Market Equilibrium

• Price ceiling: the maximum legal price that can be

charged in a market.

Figure 2-11 Page 55

Price Restrictions And Market Equilibrium (continued)

• Price floor: the minimum legal price that can be

charged in a market.

Figure 2-12 Page 58

Comparative Statics (changes In Demand)

• Effect the increase in demand of rental cars.

Figure 2-13 Page 60.

Comparative Statics (changes In Supply)

• Effect higher input prices Figure 2-14 Page 62.

Homework:The demand for good X is given by:Qx = 1200 – 0.5 Px + 0.25 Py – 8 Pz + 0.1MPy = 5900Pz = 90M = 55000a. Indicate whether goods Y and Z are substitutes or complements for good X.b. Is X an inferior or normal good?c. How many units of good X will be purchased when Px = 4910

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