2 demand & supply i

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Supply and Demand:An Introduction

Supply and Demand:An Introduction


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Copyright c 2007 by The McGraw-HillCompanies, Inc. All rights reserved.

Chapter 3 - Supply and Demand: An Introduction Slide 2

What, How, and For Whom?Central Planning Versus the Market

Three Problems All Economic SystemsMust Address

What should be produced?How should it be produced?For whom will it be produced?


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Centralized Economic Organizations

Former Soviet UnionCuba


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A small number of individuals address:What

Establish production targets for factories and farms

HowPlan how to achieve the goals

For WhomDistribute the goods and services produced


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Free-Market or Capitalist EconomicSystem

Individual choices determine:Which careers to pursueWhich products to produce or buyWhen to start and shut-down a business

Who gets what is decided by individualpreferences and purchasing power


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Buyers and Sellers In Markets

MarketConsists of all buyers and sellers of a goodor service

What do you think?What determines the price of pizza,gasoline, a car wash, or other goods andservices?


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The Demand Curve

A schedule or graph that tells us thequantity of a good that buyers willing andable to buy at each price.


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Points Along the Demand Curveof a Pizza Market

Demand for Pizza

Price(Rs/slice)

Quantity demanded(1000s of slices/day)

20 16

30 12

40 8


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A Property of Demand

As price of a good or service goes downthe quantity consumers buy will increase,other things remaining the same

Therefore, the demand curve is downward-sloping


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The Daily DemandCurve for Pizza in Mumbai

Price(Rs per slice)

Quantity(1000s of slices per day)

40

8

20

16

30

12

Demand


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The Demand Curve

Why do buyers purchase a greater quantityat lower prices and vice-versa?


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The Substitution Effect

The change in the quantity demanded of agood that results because buyers switch tosubstitutes when the price of the goodchanges


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The Income Effect

The change in the quantity demanded of agood that results because a change in theprice of a good changes the buyerspurchasing power


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The Supply CurveA curve or schedule showing the quantityof a good that sellers wish to sell at eachprice


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Points Along the Supply Curve of a Pizza Market

Supply of pizza

Price(Rs/slice)

Quantity supplied(1000s of slices/day)

20 8

30 12

40 16


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The Daily SupplyCurve for Pizza in Mumbai

Price(Rs per slice)


40

20

30

8 12 16

Supply


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Points Along the Demand andSupply Curves of a Pizza Market

Price(Rs/slice)

Quantity demanded(1000s of slices/day)

Quantity supplied(1000s of slices/day)

20 16 8

30 12 12

40 8 16


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The Equilibrium Price andQuantity of Pizza In Mumbai

Price($ per slice)


40

20

30

8 12 16

Supply

Demand

Equilibrium at Rs 30Quantity Demanded =Quantity Supplied


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Market Equilibrium

EquilibriumA system is in equilibrium when there is notendency for it to change

Market EquilibriumOccurs in a market when all buyers andsellers are satisfied with their respective

quantities at the market price


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Market Equilibrium

Equilibrium Price and EquilibriumQuantity

The values of price and quantity for whichquantity supplied and quantity demandedare equal


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Excess Supply

Price($ per slice)


4

2

3

8 12 16

Supply

Demand

Excess supply = 8,000 slices per day


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Excess Demand

Price($ per slice)


4

2

3

8 16

Excess demand = 8,000slices per day

Supply

Demand


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Graphing Supply and Demand andFinding the Equilibrium Price and Quantity

Price($per slice)


5

2

3

4

1

4

102

Demand

0 6 8

Supply

2.50

5

The Equilibrium Price = $2.50The Equilibrium Quantity = 5


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What Do You Think?Would buyers prefer a lower price than theequilibrium price?Would sellers prefer a higher price than theequilibrium price?

Market Equilibrium


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Market Equilibrium

What Do You Think?

Is the market equilibrium always an idealoutcome for all market participants?


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An Unregulated Housing Market

Monthly Rent(Rs/apartment)

Quantity(Millions of apartments/day)

16000

2

Supply

Demand

What Do You Think?Is Rs16000 more than somepeople can afford?


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Rent Controls

Monthly Rent(Rs/apartment)

Quantity(Millions of apartments/day)

16000

2

Supply

Demand

24000

Controlled = 8000

1 30

Excess demand = 2 millionapartments per month


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Market Equilibrium

Rent Controls ReconsideredOther consequences of rent controls

Maintenance will decline and housing qualitywill fallIllegal paymentsReduction in household mobilityDiscrimination


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Market Equilibrium

What do you think?

How can we make housing affordable for poor people without using rent ceilings?


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Minimum Support Price

Monthly SupportPrice

(Rs//kg)

Quantity(Millions of kgs/day)

5

2

Supply

Demand

8

1 30

What is the impact of aminimum support price of wheat set at Rs 8/kg?


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Minimum Wage Price Floor

Monthly Wages(Rs//labour)

Quantity(Millions of laborers/day)

50

2

Supply

Demand

80

1 30

What is the impact of aminimum wage set at Rs80/Day?

P i C t l


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Price ControlsIn The Pizza Market

Price($ per slice)


Supply

Demand

Excess demand = 8,000 slices per day

4

Price ceiling = 2

3

8 12 16


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Market Equilibrium

Pizza Price Controls?Market responses to a pizza price ceiling

Long linesPreferential treatment to selected customersPoorer quality ingredientsBlack-market pizzas

MB MC P di ti d E l i i


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Predicting and ExplainingChanges In Prices and Quantities

Distinguishing Between:A change in the quantity demanded

A movement along the demand curve thatoccurs in response to a change in price

A change in demandA shift of the entire demand curve

MB MC A I I Q i


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An Increase In QuantityDemanded vs. An Increase In Demand

Price($/can)

Quantity(1000s of cans/day)

5

2

3

4

1

4

122

6

0 106 8

Increase inquantity

demanded

D

MB MC A I I Q tit


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An Increase In QuantityDemanded vs. An Increase In Demand

Price($/can)


5

2

3

1

4

12

6

0

Increase in demand

D

D

D

D

MB MC Predicting and Explaining


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Change in the quantity suppliedA movement along the supply curve thatoccurs in response to a change in price

Change in supplyA shift of the entire supply curve

MB MC A I I Q tit


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An Increase In QuantitySupplied vs. An Increase In Supplied

Price($/can)


5

2

3

4

1

4

102

6

0 6 8

S

S

Increase in quantitysupplied

MB MC An Increase In Q antit


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An Increase In QuantitySupplied vs. An Increase In Supplied

Price($/can)


5

2

3

4

1

4

102

6 S

0 6 8

S

S

S

Increase in supply

MB MC The Effect on the Market for Tennis


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The Effect on the Market for TennisBalls of a Decline in Court-Rental Fees

Price($/ball)

Quantity(letters/month)

1.00

S

D

40

D

1.40

58



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Shifts in DemandComplements

Two goods are complements in consumption if

an increase (decrease) in the price of onecause a decrease (increase) in the demand for the other



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Shifts in DemandSubstitutes

Two goods are substitutes in consumption if an

increase (decrease) in the price of one causesan increase (decrease) in the demand for theother



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Shifts in DemandChanges In Demand

An increase (decrease) in the demand for a

good will shift the demand curve to the right(left)


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A Change In IncomeInferior Good

One whose demand decreases (increases)

when the incomes of buyers increase(decrease)

MB MC The Effect of a Credible Rumor on


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The Effect of a Credible Rumor onthe Market for Apple Macintosh Computers

Price

Apple Computers(units per month)

P

Q

S

D

P

Q

D

D = demand after rumor of cheaper model

soon to be released

MB MC The Effect of the Increase in


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The Effect of the Increase inthe Population of Potential Buyers

Price

Housing NY City(units per month)

P

Q

S

D

P

Q

D

D = demand after increase in population



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Factors that Shift DemandPrice of complementsPrice of substitutesIncomePreferencesPopulation of potential buyersExpectations

MB MC The Effect on the Market for New Houses


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The Effect on the Market for New Housesof a Decline in Carpenters Wage Rates

Price($1000/house)

Quantity(houses/month)

120

40

D

S

90

50

S



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Factors that Shift SupplyCosts of productionTechnologyWeather Number of suppliersExpectations

Price of related goods



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Predicting and ExplainingChanges In Prices and Demand

Factors That Cause an Increase(rightward or upward shift) in Demand

1. A decrease in the price of complementsto the good or service

2. An increase in the price of substitutes for the good or service

3. An increase in income (for a normalgood)



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Factors That Cause an Increase(rightward or upward shift) in Demand

4. An increased preference by demandersfor the good or service

5. An increase in the population of potentialbuyers

6. An expectation of higher prices in thefuture



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Factors That Cause an Increase (rightwardor upward shift) in Supply

1. A decrease in the cost of materials, labor, or other inputs used in the production of the good or service

2. An improvement in technology that reduces thecost of producing the good or service

3. Price of other goods alternate goods and jointproducts


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2 demand & supply i

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