supply & demand three functions of price a. determines value b. communicates between buyers and...

SUPPLY & DEMAND Three functions of priceA. Determines valueB. Communicates between

buyers and sellersC. Rationing device

DEMAND Single Consumer Demand Schedule

Average Priceof dvd movies

Quantity Demanded

$25 0

$20 2

$15 4

$10 6

$5 8

MARKET DEMAND

Market Demand

  Quantity Purchased

Average Price

of DVD Movies

  Sting    Ice

Cube    Morrissey

    Total

$25 0 1 0 1

$20 2 2 1 5

$15 4 3 2 9

$10 6 4 3 13

$5 8 5 4 17

DEMAND CURVE

DEMAND CONT.

The Law of Demand implies the following with respect to a demand curve (all of these say exactly the same thing): The demand curve is downward sloping The demand curve has a negative slope The demand curve shows an inverse

relationship between price and quantity demanded

DEMAND CONT.

The Law of Demand simply proposes that as the price of a good declines the quantity you would be willing and able to purchase during some period of time increases, given that everything else remains unchanged.

Demand vs. QD

Change in Demand Versus Change in Quantity Demanded First we said that according to the Law of

Demand that a change in price will lead to a movement along a stable demand curve and result in a change in the quantity demanded. For example, more will be purchased but only at a lower price. The only thing that can change the quantity demanded is a change in the market price.

Demand vs. QD cont.

Second we said that if one of the ceteris paribus assumptions is violated (e.g., a change in income) there will be a change in demand. Economists use the term "demand" to refer to the entire demand curve. Consequently when we say there has been an increase in demand we mean that the entire demand curve has shifted to the right. More will now be purchased at the same price.

Demand Shift

Shifters of demand

Non-Price Determinants of Demand # of buyers

increase => demand increasesdecrease => demand decreases

Consumer Tastesincrease => demand increasesdecrease => demand decreases

Shifters cont.

Consumer income (normal good)

Increase => demand increases

Decrease => demand decreases Consumer income (inferior good)

Increase => demand decreases

Decrease => demand increases

Shifters cont.

Price of Substitutes

Increase => demand increases

Decrease => demand decreases Price of Complements

Increase => demand decreases

Decrease => demand increases

Shifter cont.

Belief that the future price will

Increase => demand now will increase

Decrease => demand now will decrease

Belief that your future income will

Increase => demand now will increase

Decrease => demand now will decrease

SUPPLY

The Law of Supply states that firms will produce and offer for sale greater quantities of a good or service the higher the market price, given that everything else remains unchanged.

SUPPLY SCHEDULE

SUPPLY CURVE

SUPPLY CONT.

The Law of Supply implies the following with respect to a supply curve (all of these say exactly the same thing): The supply curve is upward sloping The supply curve has a positive slope The supply curve shows a direct

relationship between price and quantity demanded

Change in Supply vs. QS

Change in Supply versus Change in Quantity Supplied First we said that according to the Law of

Supply that a change in price will lead to a movement along a stable supply curve and result in a change in the quantity supplied. For example, more will be produced for sale but only at a higher price.

Change (Supply vs. QS) cont.

Second we said that if one of the ceteris paribus assumptions is violated (e.g., a change in technology) there will be a change in supply. Economists use the term "supply" to refer to the entire supply curve. Consequently when we say there has been an increase in supply we mean that the entire supply curve has shifted to the right. More will now be produced at the same price.

Change in Supply

Shifters of the Supply Curve

Non-Price Determinants of Supply # of sellers

increase => Supply increases decrease => Supply decreases

Addition of technology Supply will always increase

Shifters cont.

Cost of Labor

Increase => supply decreases

Decrease => supply increases Cost of Natural Resources

Increase => supply decreases

Decrease => supply increases Operating Costs (electricity)

Increase => supply decreases

Decrease => supply increases

Shifters Cont.

Business TaxesIncrease => supply decreasesDecrease => supply increases

Government RegulationsIncrease => supply decreasesDecrease => supply increases

Government subsidies Increase => supply increasesDecrease => supply decreases

EQUILIBRIUM

A market is in equilibrium when the quantity demanded is equal to quantity supplied at the market price. At the equilibrium market price there are exactly the same number of goods that suppliers are willing to sell as consumers are willing to buy.

MARKET PRICE

Equilibrium Price - the price at which the quantity demanded is equal to the quantity supplied. Other things being unchanged, there is no tendency for this price to change.

MARKET EQUILIBRIUMMarket Demand and Supply Schedules for DVD Movies

Average

Price of DVD Movies

Quantity Demanded

Quantity Supplied

$25 1 17 $20 5 13

$15 9 9 <- Equilibrium

$10 13 5 $5 17 1

MARKET EQUILIBRIUM

DISEQUILIBRIUM

How can you tell if your market is not in equilibrium? The easiest way for the firm to tell is by monitoring its inventory. When the quantity supplied is not equal to the quantity demanded at the current market price we have either undesired inventory build or undesired inventory decline. Store shelves start overflowing because you are producing more than is being sold or the store shelves go bare because people are buying your product faster than you can make it.

SHORTAGE

SURPLUS

SHORTAGE &CEILINGS

Price Ceiling - a legal requirement that maintains the market price below the equilibrium price.

Shortage - the amount that the quantity demanded exceeds the quantity supplied when the market price is below the equilibrium price.

SURPLUS & FLOORS

Price Floor - a legal requirement that maintains the market price above the equilibrium price.

Surplus - the amount that the quantity supplied exceeds the quantity demanded when the market price is above the equilibrium price

Increase in Demand

Price S P1 b P a D1 D Q Q1 Quantity

Decrease in Demand

Price S P a P1 b D1 D Q1 Q

Increase in Supply

Price S S1 P a P1 b D Q Q1 Quantity

Decrease in Supply

S1

Price S P1 b P a D Q1 Q Quantity