Demand and Supply
Lecture 4
In This Lecture
1. Prices and Competitive Conditions2. The meaning of demand and demand schedules
and curves3. The difference between a shift in demand and a
change in the the quantity demanded4. The meaning of supply and supply schedules and
curves5. The difference between shifts in supply and a
change in the quantity supplied
Prices• Prices represent the term of trade between individuals
• In a barter economy, prices could be expressed as how many coconuts are required in a trade for each fish.
• In a monetary economy, prices are expressed as the number of units of currency (dollar, euro, peso, etc.) required in trade for a unit of a ‘good.’
• Note the ratio of the currency price of a fish to the currency price of a coconut tells you how many coconuts you have to give up to get a fish (same as in the barter economy)
• Relative prices (ratios of one price to another) represent opportunity costs!
Competitive Conditions
If trading relationships between individuals are competitive, then no one individual or group of individuals through their actions can influence the price of a good.
Individuals in competitive situations will take the price as given.
Trade: It takes two to tango
• At a given price, I could decide to acquire ownership of a good -- I would be a ‘demander’ in this situation
• At a given price, I could decide to sell my ownership of the good to another individual -- in this situation I would be a ‘supplier’
ND Football Tickets
Value of Ticket to:
Peter $200
Paul$150
Mary$100
Jack$100
Jill $50
The value to the potential buyer of the good is the maximum amount he or she is willing and able to pay to good.
Don’t currently have a ticket but will demand a ticket only if the value to the individual exceeds their opportunity cost (relative price)
Demand a ticket if
Benefit ≥ Cost
ND Football Tickets
Value of Ticket
Peter$200
Paul$150
Mary$100
Jack$100
Jill $50
200
150
100
50
Price
TicketsDemand Curve
0 1 2 3 4 5
Peter
Paul
Mary and Jack
Jill
Demand Schedule
Donuts
Quantity of Donuts
Jill Jack Total
Price
$1 0 1 1
75¢ 0 3 3
50¢ 1 5 6
25¢ 2 7 9
• Why must the price decline for the individuals to demand more?
– As the individual consumes more of the good, the value they place on the next unit of consumption declines (diminishing marginal utility).
– Individuals will increase their demand only if the price falls.
Donuts
Quantity of Donuts
Jill Jack Total
Price
$1 0 1 1
75¢ 0 3 3
50¢ 1 5 6
25¢ 2 7 9
0 1 2 3 4 5 6 7 8 9
$1
75¢
50¢
25¢
Price
Donuts
When Price of the Good Falls
More of the good is demanded because
• Individuals who at the original price demanded the good may demand more
• Individuals who at the original price didn’t demand any of the good may start demanding the good
Remember this represents movement along a Demand Curve
Continuous Demand
Smooth Demand Curve Because:
• Many individuals
• Ask at any price
• Can demand fractions of units
Price
Quantity
Shifts in Demand Curve Change in Other Factors:
• Increase in Population
• Changes in Income– Normal good (income rises)– Inferior good (income rises)
• Change in prices of other goods– Substitutes (price rises)– Complements (price rises)
• Changes in Tastes• Changes in Expectations• Changes in Weather
Shifts Demand
Outward
Outward
Inward
Outward
Inward
Supply
• In the football tickets example, ND allocates the tickets according to some procedure but then the individuals who receive tickets may sell them or keep them
• In the donut example, donuts are produced and then sold to customers
• In either example, the question is what quantity of the goods will offered for sale at a given price
ND Football Tickets
Value to:
Professor W $150
Professor X $100
Professor Y $50
Professor Z $50
Value to an owner of an object or good is the minimum price at which they would be willing to part with the good.
They would ‘supply’ the good (be willing and able to sell the good) if the price they could get for the good exceeded the value they placed on the good
Sell if: PRICE ≥ Value to individual
Z and Y
200
150
100
50
Price
Tickets 0 1 2 3 4
ND Football Tickets
Value to:
Professor W $150
Professor X $100
Professor Y $50
Professor Z $50
X
W
Supply Function
Donuts
Quantity of Donuts
Tasty Dunking Total
Price
$1 4 6 10
75¢ 3 5 8
50¢ 2 4 6
25¢ 0 0 0
• Why do firms require a hirer price to supply more?
– As they produce more, the cost of production rises (diminishing returns to scale).
– Consequently as their costs rise they will only be willing to supply more if the price rises.
Donuts
0 1 2 3 4 5 6 7 8 9 10
$1
75¢
50¢
25¢
Price
Donuts
Quantity of Donuts
Tasty Dunking Total
Price
$1 4 6 10
75¢ 3 5 8
50¢ 2 4 6
25¢ 0 0 0
As the Price of the Good Rises
More is supplied because
• Existing suppliers provide more
• New suppliers start producing and supplying the good
This occurs with movement along a supply curve!
Shifts in Supply Curve
Change in Other Factors:
• Changes in Input Prices (increases)
• Changes in Technology
• Change in Expectations
Shifts Supply
Inward
Outward
Assignment for Next Lecture
• Do Homework 3 on ‘Homework Assignment’ by Wednesday, September 6 at 5 pm
• ReRead Chapter 3
• Topics Next Time
– Markets and Competitive Equilibrium