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8/3/2019 BEC-DOMS PPT on Demand &Supply
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Demand & Supply
Demand
Supply
Market Equilibrium
Examples
Price ceiling/floor
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Build a model
buyers
sellers
& their interaction
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Use the model
to predict
the impact of changes
to explain
changes that occur
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Demand
behavior of buyers
relationship between
quantity demanded of a good
price
holding other factors constant
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quantity demanded (Qd)
amount of good or service
unit of measure
per unit of time 2 bottles of water per day
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Law of Demand
If the price of a good
then the Qd
holding other things constant!!!
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Why?
higher price makes you feel poorer
income effect
higher price on one good,substitute other goods.
substitution effect
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Example: bottles of water per day
Describe demand in 2 ways:
Demand schedule
a list of Qdat each price
Demand curve
a graph of demand schedule
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Demand Schedule
P QdPrice = $/bottle
Qd = bottles/day
$2.00 0
$1.50 1
$1.00 2
$.50 3
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Demand curve
P
Qd
0 1 2 3 4
2
1.51
.5D
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individual demand
demand curve for 1 buyer
market demand**
demand curve for all buyers
add up individual Qd for each price
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Changes in Demand
recall our assumption
hold other things constant
allow only price to change but what if other factors do change?
change in demand
shift to a new demand curve
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increase in demand
increase in Qd at every price
demand curve shifts to the right
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P
Qd
0 1 2 3 4
2
1.5
1
.5 DD
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decrease in demand
decrease in Qd at every price
demand curve shifts to the left
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P
Qd
DD
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Factors affecting demand
income
prices of related goods
buyer expectations
# of buyers
preferences
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income
fornormal goods,
an increase in income will increase demand
examples:CDs, bottled water,
eating out,
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forinferior goods,
an increase in income will
decrease the demand examples:
ramen noodles,
check-cashing service
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Prices of related goods
what are related goods?
substitutes
e.g. Snapple, Coke
complements
goods consumed with water
e.g. pretzels
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substitutes
if price of Snapple rises,
people switch to water
increase in demand for water
if price of Snapple falls,
people switch from water
to Snapple
decrease in demand for water
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complements
if price of pretzels rises
eat fewer pretzels,
so drink less water,
demand for water falls
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buyer expectations
buyers can expect change in
future income
future prices
and act to change demand today
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expect price of water to rise next month,
buy a case today,
increase demand today
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# of buyers
size of population
demographics
age gender
race
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if there are more buyers
increase market demand for water
could be due to
more people overall
more people who like water
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preferences
what do we want to buy?
change in our likes/dislikes
acid washed jeans?
tattoos?
change in technology
5 1/4 floppies?
DVDs?
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if drinking more water
beneficial to health,
increase in demand for bottled water
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Important!!
Change in demand
-- occurs when other factors change
-- shift to a new demand curve
change in demand NOT caused by change in price of
the good
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Change in quantity demanded
-- occurs when prices change
-- movement along existing demand curve
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Change in Qd
P
Qd
D
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Change in Demand
P
Qd
D
D
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Supply
behavior of sellers
relationship between
quantity supplied of a good price
holding other factors constant
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Law of Supply
If the price of a good
then the Qs
holding other things constant!!!
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Why?
Holding costs constant
higher price means higher profit margin
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Supply Schedule
P QsPrice = $/bottle
Qs = bottles/day
$2.00 3
$1.50 2
$1.00 1
$.50 0
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S
Supply curve
P
Qs
0 1 2 3 4
2
1.51
.5
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Individual supply
supply curve for 1 supply
market supply**
supply curve for all sellers
add up individual Qs for each price
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Changes in Supply
if other factors do change,
change in supply
shift to a new supply curve
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increase in supply
increase in Qs at every price
supply curve shifts to the right
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P
Qs
SS
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decrease in supply
decrease in Qs at every price
supply curve shifts to the left
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P
Qs
SS
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Factors affecting supply
Cost of inputs
prices of related goods
seller expectations
# of seller
productivity
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Cost of inputs
As input prices get higher,
supply decreases
example: increase in cost of bottles
labor
electricity
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Prices of related goods
Substitutes in production
a good that can be made instead
of bottled water
e.g. bottled tea
If price of bottled tea increases,
switch to tea production,
supply of bottled water falls
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Complements in production
good that is produced with other good
e.g. Beef & leather
if price of beef rises,
Qs of beef rises,
& supply of leather rises
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Seller expectations
Expect input prices to rise in future
increase supply today
expect price of good to rise in future decrease supply today
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Productivity
Amount of output per unit of input
bottles of water per hour of labor
Increase in productivity lowers cost
increases supply
what makes productivity increase?
Technology
human capital
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Important!!
Change in supply
-- occurs when other factors change
-- shift to a new supply curve
(right or left) change in supply
-- NOT caused by change in price of
the good
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Change in quantity supplied
-- occurs when prices change
-- movement along existing supply curve
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Change in Qs
P
Qs
S
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P
Qs
S
S
Change in Supply
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Market Equilibrium
What will be the price of bottled water?
Price at which Qs = Qd
-- equilibrium price
-- equilibrium quantities
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Market forBottledWaterP
(millions bottles per day)
Q
D
S
$10
10
Equilibrium
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Why is this an equilibrium?
If Qs > Qd
surplus
price falls until Qs = Qd
If Qs < Qd
shortage
price rises until Qs = Qd
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Changes in equilibrium
If supply and/or demand changes
(shifts left or right),
then equilibrium will change too.
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Example 1
Market for bottled water
price of plastic bottles rises
what happens to equilibrium?
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Which curve is affected?
buyers or sellers?
Supply curve
bottles are an input
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Increase or decrease in supply?
Increase in cost of input
supply decreases
shift LEFT
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P
(millions bottles per day)
S
Q
D
$10
10
S
Equilibrium:
P
Q
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note
Change in supply causes
change in equilibrium price
BUT
Change in price does NOT cause a
change in supply
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Example 2
Market for bottled water
sugar is found to be harmful to health
what happens to equilibrium?
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Which curve is affected?
Demand curve
health concerns increase
preferences for water
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Increase or decrease in demand?
Increase in preference for water
demand increases
shift RIGHT
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P
(millions bottles per day)
S
Q
D
$10
10
D
Equilibrium:
P
Q
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Example 3
Market for bottled water
incomes fall &
sellers expect utilities to rise
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Which curve is affected?
Demand curve
income falls
Supply curve
seller expectations change
expect costs to rise
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Increase or decrease?
Demand decreases (left)
income falls &
bottled water is normal good
Supply increases (right)
make more water today before
costs go up
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P
(millions bottles per day)
S
Q
DD
Equilibrium:
P
Q ?
S
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Example 4: Leather sandals
Market for leather sandals
A. Mad cow disease
-- must destroy 20% of herds
what happens to equilibrium
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P
Q
S
D
S
Supplydecreases
Q decreases
P increases
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B.
PETA
campaign against leather products
what happens to equilibrium?
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P
Q
S
D
D
demanddecreases
Q decreases
P decreases
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Example 5: Natural Gas Prices
Winter 2000-2001
prices increased over 100%
why?
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3 possible causes:
1. Supply decreases
or
2. Demand increases
or3. both
P SS
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P
Q
S
D
S
Decrease in Supply
Wh ld S f ll?
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Why would S fall?
regulation
-- tougher to drill
-- increase costs hot summer (2000)
-- depletes inventories
P S
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P
Q
S
D
D
Increase in Demand
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Why would D rise?
booming economy (2000)
EPA rules-- fewer coal plants, more gas plants
cold winter
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Why did P rise?
both falling supply & rising demand
-- but demand was most
important
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Price ceiling
govt regulation sets maximum price
example: rent control in NYC
what happens?
Rent
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Rent
Q
S
D
$2500
500
$1200
250 750
rent ceiling= $1200
Rent
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Rent
Q
S
D
$2500
500
$1200
250 750
Qd = 750 units
Qs = 250 units
at P = $1200:
SHORTAGE
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who gets housing?
those willing to pay more
bogus fees:key money
those who look harder
loss of time
those who get lucky
Monica on Friends
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Result
Price does not ration scarce good
too few apt. units
lost resources in searching
price ceiling is inefficient
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Why have rent control?
intended to help make housing affordable
secondary effect
shortage
run-down buildings
rent-controlled apts. go to the connected