Demand, Supply, & Market Equilibrium

Bidding!How much will you pay for a 3 D Movie Theatre Ticket?

Price : Market Forces ka Kamaal Hain

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DemandQuantity demanded (Qd)

Amount of a good or service consumers are willing & able to purchase during a given period of time

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DemandSix variables that influence Qd

Price of good or service (P)Incomes of consumers (M)Prices of related goods & services (PR)

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• Expected future price of product (Pe)

• Number of consumers in market (N)• Generalized demand function

• ( )Taste patterns of consumers • ( )Taste patterns of consumers

• ( , , , , , )d R eQ f P M P P N • ( , , , , , )d R eQ f P M P P N

Competition in the market

Airtell Vs. Vodafone

How do you choose?- price- brand (quality)- distance- service

Supply and DemandDEMAND - from consumer's point of view

SUPPLY - from producer's point of view

DemandQuantity demanded: the amount of a good that households want to consume given their income and prices in a given time period

QuestionHow does what we "demand" differ from

what we "want"?demand is what you are willing and able to buy

given your income and the price of the good (limited)

a want is a desire, but not necessarily something you have the resources to buy (unlimited)

Generalized Demand Function

Inverse for complements

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Variable Relation to Qd

P

Pe

N

M

PR

Inverse

Direct

Direct

Direct

Direct for normal goodsInverse for inferior goods

Direct for substitutes

The Law of DemandAs the price of a good increases, the

quantity demanded falls, holding all else constant, (ceteris paribus)Ceteris Paribus - holding all else constant in real world many variables change

simultaneouslyHowever, in order to understand the economy

we must first understand each variable separately.

Graphing Demand CurvesChange in quantity demanded

Occurs when price changesMovement along demand curve

Change in demandOccurs when one of the other variables, or

determinants of demand, changesDemand curve shifts rightward or leftward

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The Demand CurveThe market demand curve (or just demand

curve) shows the relationship between the price of a good and the quantity demanded , holding constant all other variables that influence demandEach point on the curve shows the total buyers

would choose to buy at a specific priceLaw of demand tells us that demand curves

virtually always slope downward

Number of Bottles per

Month

Price per

Bottle

A

B

$4.00

2.00

D40,000 60,000

At $2.00 per bottle, 60,000 bottles are demanded (point B).

When the price is $4.00 per bottle, 40,000 bottles are demanded (point A).

B C$2.00

60,000 80,000

D1D2

An increase in income shifts the demand curve from D1 to D2.

Number of Bottles per

Month

Price per

Bottle

At each price, more bottles are demanded after the shift

Income: Factors That Shift The Demand CurveAn increase in income has effect of shifting

demand for normal goods to the rightHowever, a rise in income shifts demand for

inferior goods to the leftA rise in income will increase the demand for

a normal good, and decrease the demand for an inferior good

Wealth: Factors That Shift The Demand CurveYour wealth—at any point in time—is the total

value of everything you own minus the total dollar amount you owe

An increase in wealth willIncrease demand (shift the curve rightward)

for a normal goodDecrease demand (shift the curve leftward) for

an inferior good

Prices of Related Goods: Factors that Shift the Demand CurveSubstitute—good that can be used in

place of some other good and that fulfills more or less the same purposeA rise in the price of a substitute increases the

demand for a good, shifting the demand curve to the right

Complement—used together with the good we are interested inA rise in the price of a complement decreases

the demand for a good, shifting the demand curve to the left

Complements

V.S.

V.S.

Other Factors That Shift the Demand CurvePopulation

As the population increases in an area Number of buyers will ordinarily increase Demand for a good will increase

TastesCombination of all the personal factors that go into

determining how a buyer feels about a goodWhen tastes change toward a good, demand

increases, and the demand curve shifts to the rightWhen tastes change away from a good, demand

decreases, and the demand curve shifts to the left

Quantity

Price

D1D2

Entire demand curve shifts leftward when:• income or wealth ↓• price of substitute ↓• price of complement ↑• population ↓• expected price ↓• tastes shift toward good•Taxes ↑ or subsidies ↓

SupplyQuantity supplied (Qs)

Amount of a good or service offered for sale during a given period of time

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SupplySix variables that influence Qs

Price of good or service (P)Input prices (PI )Prices of goods related in production (Pr)Technological advances (T)Expected future price of product (Pe)Number of firms producing product (F)

Generalized supply function

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( , , , , , )s I r eQ f P P P T P F

Generalized Supply Function

Direct for complements

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Variable Relation to Qs

P

Pe

F

PI

Pr

Direct

Direct

Direct

Inverse

Inverse

Inverse for substitutes

T

Supply FunctionSupply function, or supply, shows relation

between P & Qs when all other variables are held constant Qs = g(P)

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Graphing Supply CurvesA point on a supply curve shows either:

Maximum amount of a good that will be offered for sale at a given price

Minimum price necessary to induce producers to voluntarily offer a particular quantity for sale

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Graphing Supply CurvesChange in quantity supplied

Occurs when price changesMovement along supply curve

Change in supplyOccurs when one of the other variables, or

determinants of supply, changesSupply curve shifts rightward or leftward

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The Supply Schedule and The Supply Curve

Supply schedule—shows quantities of a good or service firms would choose to produce and sell at different prices, with all other variables held constant

Supply curve—graphical depiction of a supply scheduleShows quantity of a good or service supplied at

various prices, with all other variables held constant

F

G

2.00

S

40,000 60,000

$4.00

At $4.00 per bottle, quantity supplied is 60,000 bottles (point G).

When the price is $2.00 per bottle, 40,000 bottles are supplied (point F).

Number of Bottles per

Month

Price per

Bottle

Shifts vs. Movements Along the Supply Curve

A change in the price of a good causes a movement along the supply curveIn Figure 4

A rise (fall) in price would cause a rightward (leftward) movement along the supply curve

A drop in transportation costs will cause a shift in the supply curve itselfIn Figure 5

Supply curve has shifted to the right of the old curve (from Figure 4) as transportation costs have dropped

A change in any variable that affects supply—except for the good’s price—causes the supply curve to shift

Factors That Shift the Supply CurveInput prices

A fall (rise) in the price of an input causes an increase (decrease) in supply, shifting the supply curve to the right (left)

Price of Related GoodsWhen the price of an alternate good falls(rises),

the supply curve for the good in question shifts rightward (leftward)

TechnologyCost-saving technological advances increase the

supply of a good, shifting the supply curve to the right

Factors That Shift the Supply CurveNumber of Firms

An increase (decrease) in the number of sellers—with no other changes—shifts the supply curve to the right (left)

Expected PriceAn expectation of a future price increase

(decrease) shifts the current supply curve to the left (right)

Factors That Shift the Supply CurveChanges in weather

Favorable weather Increases crop yields Causes a rightward shift of the supply curve for that

cropUnfavorable weather

Destroys crops Shrinks yields Shifts the supply curve leftward

Other unfavorable natural events may effect all firms in an areaCausing a leftward shift in the supply curve

S2

G J

S1

60,000

$4.00

80,000

A decrease in transportation costs shifts the supply curve from S1 to S2.

Number of Bottles per

Month

Price per

BottleAt each price, more bottles are supplied after the shift

P2

Q3 Q1 Q2

P1

P3

Quantity

Price Price increase moves us rightward along supply curve

S

Price increase moves us leftward along supply curve

Quantity

PriceS2

S1Entire supply curve shifts rightward when:• price of input ↓• price of alternate good ↓• number of firms ↑• expected price • technological advance• favorable weather

Quantity

Price

S1

S2Entire supply curve shifts rightward when:• price of input ↑• price of alternate good ↑• number of firms ↓• expected price ↑• unfavorable weather

Market EquilibriumEquilibrium price & quantity are

determined by the intersection of demand & supply curvesAt the point of intersection, Qd = Qs

Consumers can purchase all they want & producers can sell all they want at the “market-clearing” price

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Market Equilibrium (Figure 2.5)P

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S0

Qd , Qs0 1,10

0700100

Quantity

Price

(dol

lars

)

900300 500 1,500

1,300

10

20

30

40

50

60

70

80

D0

••

• ••

ExerciseWrite down a list of 5 things you did

yesterday (e.g., had breakfast, attended Econ 110 lecture,

went to the gym, talked to friend X, wrote an essay, etc.). Next to each event, give examples of opportunity costs associated with doing it

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DiscussionDiscussion of Demand and Supply cases.

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