Supply and Demand. Supply and Demand Demand Relationship between demand and price the law of demand the income effect the substitution effect The

Supply andSupply andDemandDemand

Supply and Demand

Demand

Demand

Relationship between demand and price the law of demand the income effect the substitution effect

The demand curve assumptions

other things being equal (ceteris paribus) a given time period

the axes individual's and market demand curves

The demand curve:The demand for potatoes (monthly)The demand curve:

The demand for potatoes (monthly)

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Price(pence per kg)

20

Market demand(tonnes 000s)

700A

Point

A

Demand

Market demand for potatoes (monthly)Market demand for potatoes (monthly)

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Pri

ce (

pen

ce p

er k

g)

Price(pence per kg)

20

40


700

500

A

B

Point

A

B

Demand


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Pri

ce (

pen

ce p

er k

g)

Price(pence per kg)

20

40

60


700

500

350

A

B

C

Point

A

B

C

Demand


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Pri

ce (

pen

ce p

er k

g)

Price(pence per kg)

20

40

60

80


700

500

350

200

A

B

C

D

Point

A

B

C

D

Demand


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Pri

ce (

pen

ce p

er k

g)

Price(pence per kg)

20

40

60

80

100


700

500

350

200100

A

B

C

D

E

Point

A

B

C

D

E

Demand


Demand

Other determinants of demand

tastes

number and price of substitute goods

number and price of complementary goods

income

distribution of income

expectations

Demand

Movements along and shifts in the demand curve

change in price

movement along D curve

change in any other determinant of demand

shift in D curve

increase in demand rightward shift

decrease in demand leftward shift

D1

Pric

e

P

O Q0 Q1

Quantity

An increase in demandAn increase in demand

D0

Possible causes of a rise in demand• Tastes shift towards this product• Rise in price of substitute goods• Fall in price of complementary goods• Rise in income• Expectations of a rise in price

Demand

Demand functions

simple demand functions

Qd = a – bP

more complex demand functions

Qd = a – bP + cY + dPs – ePc

estimated demand equations

problems of estimating demand equations

demand functions and the demand curve

0

10

20

30

40

50

0 2 4 6 8 10

D

P

Q (000s)

Demand curve for equation: Qd = 10 000 – 200PDemand curve for equation: Qd = 10 000 – 200P

0

10

20

30

40

50

0 2 4 6 8 10

P

5

Qd (000s)

9

D

P

Q (000s)


0

10

20

30

40

50

0 2 4 6 8 10

P

510

Qd (000s)

98

D

P

Q (000s)


0

10

20

30

40

50

0 2 4 6 8 10

P

51015

Qd (000s)

987

D

P

Q (000s)


0

10

20

30

40

50

0 2 4 6 8 10

P

5101520

Qd (000s)

9876

D

P

Q (000s)


Supply and Demand

Supply

Supply

Relationship between supply and price short-run supply long-run supply

The supply curve assumptions

other things remain equal (ceteris paribus) a given time period

the axes individual's and market supply curves

The supply curve:The supply of potatoes (monthly)

The supply curve:The supply of potatoes (monthly)

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Pri

ce (

pen

ce p

er k

g)


Supply

a

P

20

Q

100a

Market supply of potatoes (monthly)Market supply of potatoes (monthly)

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Pri

ce (

pen

ce p

er k

g)


Supply

a

b

P

20 40

Q

100200

ab


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Pri

ce (

pen

ce p

er k

g)


Supply

a

b

c

P

20 40 60

Q

100200350

abc


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Pri

ce (

pen

ce p

er k

g)


Supply

a

b

c

d P

20 40 60 80

Q

100200350530

abcd


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Pri

ce (

pen

ce p

er k

g)


Supply

a

b

c

d

e

P

20 40 60 80100

Q

100200350530700

abcde


Supply

Relationship between supply and price short-run supply long-run supply

The supply curve assumptions

other things remain equal (ceteris paribus) a given time period

the axes individual's and market supply curves why supply curves generally slope up

Supply

Other determinants of supply

costs of production

profitability of alternative products (substitutes in supply)

profitability of goods in joint supply

nature and other random shocks

aims of producers

expectations of producers

Supply

Movements along and shifts in the supply curve

change in price

movement along S curve

change in any other determinant of supply

shift in S curve

increase in supply rightward shift

decrease in supply leftward shift

Supply

Supply functions

simple supply functions

Qs = a + bP

more complex supply functions

Qs = a + bP + cC + dPs – ePj

non-linear functions

estimated supply equations

problems of estimating supply equations

P

QO

S0

Increase

S1Possible causes of a rise in supply

• Fall in costs of production

• Reduced profitability of alternative products that could be supplied

• Increased profitability of goods in joint supply

• Benign shocks

• Expectations of a fall in price

Shifts in the supply curveShifts in the supply curve

P

QO

S2 S0 S1

IncreaseDecrease

Shifts in the supply curveShifts in the supply curve

Supply and Demand

Price and output determination


Equilibrium price and output

response to shortages and surpluses

shortage (D > S)

price rises

surplus (S > D)

price falls

significance of ‘equilibrium’

Equilibrium price and output:The Market Demand and Supply of Potatoes (Monthly)

Equilibrium price and output:The Market Demand and Supply of Potatoes (Monthly)

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

D

C

Aa

c

d

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

Bb

The determination of market equilibrium (potatoes: monthly)


0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

D

C

B

Aa

b

c

d

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

SHORTAGE

(300 000)



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

C

B

Aa

b

c

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

D dSURPLUS

(330 000)



0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

D d

Qe


E

B

Aa

b

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)The determination of market equilibrium

(potatoes: monthly)The determination of market equilibrium

(potatoes: monthly)

Effects of shifts in the demand curve

movement along the supply curve and the new demand curve


P

QO

Pe1

Qe1

S

D1

g

Initial equilibrium at point g

Effect of a shift in the demand curveEffect of a shift in the demand curve

P

QO

Pe1

Qe1

S

D1

g


P

QO

Pe1

Qe1

S

D1

D2

g


P

QO

Pe1

Qe1

S

g h

D1

D2

Pe2

Qe2

i New equilibrium at point i




Effects of shifts in the supply curve

movement along demand curve and new supply curve


P

QO

Pe1

Qe1

D

S1

g Initial equilibrium at point g

Effect of a shift in the supply curveEffect of a shift in the supply curve

P

QO

Pe1

Qe1

D

S1

g


P

QO

Pe1

Qe1

D

S1

S2

g


P

QO

Pe1

Pe3

Qe3Qe1

D

S1

S2

j g

k

New equilibrium at point k




Effects of shifts in the supply curve

movement along demand curve and new supply curve

Identifying the position of demand and supply curves


P

O Q

S1

S2

1000

20p

800

30p b

aWhat has caused a movement from point a to point b?

Problems in identifying the position and shape ofthe demand curve: shift in supply curve


P

O Q

D

S1

S2

800 1000

20p

30p b

aShift in supply

alone.



P

O Q

S1

1000

20p a

D1

D2

S2

800

30p b Shift in both supply and demand.

Problems in identifying the position and shape of the demand curve: shift in supply and demand curves

Problems in identifying the position and shape of the demand curve: shift in supply and demand curves

Supply and Demand

The Control of Prices

The control of prices

Equilibrium price and the absence of shortages and surpluses

Minimum prices justification

effects

P

Q O

Pe

S

D

Minimum price: price floorMinimum price: price floor

P

Q O

Pe

minimumprice

Qd Qs

S

D

surplus

Minimum price: price floorMinimum price: price floor


Minimum prices justification effects dealing with resulting surpluses

Maximum prices justification effects

P

Q O

Pe

S

D

Maximum price: price ceilingMaximum price: price ceiling

P

Q O

Pe

S

D

Qs Qd

maximumprice

shortage

Maximum price: price ceilingMaximum price: price ceiling


Minimum prices justification effects dealing with resulting surpluses

Maximum prices justification effects dealing with resulting shortages rationing black markets

P

QO

Pg

Pe

Qs Qd

D

S

Price ceiling

No black market

Effect of price control on black-market pricesEffect of price control on black-market prices

P

QO

Pg

Pe

Qs Qd

D

S

Pb

If black marketeers buy all the supplies at Pg, the black market equilibrium

price will be Pb.

Effect of price control on black-market pricesEffect of price control on black-market prices

Documents

Supply and Demand. Supply and Demand Demand Relationship between demand and price the law of demand the income effect the substitution effect The