01. supply and demand

Supply and DemandSupply and Demand


DemandDemand

DEMANDDEMAND

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

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

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

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


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


DEMANDDEMAND

Other determinants of demand

tastes

number and price of substitute goods

number and price of complementary goods

income

distribution of income

expectations

Other determinants of demand

tastes

number and price of substitute goods

number and price of complementary goods

income

distribution of income

expectations

DEMANDDEMAND

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

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

DEMANDDEMAND

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

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)



SupplySupply

SUPPLYSUPPLY

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

Relationship between supply and price short-run supply

long-run supply


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


SUPPLYSUPPLY

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


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

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

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


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

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

SUPPLYSUPPLY

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

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

SUPPLYSUPPLY

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

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

SUPPLYSUPPLY

Supply functions

simple supply functions

Qs = a + bP

more complex supply functions

Qs = a + bP + cC + dPs – ePj

estimated supply equations

problems of estimating supply equations

Supply functions

simple supply functions

Qs = a + bP

more complex supply functions

Qs = a + bP + cC + dPs – ePj

estimated supply equations

problems of estimating supply equations

P

QO

S0

Increase

Shifts in the supply curveShifts in the supply curve

S1

P

QO

S2 S0 S1

IncreaseDecrease

Shifts in the supply curveShifts in the supply curve


Price and output determination

Price and output determination

PRICE AND OUTPUT DETERMINATIONPRICE 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

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

The determination of market equilibrium (potatoes: monthly)



E

D

C

Aa

c

d

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

Bb

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



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

QO

Pe1

Qe1

S

D1

g

P

QO

Pe1

Qe1

S

D1

g

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

P

QO

Pe1

Qe1

S

D1

D2

g


P

QO

Pe1

Qe1

S

g h

D1

D2

Pe2

Qe2

i





Effects of shifts in the supply curve

movement along demand curve and new supply curve





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

QO

Pe1

Qe1

D

S1

g

P

QO

Pe1

Qe1

D

S1

g

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

P

QO

Pe1

Qe1

D

S1

S2

g


P

QO

Pe1

Pe3

Qe3Qe1

D

S1

S2

j g

k







Identifying the position of demand and supply curves





Identifying the position of demand and supply curves

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


P

O Q

S1

1000

20p a

P

O Q

S1

S2

800 1000

20p

30p b

a



P

O Q

D

S1

S2

800 1000

20p

30p b

a



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


P

O Q

S1

20p a

1000

P

O Q

S1

S2

20p

30p b

a

800 1000



P

O Q

S1

S2

800 1000

20p

30p b

a

D1

D2




ElasticityElasticity

ELASTICITYELASTICITY

Defining elasticity

the responsiveness of demand and supply

Price elasticity of demand

the responsiveness of demand to a change in price

Defining elasticity

the responsiveness of demand and supply


the responsiveness of demand to a change in price

Quantity

Pri

ce

O Q1

P1

a

S1

D

Market supply and demandMarket supply and demand

Quantity

Pri

ce

O Q2 Q1

P1

P2

b

S2

S1

D

a


Quantity

Pri

ce

O Q2 Q1

P1

P2

S2

S1

D

D'

a

b


Quantity

Pri

ce

O Q3 Q2 Q1

P1

P2

P3

c

S2

S1

D

D'

a

b




measurement

proportionate (or %) Qd / proportionate (or %) P

use of proportionate or percentage changes

the sign (positive or negative)

the value (greater or less than one)


measurement

proportionate (or %) Qd / proportionate (or %) P

use of proportionate or percentage changes

the sign (positive or negative)

the value (greater or less than one)


Determinants of price elasticity of demand number and closeness of substitute goods

the proportion of income spent on the good

time

Price elasticity of demand and consumer expenditure (P x Q)

Determinants of price elasticity of demand number and closeness of substitute goods

the proportion of income spent on the good

time


Consumers’ total expenditure =

firms’ total revenue=

£2 x 3m = £6m

Consumers’ total expenditure =

firms’ total revenue=

£2 x 3m = £6m

P(£)

Q (millions of units per period of time)

D

Total expenditureTotal expenditure

0

1

2

3

4

0 1 2 3 4 5



effects of a price change on expenditure: elastic demand



P(£)


0

aD

Elastic demand between two pointsElastic demand between two points

Expenditure fallsas price rises

4

20

5

10

b




effects of a price change on expenditure: inelastic demand




a4

20

P(£)


0

D

Expenditure risesas price rises

Inelastic demand between two pointsInelastic demand between two points

8

15

c





special cases




special cases

P2

P

QO Q1

P1

D

b

a

Totally inelastic demand (PD = 0)Totally inelastic demand (PD = 0)

Q2

P

QO Q1

P1 Da b

Infinitely elastic demand (PD = )Infinitely elastic demand (PD = )

P

QO 40

20

D

100

8

a

Unit elastic demand (PD = –1)Unit elastic demand (PD = –1)

b





special cases

applications to price decisions




special cases


P(£)


0

b

aD

5

4

10 20

Expenditure fallsas price rises

Elastic demand between two pointsElastic demand between two points

P(£)


0

c

a

D

8

4

15 20

Expenditure risesas price rises

Inelastic demand between two pointsInelastic demand between two points





special cases


different elasticities along a demand curve




special cases


different elasticities along a demand curve

Different elasticities along different portions of a demand curveDifferent elasticities along different portions of a demand curve

P

QO

P1

Q1

a

D

P

QO

P1

P2

Q1 Q2

a

b

D

Elasticdemand


P

QO

P1

P2

P3

Q1 Q2Q3

a

b

c

D

Inelasticdemand



Measurement of elasticity: arc elasticity

the formula for price elasticity of demand

Q/Q ÷ P/P

using the average or 'mid-point' method

Measurement of elasticity: arc elasticity


Q/Q ÷ P/P

using the average or 'mid-point' method

0

2

4

6

8

10

0 10 20 30 40 50

P (£)

Q (000s)

Demand

Measuring elasticity using the arc methodMeasuring elasticity using the arc method

m

n

0

2

4

6

8

10

0 10 20 30 40 50

P (£)

Q (000s)

Q P

mid Q mid PPd =

Demand

m

n

Q = 10

P = –2

Mid P

7

Mid Q15


0

2

4

6

8

10

0 10 20 30 40 50

P (£)

Q (000s)

Q P

mid Q mid PPd =

10 2 15 7

=

Demand

m

n

Q = 10

P = –2

Mid P

7

Mid Q15


0

2

4

6

8

10

0 10 20 30 40 50

P (£)

Q (000s)

Q P

mid Q mid PPd =

10 2 15 7

=

= 10/15 x 7/2

Demand

m

n

Q = 10

P = –2

Mid P

7

Mid Q15


0

2

4

6

8

10

0 10 20 30 40 50

P (£)

Q (000s)

Q P

mid Q mid PPd =

10 2 15 7

=

= 10/15 x 7/2

= 70/30

Demand

m

n

Q = 10

P = –2

Mid P

7

Mid Q15


0

2

4

6

8

10

0 10 20 30 40 50

P (£)

Q (000s)

Q P

mid Q mid PPd =

10 2 15 7

=

= 10/15 x 7/2

= 70/30

= 7/3 = 2.33

Demand

m

n

Q = 10

P = –2

Mid P

7

Mid Q15



Measurement of elasticity: point elasticity


dQ/dP x P/Q

the elasticity of a straight-line demand ‘curve’ (constant dQ/dP)

the elasticity of a curved demand curve

dQ/dP is the tangent to the curve

Measurement of elasticity: point elasticity


dQ/dP x P/Q




Measuring elasticity at a pointMeasuring elasticity at a point

P

Q

0

D

r

Pd = (1 / slope) x P/Q

P

Q

30

0 40

D

r

50

100



P

Q

50

30

0 40 100

D

r


= 100/50 x 30/40


P

Q

50

30

0 40 100

D

r


= 100/50 x 30/40

= 60/40


P

Q

50

30

0 40 100

D

r


= 100/50 x 30/40

= 60/40

= 1.5



Measurement of elasticity: point elasticity the formula for price elasticity of demand

dQ/dP x P/Q




different elasticities along a straight-line demand curve

Measurement of elasticity: point elasticity the formula for price elasticity of demand

dQ/dP x P/Q




different elasticities along a straight-line demand curve

0

2

4

6

8

10

0 10 20 30 40 50

Different elasticities along a straight-line demand curveDifferent elasticities along a straight-line demand curve

P

Q

Demand

n

m

l

k


0

2

4

6

8

10

0 10 20 30 40 50

P

Q

Demand

n

m

l

k


(1 / slope) is constant

= 50/10 = 5


0

2

4

6

8

10

0 10 20 30 40 50

P

Q

Demand

n

m

l

k



= 50/10 = 5But P/Q varies:

at n, P/Q = 8/10


0

2

4

6

8

10

0 10 20 30 40 50

P

Q

Demand

n

m

l

k



= 50/10 = 5But P/Q varies:

at n, P/Q = 8/10at m, P/Q = 6/20at l, P/Q = 4/30

l



Price elasticity of supply measurement

determinants

applications

Price elasticity of supply measurement

determinants

applications

Supply in different time periodsSupply in different time periods

D1

P1

Q1

P

Q O

a

D1

D2

P1

Q1

P

Q O

a


D1

D2

Si

P1

P2

Q1

P

Q O

a

b


D1

D2

Si SS

P1

P3

P2

Q1 Q3

P

Q O

a

b

c


D1

D2

Si SS

SL

P1

P3

P2

Q1 Q3

P

Q O

a

b

c

P4

Q4

d



Income elasticity of demand

measurement

determinants

applications

Cross-price elasticity of demand

measurement

determinants

applications

Income elasticity of demand

measurement

determinants

applications

Cross-price elasticity of demand

measurement

determinants

applications


The Time DimensionThe Time

Dimension

THE TIME DIMENSIONTHE TIME DIMENSION

Short-run and long-run price adjustment

short- and long-run demand and supply curves

short- and long-run adjustment to a change in demand or supply

Short-run and long-run price adjustment

short- and long-run demand and supply curves

short- and long-run adjustment to a change in demand or supply

D1

P1

Q1

P

Q O

Response of supply to an increase in demandResponse of supply to an increase in demand

a

D1

D2

P1

Q1

P

Q O

a


D1

D2

S short-run

P1

P2

Q1 Q2

P

Q O

a

b


D1

D2

S long-run

P1

P3

P2

Q1 Q2 Q3

P

Q O

b

c

S short-run

a


Response of demand to an increase in supplyResponse of demand to an increase in supply

S1

P1

Q1

P

Q O

a

S1

P1

Q1

P

Q O

a

S2


S1

S2

D short-run

P1

P2

Q1 Q2

P

Q O

a

b


S1

S2

D short-run

D long-run

P1

P3

P2

Q1 Q2 Q3

P

Q O

a

b

c



Short-run and long-run price adjustment short- and long-run demand and supply curves short- and long-run adjustment to a change in

demand or supply

Speculation


demand or supply

Speculation



demand or supply

Speculation stabilising speculation


demand or supply

Speculation stabilising speculation

Stabilising speculation: initial price fallStabilising speculation: initial price fall

P1

P

Q O

S1

D1

a

P1

P2

P

Q O

D2

a

b

S1

D1


S2

D3

P1

P2

P

Q O

P3

D2

a

b

c

S1

D1


Stabilising speculation: initial price riseStabilising speculation: initial price rise

P1

P

Q O

S1

D1

a

P1

P2

P

Q O

S1

D1

D2

a

b


P1

P2

P

Q O

P3

S1

S2

D1

D2

a

b

D3

c




demand or supply

Speculation stabilising speculation destabilising speculation


demand or supply


Destabilising speculation: initial price fallDestabilising speculation: initial price fall

P1

P

Q O

S1

D1

a

P1

P2

P

Q O

S1

D1

D2

a

b


P1

P2

P

Q O

P3

S1

S2

D1

D2

a

b

D3

c


Destabilising speculation: initial price riseDestabilising speculation: initial price rise

P1

P

Q O

S1

D1

a

P1

P2

P

Q O

S1

D1

D2

a

b


P1

P2

P

Q O

P3

S1

S2

D1

D2

a

b

D3

c




demand or supply


Uncertainty and risk


demand or supply


Uncertainty and risk



demand or supply


Uncertainty and risk defining risk and uncertainty


demand or supply


Uncertainty and risk defining risk and uncertainty



demand or supply


Uncertainty and risk defining risk and uncertainty reducing risks by holding stocks


demand or supply


Uncertainty and risk defining risk and uncertainty reducing risks by holding stocks



demand or supply


Uncertainty and risk defining risk and uncertainty reducing risks by holding stocks futures markets


demand or supply


Uncertainty and risk defining risk and uncertainty reducing risks by holding stocks futures markets

Education

01. supply and demand