2 Demand & Supply I

Supply
Supply and Demand:

Demand:
An
An Introduction
Introduction
MB MC
MB MC
What, How, and For Whom?
Central Planning Versus the Market
 Three Problems All Economic Systems

Must Address
 What should be produced?
 How should it be produced?
 For whom will it be produced?
Copyright c 2007 by The McGraw-Hill Chapter 3 - Supply and Demand: An Introduction Slide 2
Companies, Inc. All rights reserved.
MB MC
 Centralized Economic Organizations
 Former Soviet Union

 Cuba
MB MC
 A small number of individuals address:

 What
 Establish production targets for factories and farms
 How
 Plan how to achieve the goals
 For Whom
 Distribute the goods and services produced
MB MC
 Free-Market or Capitalist Economic

System
 Individual choices determine:
 Which careers to pursue
 Which products to produce or buy
 When to start and shut-down a business
 Who gets what is decided by individual

preferences and purchasing power
MB MC
Buyers and Sellers In Markets
 Market
 Consists of all buyers and sellers of a good
or service
 What do you think?
 What determines the price of pizza,
gasoline, a car wash, or other goods and
services?
MB MC
 The Demand Curve
A schedule or graph that tells us the

quantity of a good that buyers willing and
able to buy at each price.
MB MC
Points Along the Demand Curve
of a Pizza Market
Demand for Pizza
Price Quantity demanded

(Rs/slice) (1000s of slices/day)
20 16
30 12
40 8
MB MC
 A Property of Demand
 As price of a good or service goes down

the quantity consumers buy will increase,
other things remaining the same
 Therefore, the demand curve is downward-

sloping
MB MC
The Daily Demand
Curve for Pizza in Mumbai
Price
(Rs per slice)
40
30
20
Demand
Quantity
(1000s of slices per day)
8 12 16
MB MC
 The Demand Curve
 Why do buyers purchase a greater quantity

at lower prices and vice-versa?
MB MC
 The Substitution Effect
 The change in the quantity demanded of a

good that results because buyers switch to
substitutes when the price of the good
changes
MB MC
 The Income Effect
 The change in the quantity demanded of a

good that results because a change in the
price of a good changes the buyer’s
purchasing power
MB MC
 The Supply Curve

A curve or schedule showing the quantity
of a good that sellers wish to sell at each
price
MB MC
Points Along the Supply Curve of
a Pizza Market
Supply of pizza
Price Quantity supplied

(Rs/slice) (1000s of slices/day)
20 8
30 12
40 16
MB MC
The Daily Supply
Curve for Pizza in Mumbai
Price
(Rs per slice)
Supply
40
30
20
Quantity
8 12 16
MB MC
Points Along the Demand and
Supply Curves of a Pizza Market
Price Quantity demanded Quantity supplied

(Rs/slice) (1000s of slices/day) (1000s of slices/day)
20 16 8
30 12 12
40 8 16
MB MC
The Equilibrium Price and
Quantity of Pizza In Mumbai
Price
($ per slice)
Supply
40 Equilibrium at Rs 30
Quantity Demanded =
30 Quantity Supplied
20
Demand
Quantity
8 12 16
MB MC
Market Equilibrium
 Equilibrium
A system is in equilibrium when there is no
tendency for it to change
 Market Equilibrium
 Occurs in a market when all buyers and
sellers are satisfied with their respective
quantities at the market price
MB MC
Market Equilibrium
 Equilibrium Price and Equilibrium

Quantity
 The values of price and quantity for which

quantity supplied and quantity demanded
are equal
MB MC
Excess Supply
Excess supply = 8,000 slices per day
Price
($ per slice)
Supply
Demand
Quantity
8 12 16
MB MC
Excess Demand
Price
($ per slice)
Supply
4
Excess demand = 8,000
3 slices per day
Demand
Quantity
8 16
MB MC
Graphing Supply and Demand and
Finding the Equilibrium Price and Quantity
Price
($per slice) Supply
5
4
The Equilibrium Price = $2.50
3 The Equilibrium Quantity = 5
2.50
2
1
Demand
Quantity
0 (1000s of slices per day)
2 4 6 8 10
5
MB MC
Market Equilibrium
 What Do You Think?

 Would buyers prefer a lower price than the
equilibrium price?
 Would sellers prefer a higher price than the
equilibrium price?
MB MC
Market Equilibrium
 What Do You Think?
 Is the market equilibrium always an ideal

outcome for all market participants?
MB MC
An Unregulated Housing Market
Monthly Rent
(Rs/apartment) Supply
What Do You Think?

16000 Is Rs16000 more than some
people can afford?
Demand
Quantity
(Millions of apartments/day)
2
MB MC
Rent Controls
Monthly Rent
(Rs/apartment) Supply
24000
Excess demand = 2 million

16000 apartments per month
Controlled = 8000
Demand
Quantity
(Millions of apartments/day)
0 1 2 3
MB MC
Market Equilibrium
 Rent Controls Reconsidered

 Other consequences of rent controls
 Maintenance will decline and housing quality
will fall
 Illegal payments
 Reduction in household mobility
 Discrimination
MB MC
Market Equilibrium
 What do you think?
 How can we make housing affordable for

poor people without using rent ceilings?
MB MC
Minimum Support Price
Monthly Support
Price Supply
(Rs//kg)
8
What is the impact of a

minimum support price of
5
wheat set at Rs 8/kg?
Demand
Quantity
(Millions of kgs/day)
0 1 2 3
MB MC
Minimum Wage – Price Floor
Monthly Wages
(Rs//labour) Supply
80
What is the impact of a

minimum wage set at Rs
50
80/Day?
Demand
Quantity
(Millions of laborers/day)
0 1 2 3
MB MC
Price Controls
In The Pizza Market
Price
($ per slice) Supply
4
Excess demand = 8,000 slices per day
Price ceiling = 2
Demand
Quantity
8 12 16
MB MC
Market Equilibrium
 Pizza Price Controls?

 Market responses to a pizza price ceiling
 Long lines
 Preferential treatment to selected customers
 Poorer quality ingredients
 Black-market pizzas
MB MC
Predicting and Explaining
Changes In Prices and Quantities
 Distinguishing Between:
A change in the quantity demanded
A movement along the demand curve that
occurs in response to a change in price
A change in demand
A shift of the entire demand curve
MB MC
An Increase In Quantity
Demanded vs. An Increase In Demand
Price
($/can)
6 Increase in
quantity
5 demanded
1
D
Quantity
(1000s of cans/day)
0 2 4 6 8 10 12
MB MC
Demanded vs. An Increase In Demand
Price
($/can) D’
6 D
4
Increase in demand
3
2
D’
1
D
Quantity
(1000s of cans/day)
0 12
MB MC
 Change in the quantity supplied

A movement along the supply curve that
occurs in response to a change in price
 Change in supply
A shift of the entire supply curve
MB MC
Supplied vs. An Increase In Supplied
Price
($/can)
6
S
5
Increase in quantity
4 supplied
2
S
1
Quantity
(1000s of cans/day)
0 2 4 6 8 10
MB MC
Supplied vs. An Increase In Supplied
Price
($/can)
6 S S’
5
3
Increase in supply
2
1
S S’
Quantity
(1000s of cans/day)
0 2 4 6 8 10
MB MC
The Effect on the Market for Tennis
Balls of a Decline in Court-Rental Fees
Price
($/ball) S
1.40
1.00
D’
D
Quantity
(letters/month)
40 58
MB MC
 Shifts in Demand
 Complements
 Two goods are complements in consumption if
an increase (decrease) in the price of one
cause a decrease (increase) in the demand for
the other
MB MC
 Substitutes
 Two goods are substitutes in consumption if an
increase (decrease) in the price of one causes
an increase (decrease) in the demand for the
other
MB MC
 Changes In Demand
 An increase (decrease) in the demand for a
good will shift the demand curve to the right
(left)
MB MC
 A Change In Income
 Normal Good
 One whose demand increases (decreases)
when the incomes of buyers increase
(decrease)
MB MC
 A Change In Income
 Inferior Good
 One whose demand decreases (increases)
when the incomes of buyers increase
(decrease)
MB MC
The Effect of a Credible Rumor on
the Market for Apple Macintosh Computers
D’ = demand after rumor of cheaper model
soon to be released
Price
S
P’
D
D’ Apple Computers
(units per month)
Q’ Q
MB MC
The Effect of the Increase in
the Population of Potential Buyers
D’ = demand after increase in population

Price
S
P’
D’
D Housing NY City
(units per month)
Q Q’
MB MC
 Factors that Shift Demand

 Price of complements
 Price of substitutes
 Income
 Preferences
 Population of potential buyers
 Expectations
MB MC
The Effect on the Market for New Houses
of a Decline in Carpenters’ Wage Rates
Price
($1000/house)
S
S’
120
90
D
Quantity
(houses/month)
40 50
MB MC
 Factors that Shift Supply

 Costs of production
 Technology
 Weather
 Number of suppliers
 Expectations
 Price of related goods
MB MC
Changes In Prices and Demand
 Factors That Cause an Increase

(rightward or upward shift) in Demand
1. A decrease in the price of complements
to the good or service
2. An increase in the price of substitutes for
the good or service
3. An increase in income (for a normal
good)
MB MC
 Factors That Cause an Increase

(rightward or upward shift) in Demand
4. An increased preference by demanders
for the good or service
5. An increase in the population of potential
buyers
6. An expectation of higher prices in the
future
MB MC
 Factors That Cause an Increase (rightward

or upward shift) in Supply
1. A decrease in the cost of materials, labor, or other
inputs used in the production of the good or
service
2. An improvement in technology that reduces the
cost of producing the good or service
3. Price of other goods – alternate goods and joint
products
End of
Chapter
MB MC

2 Demand &amp; Supply I

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2 Demand &amp; Supply I

Uploaded by

Copyright:

Available Formats

Supply

Supply and Demand:

 Three Problems All Economic Systems

 Centralized Economic Organizations

 Former Soviet Union

 A small number of individuals address:

 Free-Market or Capitalist Economic

 When to start and shut-down a business

 Who gets what is decided by individual

Buyers and Sellers In Markets

Buyers and Sellers In Markets

 The Demand Curve

A schedule or graph that tells us the

Demand for Pizza

Price Quantity demanded

Buyers and Sellers In Markets

 As price of a good or service goes down

 Therefore, the demand curve is downward-

Buyers and Sellers In Markets

 The Demand Curve

 Why do buyers purchase a greater quantity

Buyers and Sellers In Markets

 The Substitution Effect

 The change in the quantity demanded of a

Buyers and Sellers In Markets

 The Income Effect

 The change in the quantity demanded of a

Buyers and Sellers In Markets

 The Supply Curve

Price Quantity supplied

Price Quantity demanded Quantity supplied

 Equilibrium Price and Equilibrium

 The values of price and quantity for which

 What Do You Think?

 What Do You Think?

 Is the market equilibrium always an ideal

An Unregulated Housing Market

What Do You Think?

Excess demand = 2 million

 Rent Controls Reconsidered

 Reduction in household mobility

 What do you think?

 How can we make housing affordable for

Minimum Support Price

What is the impact of a

Minimum Wage – Price Floor

What is the impact of a

 Pizza Price Controls?

 Poorer quality ingredients

 Change in the quantity supplied

D’ = demand after increase in population

 Factors that Shift Demand

 Factors that Shift Supply

 Factors That Cause an Increase

 Factors That Cause an Increase

 Factors That Cause an Increase (rightward

You might also like

2 Demand & Supply I

2 Demand & Supply I