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Markets: Supply and Demand. Markets Market : A group of buyers and sellers of a certain good or service Competitive Market : Many buyers and many sellers.

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Presentation on theme: "Markets: Supply and Demand. Markets Market : A group of buyers and sellers of a certain good or service Competitive Market : Many buyers and many sellers."— Presentation transcript:

1 Markets: Supply and Demand

2 Markets Market : A group of buyers and sellers of a certain good or service Competitive Market : Many buyers and many sellers so each has small if any impact on the price Role of Price: information -“price signal”

3 Perfectly Competitive Market: many buyers and sellers – none have any influence over the market price Everybody is a price taker Monopoly : only one seller, so sets the price Monopsony : only one buyer, so sets the price Other markets: somewhere between these extremes

4 Demand Quantity demanded – Amount of a good buyers are willing and able to purchase at a certain price Law of demand – Other things equal (ceteris paribus) when the price of the good rises the quantity demanded of a good falls

5 Demand Schedule/Curve : one a table, the other a graph – Both represent the relationship between price and quantity demanded Individual Demand : Demand of a single individual We will focus on linear demand curves: – A simplifying assumption

6 Price of CoffeeQuantity Demanded (cups) $0.006 $0.505 $1.004 $1.503 $2.002 $2.501 $3.000 123456 $1.00 $2.00 $3.00 Price Quantity Sara’s Demand Schedule and Demand Curve Note: we say price affects quantity – Q=f(P) but price is on “y” axis – comes from historical perspective and fish markets – Marshal?

7 Market Demand : Sum of all individuals’ demand in that market Market Demand Curve : Sum up individual demand curves horizontally Price of CoffeeSaraDavidMarket $0.0061218 $0.5051015 $1.004812 $1.50369 $2.00246 $2.50123 $3.00000 Market Demand Schedule

8 $1.00 $2.00 $3.00 Price $1.00 $2.00 $3.00 Price $1.00 $2.00 $3.00 Price 618124 8 Market Demand Curve Creation Sara’s Demand David’s Demand Market Demand

9 More on Demand Curves Shifts in Demand – Increased Demand Anything that increases the quantity demanded at all prices Curve shifts to the right – Decreased Demand Anything that decreases the quantity demanded at all prices Curve shifts to the left Note: Difference between change in quantity demanded and shift in demand

10 P Q Increased Demand Decreased Demand Change in quantity demanded Change in Demand vs Change in Quantity Demanded Change in Demand

11 What things shift demand (change demand) – Income – Price of related goods – Tastes – Expectations – Number of buyers

12 On Effect of Income Normal Good: – When income goes up demand goes up – When income goes down demand goes down Inferior Good: – When income goes up demand goes down – When income goes down demand goes up

13 On Effect of Related Goods Substitutes (need 2 goods): – An increase in the price of one leads to an increase in demand for the other – A decrease in the price of one leads to an decrease in demand for the other Compliments (need 2 goods): – An increase in the price of one leads to an decrease in demand for the other – A decrease in the price of one leads to an increase in demand for the other

14 Tastes: Like it more, increase demand Expectations: What you think might happen in the future (income, price changes) can affect current demand Number of buyers: more buyers, increase demand

15 Remember The Difference Change in price – Change in quantity demanded (movement along demand curve) Change in all others (income, tastes, price of other goods, etc.) – Change in demand (shift in demand curve)

16 Example Reducing Soda Consumption Tax sugar – will increase the price – Leads to a movement along the demand curve Education On Healthy Diet – will change tastes – Lead to a shift in the demand curve

17 P Q P’ Q’ P’’ Q’’ Tax Q’’’ Movement along demand due to change in price Shift in demand due to change in tastes

18 Supply Quantity Supplied: – Amount of the good that suppliers are willing and able to supply at a specific price Law of Supply: – All other things being equal, if price goes up quantity supplied will go up

19 Supply Schedule/Curve : one a table, the other a graph – Both represent the relationship between price and quantity supplied Individual Supply : Supply of a single individual/firm (seller) We will focus on linear supply curves: – A simplifying assumption

20 Price of CoffeeQuantity Supplied (cups) $0.000 $0.501 $1.002 $1.503 $2.004 $2.505 $3.006 123456 $1.00 $2.00 $3.00 Price Quantity Starbuck’s Supply Schedule and Supply Curve

21 Market Supply : Sum of all suppliers individual supply in that market Market Supply Curve : Sum up individual supply curves horizontally Price of CoffeeStarbucksSeattle’s BestMarket $0.00000 $0.50123 $1.00246 $1.50369 $2.004812 $2.5051015 $3.0061218 Market Supply Schedule

22 $1.00 $2.00 $3.00 Price $1.00 $2.00 $3.00 Price $1.00 $2.00 $3.00 Price 61812264 Market Supply Curve Creation (sort of) Starbuck’s Supply Seattle’s Supply Market Supply

23 More on Supply Curves Shifts in Supply – Increased Supply Anything that increases the quantity supplied at all prices Curve shifts to the right – Decreased Supply Anything that decreases the quantity supplied at all prices Curve shifts to the left Note: Difference between change in quantity supplied and change in supply

24 P Q Increased Supply Decreased Supply Change in quantity supplied Change in Supply vs Change in Quantity Supplied Change in Supply

25 What things shift supply curve (change supply) – Price of inputs: input prices go up, supply goes down – Technology: better tech., increase in supply – Expectations: beliefs about future can affect current supply – Number of sellers: more sellers increases supply Again remember difference between change in supply (shift of curve) and change in quantity supplied (movement on curve)

26 Equilibrium Market equilibrium: when markets “clear”, quantity demanded = quantity supplied Equilibrium price: the price at which the market clears Equilibrium quantity: the amount of the good bought/sold at the equilibrium

27 P Q $1.50 9 Equilibrium Equilibrium Price Equilibrium Quantity Market Demand Market Supply Equilibrium Between Demand and Supply

28 Out of Equilibrium Surplus: excess supply – Quantity supplied > quantity demanded – Downward pressure on price to clear market Shortage: excess demand – Quantity demanded > quantity supplied – Upward pressure on price to clear market Note difference between shortage and scarcity

29 Surplus Price higher than eq. price Quantity Demanded Quantity Supplied P Q Price lower than eq. price Shortage Quantity Demanded Quantity Supplied Supply Demand Shortage and Surplus Excess Supply Excess Demand

30 Changes to Equilibrium Analyzing Changes in the market after some “shock” or change 1 st is supply changed, is demand changed How is it changed Graphically make the change and determine new equilibrium Beware of drawing conclusion based on scale

31 Example: Study finds eating ice-cream increases students GPA What happens? – Demand increases, quantity supplied increases P’’ P’ Q’’Q’ Original Eq. New Eq. Demand Increases Quantity Supplied Increases Price increased in mkt Quantity increased in mkt

32 Example: Study finds eating ice-cream increases students GPA and price of sugar goes up What happens? – Demand increases, Supply Decreases P’’ P’ Q’’Q’ Original Eq. New Eq. Demand Increases Supply Decreases Price increased in mkt Quantity increased in mkt But: b/c of scale

33 Example: Study finds eating ice-cream increases students GPA and price of sugar goes up What happens? – Demand increases, Supply Decreases P’’ P’ Q’’Q’ Original Eq. New Eq. Demand Increases Supply Decreases Price increased in mkt Quantity decreased in mkt But: b/c of scale

34 So in analyzing market changes be careful of possible ambiguous answers If supply and demand both change do their changes have the same qualitative effect on price/quantity If the same then effect is known If different the effect depends on which is larger

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