# Markets: Supply and Demand

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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 so each has small if any impact on the price Role of Price: information -“price signal”

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

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

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

Quantity Demanded (cups)
Sara’s Demand Schedule and Demand Curve Price Price of Coffee Quantity Demanded (cups) \$0.00 6 \$0.50 5 \$1.00 4 \$1.50 3 \$2.00 2 \$2.50 1 \$3.00 \$3.00 \$2.00 \$1.00 1 2 3 4 5 6 Quantity Note: we say price affects quantity – Q=f(P) but price is on “y” axis – comes from historical perspective and fish markets – Marshal?

Market Demand : Sum of all individuals’ demand in that market
Market Demand Curve : Sum up individual demand curves horizontally Market Demand Schedule Price of Coffee Sara David Market \$0.00 6 12 18 \$0.50 5 10 15 \$1.00 4 8 \$1.50 3 9 \$2.00 2 \$2.50 1 \$3.00

Market Demand Curve Creation
Sara’s Demand David’s Demand Market Demand Price Price Price \$3.00 \$3.00 \$3.00 \$2.00 \$2.00 \$2.00 \$1.00 \$1.00 \$1.00 4 6 8 12 12 18

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

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

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

On Effect of Income Normal Good: Inferior 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

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

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

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)

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

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

Supply Quantity Supplied: Law of Supply:
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

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

Quantity Supplied (cups)
Starbuck’s Supply Schedule and Supply Curve Price Price of Coffee Quantity Supplied (cups) \$0.00 \$0.50 1 \$1.00 2 \$1.50 3 \$2.00 4 \$2.50 5 \$3.00 6 \$3.00 \$2.00 \$1.00 1 2 3 4 5 6 Quantity

Market Supply : Sum of all suppliers individual supply in that market
Market Supply Curve : Sum up individual supply curves horizontally Market Supply Schedule Price of Coffee Starbucks Seattle’s Best Market \$0.00 \$0.50 1 2 3 \$1.00 4 6 \$1.50 9 \$2.00 8 12 \$2.50 5 10 15 \$3.00 18

Market Supply Curve Creation (sort of)
Starbuck’s Supply Seattle’s Supply Market Supply Price Price Price \$3.00 \$3.00 \$3.00 \$2.00 \$2.00 \$2.00 \$1.00 \$1.00 \$1.00 2 6 4 12 6 18

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

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

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)

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

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

Out of Equilibrium Surplus: excess supply Shortage: excess demand
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

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

Changes to Equilibrium
Analyzing Changes in the market after some “shock” or change 1st 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

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

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

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

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