0 Chapter 3 Demand, supply and the market David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,8th Edition, McGraw-Hill, 2005PowerPoint presentation by Alex Tackie and Damian Ward
1 Some key terms Market Demand Supply Equilibrium price a set of arrangements by which buyers and sellers are in contact to exchange goods or servicesDemandthe quantity of a good buyers wish to purchase at each conceivable priceSupplythe quantity of a good sellers wish to sell at each conceivable priceEquilibrium priceprice at which quantity supplied = quantity demandedSee Sections 3-1 and 3-2 in the main text.
2 Catherine’s Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.17
4 Changes in Quantity Demanded Movement along the demand curve caused by a change in the price of the product.Price of Ice-Cream ConesA tax that raises the price of ice-cream cones results in a movement along the demand curve.B$2.00A1.00D48Quantity of Ice-Cream Cones
5 Market Demand versus Individual Demand Market demand refers to the sum of all individual demands for a particular good or service.Graphically, individual demand curves are summed horizontally to obtain the market demand curve.
6 The Demand curve shows the relation between price and quantity demanded holding other things constantPrice“Other things” include:the price of related goodsconsumer incomesconsumer preferencesChanges in these other things affect the position of the demand curveSee Sections 3-3 and 3-4 in the main text.DQuantity
7 Prices of related goods and Effect on Demand Substitute Goods:coffee for tea; train ride for driving your own auto; coal for natural gasIf Price of coffee increases then Demand for tea increasesComplimentary Goods:tea and sugar; coffee and milk; gas and car; coal and coal heatersIf Price of gas increases, then Demand for automobiles decreasesSee Sections 3-3 and 3-4 in the main text.
8 Effect of Consumer Income on Demand: Normal Goods versus Inferior Goods For normal goods, demand increases when consumer income increases.Most goods are normal goods.Inferior Goods:For inferior goods, demand decreases when consumer income increases.Second-hand cars, second-hand clothing, bus rides (versus driving your own auto or cab rides)See Sections 3-3 and 3-4 in the main text.
9 Ben’s Supply Schedule (The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.)29
11 Market Supply versus Individual Supply Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.Graphically, individual supply curves are summed horizontally to obtain the market supply curve.
12 The Supply curve shows the relation between price and quantity supplied holding other things constant“Other things” include:technologyinput costsgovernment regulationsChanges in these other things affect the position of the demand curveSPriceSee Sections 3-3 and 3-6 in the main text.Quantity
13 SUPPLY AND DEMAND TOGETHER Demand ScheduleSupply ScheduleAt $2.00, the quantity demanded is equal to the quantity supplied!36
14 Market equilibrium (1) S P0 E0 D0 Q0 Price Market equilibrium is at E0 where quantity demanded equals quantity suppliedQ0P0E0with price P0 and quantity Q0See Section 3-2 in the main text.Quantity
15 Market equilibrium and disequilibrium If price were below P0 there would be excess demandconsumers wish to purchase more than producers wish to supplySP1excess supplyDPriceEP0If price were above P0 there would be excess supplyproducers wish to supply more than consumers wish to purchaseP2excess demandSee Section 3-3 in the main text.SDQ0Quantity
16 A shift in demand D0 S D1 Q1 P1 Q0 P0 S If the price of a substitute good decreases ...PriceD0SThe demand curve shiftsfrom D0D0 to D1D1.D1Q1P1less will be demanded ateach price.E0Q0P0E1See Sections 3-4 and 3-5 in the main text.So the market moves to anew equilibrium at E1.If price stayed at P0 therewould be excess supply.SQuantity
17 A shift in supply S1 S0 D Q1 P1 E2 P0 E0 D Q0 Suppose safety The supply curveshifts to S1S1Suppose safetyregulations are tightened,increasing producers’ costsS0DPriceQ1P1E2So the market moves to anew equilibrium at E2P0E0If price stayed at P0 therewould be excess demandSee Sections 3-6 and 3-7 in the main text.DQ0Quantity
18 Two ways in which demand may increase (1) Price(1) A movement along the demand curve from A to Brepresents consumer reaction to a price changecould follow a supply shiftAP0BP1Q1See Box 3-2 in the main text.DQ0Quantity
19 Two ways in which demand may increase (2) (2) A movement of the demand curve from D0 to D1leads to an increase in demand at each pricee.g. at P0 quantity demanded increases from Q0 to Q2: at P1 quantity demanded increases from Q1 to Q3PriceCD1FQ2Q3P0AP1BSee Box 3-2 in the main text.D0Q0Q1Quantity
20 A market in disequilibrium Suppose a disastrous harvest moves the supply curve to SSgovernment may try to protect the poor, setting a price ceiling at P1which is below P0, the equilibrium price levelThe result is excess demandPriceSDP2EP0ABP1excess demandYou may wish to point out that:1 Supply is actually reduced as a result of this policy;2 There is a possible long-run effect on resource allocation arising because the incentives for producers are poor with prices held artificially low;3 A price ceiling at P2 would be ineffective/irrelevant, given that the market could reach its equilibrium level.See Section 3-8 in the main text.DSRATIONING is needed to cope with the resulting excess demandQSQ0QDQuantity
21 Price and quantity changes In practice, we cannot plot ex ante demand curves and supply curvesSo we use historical data and the supposition that the observed values are equilibrium onesSince other things are often not constant, some detective work is requiredThis is where our theory comes in usefulSee Box 3-5 in main text.
22 What, how and for whom The market: decides how much of a good should be producedby finding the price at which the quantity demanded equals the quantity suppliedtells us for whom the goods are producedthose consumers willing to pay the equilibrium pricedetermines what goods are being producedthere may be goods for which no consumer is prepared to pay a price at which firms would be willing to supplySee Section 3-9 in the main text.