1. Chapter 2
Supply and Demand

2. Topics Demand. Supply. Market Equilibrium. Shocking the Equilibrium.
Effects of Government Interventions.
When to Use the Supply-and-Demand Model.
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3. Demand: Determinants of Demand
The following factors determine the demand for a good:
Price of the good
Tastes
Information
Prices of other goods
Complements and substitutes
Income
Government rules and regulations
Other factors
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4. Demand: The Demand Curve
Quantity demanded - the amount of a good that consumers are willing to buy at a given price, holding constant the other factors that influence purchases.
Demand curve - the quantity demanded at each possible price, holding constant the other factors that influence purchases
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5. Figure 2.1 A Demand Curve
Law of Demand consumers demand more of a good the lower its price, holding constant all other factors that influence consumption
14.30
, $ per kg p
Demand curve for pork, D1
4.30
3.30
2.30
200
220
240
286
Q, Million kg of pork per year
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6. Figure 2.2 A Shift of the Demand Curve
, $ per kg
Effect of a 60¢ increase in the price of beef p
3.30 D2 D1
176
220
232
Q, Million kg of pork per year
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7. The Demand Function The processed pork demand function is:
Q = D(p, pb, pc, Y)
where Q is the quantity of pork demanded
p is the price of pork (dollars per kg)
pb is the price of beef (dollars per kg)
pc is the price of chicken (dollars per kg)
Y is the income of consumers (thousand dollars)
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8. From the Demand Function to the Demand Curve
Estimated demand function for pork:
Q = 171−20p + 20pb + 3pc + 2Y
Using the values pb = 4, pc = 3.33 and Y = 12.5, we have
Q = 286−20p
which is the linear demand function for pork.
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9. From the Demand Function to the Demand Curve (cont.)
Q = 286−20p
14.30
If p = $3.30 then,
Q = 220
In general,
D Q = -20D p
= slope D p
If p increases by $1 (to $4.30) then,
Q = 200
If p = 0, then
Q = 286
If p decreases by $1 (to $2.30) then,
Q = 240
, $ per kg p
Demand cu r v e f
or po r k, D 1
4.30
3.30
2.30
200
220
240
286 Q
, Million kg of po r
k per y
ear
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10. Solved Problem 2.1
How much would the price have to fall for consumers to be willing to buy 1 million more kg of pork per year?
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11. Solved Problem 2.1
Express the price that consumers are willing to pay as a function of quantity.
Q = 286−20p
20p = Q
p = − 0.05Q
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12. Solved Problem 2.1
Use the inverse demand curve to determine how much the price must change for consumers to buy 1 million more kg of pork per year.
Δp = p2 − p1
= (14.30 − 0.05Q2) − (14.30 − 0.05Q1)
= –0.05(Q2 − Q1)
= –0.05ΔQ.
The change in quantity is ΔQ = Q2 − Q1 = (Q1 + 1)−Q1 = 1, so the change in price is Δp = –0.05.
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13. Summing Demand Curves
The total demand shows the total quantity demanded at each price
The total quantity demanded at a given price is the sum of the quantity each consumer demands at that price
Q = Q1 + Q2 = D1(p) + D2(p)
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14. Application Aggregating the Demand for Broadband Service
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15. Supply: Determinants of Supply
The following factors determine the supply for a good:
Price of the good
Costs
Government rules and regulations
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16. Supply: The Supply Curve
Quantity supplied - the amount of a good that firms want to sell at a given price, holding constant other factors that influence firms’ supply decisions, such as costs and government actions
Supply curve - the quantity supplied at each possible price, holding constant the other factors that influence firms’ supply decisions
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17. Figure 2.3 A Supply Curve An increase in the price… causes a movement
, $ per kg
5.30
Supply cu r v e , S 1 p
3.30
causes a movement
along the curve….
176
220
300
and a decrease in the
quantity supplied…. Q
, Million kg of po r
k per y
ear
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18. Figure 2.4 A Shift of a Supply Curve
A $0.25 increase in the price of hogs…..
shifts the supply curve to the left
, $ per kg p S2 S 1
3.30
reducing the quantity supplied at the previous price.
176
205
220 Q
, Million kg of po r
k per y
ear
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19. The Supply Function The processed pork supply function is:
Q = S(p, ph)
where Q is the quantity of pork supplied
p is the price of pork (dollars per kg)
ph is the price of a hog (dollars per kg)
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20. From the Supply Function to the Supply Curve
Estimated demand function for pork:
Q = p−60ph
Using the values ph = $1.50 per kg
Q = p.
What happens to the quantity supplied if the price of processed pork increases by Δp = p2−p1?
Answer:
What happens to the quantity supplied if the price of processed pork increases by Δp = p2−p1? Using the same approach as before, we learn from Equation 2.7 that ΔQ = 40Δp.8 A $1 increase in price (Δp = 1) causes the quantity supplied to increase by ΔQ = 40 million kg per year. This change in the quantity of pork supplied as p increases is a movement along the supply curve.
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21. Summing Supply Curves
The total supply curve shows the total quantity produced by all suppliers at each price
Horizontal sum of each producer’s supply curve
Sum of all quantities supplied at a given price
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22. Figure 2.5 Total Supply: The Sum of Domestic and Foreign Supply
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23. Solved Problem 2.2
How does a quota set by the United States on foreign steel imports of Q affect the total American supply curve for steel given the domestic supply, Sd in panel a of the graph, and foreign supply, Sf in panel b?
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24. Solved Problem 2.2
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25. Market Equilibrium
Equilibrium - a situation in which no one wants to change his or her behavior
equilibrium price is the price at which consumers can buy as much as they want and sellers can sell as much as they want
equilibrium quantity is the quantity bought and sold at the equilibrium price
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26. Market Equilibrium (cont.)
Excess demand the amount by which the quantity demanded exceeds the quantity supplied at a specified price.
Excess supply the amount by which the quantity supplied is greater than the quantity demanded at a specified price
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27. Figure 2.6 Market Equilibrium
Above the equilibrium price….
Market equilibrium point!
, $ per kg
Excess supply = 39 p S
3.95 e
3.30
2.65
Excess demand = 39
Below the equilibrium price…. D
is below the quantity demanded
is below the quantity supplied
176
194
207
220
233
246
the quantity supplied…. Q
, Million kg of po r
k per y
ear
the quantity demanded….
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28. Using Math to Determine the Equilibrium
Demand: Qd = 286 − 20p
Supply: Qs = p
Equilibrium:
Qd = Qs
286 − 20p = p
60p = 198
P = $3.30
Q = 286 – 20(3.3) = 220
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29. Equilibrium: Practice Problem
The demand function for a good is Q = a−bp, and the supply function is Q = c + ep, where a, b, c, and e are positive constants. Solve for the equilibrium price and quantity in terms of these four constants.
Problem # 27 of the end of chapter problems
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30. Qd=Qs a-bp = c+ep a-c = ep+bp p(e+b) = a-c p = (a-c)/(e+b)
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31. Shocking the Equilibrium
The equilibrium changes only if a shock occurs that shifts the demand curve or the supply curve. These curves shift if one of the variables we were holding constant changes.
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32. Figure 2.7a Equilibrium Effects of a Shift of a Demand Curve
A $0.60 increase in the price of beef shifts demand outward
, $ per kg
Which puts an upward pressure on the price to a new equilibrium. p e2 S
3.50
3.30 e D2 1 D 1
At the original price there is now excess demand….
Excess demand = 12
176
220
228
232
Q, Million kg of pork per year
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33. Figure 2.7b Equilibrium Effects of a Shift of a Supply Curve
A $0.25 increase in the price of hogs shifts the supply curve to the left
, $ per kg
Which puts an upward pressure on the price to a new equilibrium. p S2 e2 S 1
3.55
3.30 e 1 D
At the original price there is now excess demand….
Excess demand = 15
176
205
215
220
Q, Million kg of pork per year
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34. Solved Problem 2.3
Mathematically, how does the equilibrium price of pork vary as the price of hogs changes if the variables that affect demand are held constant at their typical values?
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35. Solved Problem 2.3
Solve for the equilibrium price of pork in terms of the price of hogs.
Qd = 286−20p
Qs = p−60ph
286−20p = p−60ph
-60p = -108 – 60ph
-p = -1.8 – ph
Show how the equilibrium price of pork varies with the price of hogs.
Since Δp = Δph, any increase in the price of hogs causes an equal increase in the price of processed pork.
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36. Equilibrium Effects of Government Interventions
Government action can cause
a shift in the supply curve, the demand curve, or both
the quantity demanded to be different from quantity supplied
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37. Equilibrium Effects of Government Interventions (cont.)
Policies that shift supply curves
Licensing laws, quotas
Policies that cause demand to differ from supply
Price ceilings, price floors
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38. Figure 2.8 A Ban on Rice Imports Raises the Price in Japan
ice of
ice per pound Q2 Q 1 S
(no ban) D , T
ons of
ice per y
ear p2 e2 e
(ban) –
A ban on rice imports shifts the total supply of rice in Japan…
which causes the equilibrium to change and the price to increase.
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39. Solved Problem 2.4
What is the effect of a United States quota on sugar of Q on the equilibrium in the U.S. sugar market? Hint: The answer depends on whether the quota binds (is low enough to affect the equilibrium).
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40. Solved Problem 2.4
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41. Figure 2.9 Price Ceiling on Gasoline
Supply shifts to the left…. S 1
, $ per gallon p
but gas stations must continue to charge a price of p1….. e 1 p1 p – =
Price ceiling D
Q1= Qd
which creates excess demand. Qs Q
, Gallons of gasoline per month
Excess demand
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42. Solved Problem 2.5
Suppose that there is a single labor market in which everyone is paid the same wage. If a binding minimum wage, w, is imposed, what happens to the equilibrium in this market?
Answer:
Show the initial equilibrium before the minimum wage is imposed.
Draw a horizontal line at the minimum wage, and show how the market equilibrium changes.
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43. Figure 2.10 Minimum Wage
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44. Why Supply Need Not Equal Demand
The quantity that firms want to sell and the quantity that consumers want to buy at a given price need not equal the actual quantity that is bought and sold.
Example: price ceiling.
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45. Perfectly Competitive Markets
Everyone is a price taker.
Firms sell identical products.
Everyone has full information about the price and quality of goods.
Costs of trading are low.
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46. Figure 2A.1 Regression
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