economy questions
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1.4DemandSupplyandEquilibrium.pptx1.4 Demand, Supply, and Equilibrium
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4 Demand, Supply, and Equilibrium
Chapter Outline 1. Markets 2. How Do Buyers Behave? 3. How Do Sellers Behave? 4. Supply and Demand in Equilibrium 5. What Would Happen if the Government Tried to Dictate the Price of Gasoline? 6. Elasticity
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1. Markets
A market is a group of economic agents who are trading a good or service, and the rules and arrangements for trading.
The market price is the price at which buyers and sellers conduct transactions.
In a Perfectly Competitive Market:
All the sellers sell an identical good/service
Any individual buyer or any individual seller isn’t powerful enough on his or her own to affect the market price (Price--takers).
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Very few markets are perfectly competitive.
Many markets are nearly perfectly competitive.
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1. Markets
2. How do Buyers Behave?
We study the behavior of price-taker buyers.
Quantity Demanded: Amount of a good that buyers are willing to purchase at a given price.
Demand Schedule: A table that reports the quantity demanded at different prices, holding all else equal.
Holding all else equal implies that everything else in the economy is held constant. The Latin phrase ceteris paribus means “with other things the same.”
Demand Curve: Plots the quantity demanded at different prices. Plots the demand schedule.
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2. How do Buyers Behave?
The demand curve has an important property
Law of Demand: the quantity demanded is negatively related with the price (holding all else equal).
Willingness to pay: is the highest price that a buyer is willing to pay for an extra unit of the good.
Diminishing Marginal Benefit: As you consume more of a good, your willingness to pay for an additional unit declines.
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2. How do Buyers Behave?
Market Demand Curve: The sum of the individual demand curves of all the potential buyers. The market demand curve plots the relationship between the total quantity demanded and the market price, holding all else equal.
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2. How do Buyers Behave?
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2. How do Buyers Behave?
Exhibit 4.3 Market Demand Curve for Oil
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2. How do Buyers Behave?
Shifts of the Demand Curve
Tastes and preferences
Income and wealth
Availability and prices of related goods
Number and scale of buyers
Buyers’ expectations about the future
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2. How do Buyers Behave?
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2. How do Buyers Behave?
Demand curve shifts only when the quantity demanded changes at a given price.
If a good’s price changes and its demand curve hasn’t shifted, the own price change produces a movement along the demand curve.
Hence: “shift of the demand curve” vs “movement along the demand curve”.
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2. How do Buyers Behave?
Tastes and preferences: e.g. willingness to buy oil products decreases as a result of growing environmental worries Demand shifts to the left.
Income and wealth:
Normal good: An increase in income causes the demand curve to shift to the right (holding the good’s price fixed).
Inferior good: An increase in income causes the demand curve to shift to the left (holding the good’s price fixed).
Availability and prices of related goods
Two goods are substitutes when the fall in the price of one leads to a left shift in the demand curve for the other.
Two goods are complements when the fall in the price of one leads to a right shift in the demand curve for the other.
Number and scale of buyers: When the number of buyers increases, the demand curve shifts right.
Buyers’ expectations about the future: e.g. evolution of the labor market in the financial crises and the demand of durable goods.
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2. How do Buyers Behave?
Summary of Shifts in the Demand Curve and Movements Along the Demand Curve
The demand curve shifts when these factors change
Tastes and preferences
Income and wealth
Availability and prices of related goods
Number and scale of buyers
Buyers’ expectations about the future
The only reason for a movement along the demand curve A change of the price of the good itself.
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Example
How much more gasoline would people buy if its price were lower?
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Example
Exhibit 4.5 The Quantity of Gasoline Demanded (per person) and the Price of Gasoline in Brazil, Mexico, and Venezuela
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3. How do Sellers Behave?
Quantity Supplied: The amount of a good that sellers are willing to sell at a given price.
Supply Schedule: A table that reports the quantity supplied at different prices. (Holding all else equal.)
Supply Curve: Plots the quantity supplied at different prices. (Plots the supply schedule.)
Law of Supply: In almost all cases, the quantity supplied rises when the price rises (holding all else equal).
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3. How do Sellers Behave?
Willingness to Accept: is the lowest price that a seller is willing to get paid to sell an extra unit of a good. It is the same as the marginal production cost.
Market Supply Curve: Plots the relationship between the total quantity supplied and the market price, holding all else equal.
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3. How do Sellers Behave?
3. How do Sellers Behave?
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3. How do Sellers Behave?
Shifts of the Supply Curve: Occur when one of the following changes:
1. Input prices: An input is a good/service used to produce another good/service. e.g. oil price
2. Technology: e.g. Fracking
3. Number and scale of sellers: e.g. Libyan war.
4. Sellers’ expectations about the future: e.g. production of natural gas during the summer.
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3. How do Sellers Behave?
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3. How do Sellers Behave?
Summary of shifts in the Supply Curve and Movements Along the Supply Curve
The supply curve shifts when these factors change:
1. Input prices
2. Technology
3. Number and scale of sellers
4. Sellers’ expectations about the future
The only reason for a movement along the supply curve Change of the price of the good itself.
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4. Supply and Demand in Equilibrium
Competitive Equilibrium: Crossing point of demand and supply curves.
Competitive Equilibrium Price: equates quantity supplied and demanded.
Competitive Equilibrium Quantity: Quantity that corresponds to the competitive equilibrium price.
Excess Demand: When the market price is below the competitive equilibrium price, the quantity demanded excess the quantity supplied. This situation results in a shortage.
Excess Supply: When the market price is above the competitive equilibrium price, the quantity demanded excess the quantity supplied. This situation results in a surplus.
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4. Supply and Demand in Equilibrium
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4. Supply and Demand in Equilibrium
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4. Supply and Demand in Equilibrium
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4. Supply and Demand in Equilibrium
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4. Supply and Demand in Equilibrium
Both the Demand Curve and Supply Curve Shift Right
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4. Supply and Demand in Equilibrium
The Demand Curve Shifts Right and the Supply Curve Shifts Left
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4. Supply and Demand in Equilibrium
The Demand Curve Shifts Left and the Supply Curve Shifts Right
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4. Supply and Demand in Equilibrium
Both the Demand Curve and the Supply Curve Shift Left
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4. Supply and Demand in Equilibrium
| Effects of Shifts of Demand and Supply | |||
| Change in Supply | Change in Demand | ||
| Incr. Demand | Decr. Demand | ||
| Incr. Supply | Equil. P ? Equil. Q | Equil. P Equil. Q ? | |
| Decr. Supply | Equil. P Equil. Q ? | Equil. P ? Equil. Q |
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4. Supply and Demand in Equilibrium
Why do the price of roses increase right before Valentine’s Day?
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4. Supply and Demand in Equilibrium
Change in Demand for Roses
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4. Supply and Demand in Equilibrium
Then why doesn’t the price of beer increase right before Super Bowl Sunday?
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4. Supply and Demand in Equilibrium
Change in Market for Roses and Beer
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4. Supply and Demand in Equilibrium
5. Government Intervention
Some markets have prices that are set by laws, regulations, or social norms.
E.g. oil crisis of 1973-1974. The U.S. government capped the price of gasoline.
E.g. Henrico County (Virginia) sale of 1,000 Apple laptops for $50.
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5. Government Intervention
6. Elasticity
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Elasticity: Percentage change in one variable resulting from a 1-percent increase in another.
Price Elasticity of Demand: Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price.
Price Elasticity of Demand
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INELASTIC DEMAND
When demand is inelastic, the quantity demanded is relatively unresponsive to changes in price. As a result, total expenditure on the product increases when the price increases.
ELASTIC DEMAND
When demand is elastic, total expenditure on the product decreases as the price goes up.
| TABLE 4.3 | PRICE ELASTICITY AND CONSUMER EXPENDITURES | |||
| DEMAND | IF PRICE INCREASES, EXPENDITURES | IF PRICE DECREASES, EXPENDITURES | ||
| Inelastic | Increase | Decrease | ||
| Unit elastic | Are unchanged | Are unchanged | ||
| Elastic | Decrease | Increase |
6. Elasticity
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6. Elasticity
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6. Elasticity
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Income Elasticity of Demand: Percentage change in the quantity demanded resulting from a 1-percent increase in income.
Other Demand Elasticities
Cross-Price Elasticity of Demand: Percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another.
Price Elasticity of Supply: Percentage change in quantity supplied resulting from a 1-percent increase in price.
Elasticities of Supply
6. Elasticity
Key Ideas
In a perfectly competitive market, (1) sellers all sell an identical good or service, and (2) any individual buyer or any individual seller isn’t powerful enough on his or her own to affect the market price of that good or service.
The demand curve plots the relationship between the market price and the quantity of a good demanded by buyers.
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Key Ideas
The supply curve plots the relationship between the market price and the quantity of a good supplied by sellers.
The competitive equilibrium price equates the quantity demanded and the quantity supplied.
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Key Ideas
When prices are not free to fluctuate, markets fail to equate quantity demanded and quantity supplied.
Supply and demand elasticities are essential to understand the sensitivity of equilibrium prices and quantities to diverse perturbations.
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