Chapter 4 Professor Yuna Chen Demand Supply and

Chapter 4 Professor Yuna Chen Demand, Supply, and Markets © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1

4 -1 Demand • Demand – The quantity consumers are willing and able to buy at each possible price during a given time period other things constant © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

4 -1 a Law of Demand • Law of demand – Higher price: lower quantity demanded – Quantity demanded varies inversely with price, other things constant © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3

4 -1 a Law of Demand • Substitution effect of a price change – When the price of a good falls • That good becomes cheaper compared to other goods • Consumers tend to substitute that good for other goods © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4

4 -1 a Law of Demand • Income effect of a price change – A fall in the price of a good increases consumers’ real income – Purchasing power of money increases – Consumers are able to purchase more goods © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5

4 -1 b Demand Schedule and Curve • Demand schedule - A table showing quantity demanded at each price • Demand curve – A graph showing quantity demanded at each price – Downward sloping © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6

Example Demand schedule Demand curve Price Quantity demanded $15 1 $10 2 $5 3 $15 $10 $5 1 2 3 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7

4 -1 b Demand Schedule and Curve • Demand – Entire relationship between price and quantity demanded • Quantity demanded – Amount of a good consumers are willing and able to buy at a particular price – A point on the demand curve © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8

4 -1 b Demand Schedule and Curve • A change in price -> change in quantity demanded -> movement along the demand curve © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9

4 -2 Shifts of the Demand Curve a. b. c. d. income of consumers Prices of other goods Consumer expectations The number or composition of consumers in the market e. Consumer tastes © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10

4 -2 a Changes in Consumer Income • Increase in consumer income – Increase in demand – Demand curve shifts rightward • Normal good – Demand increases as income increases • Inferior good – Demand decreases as income increases © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11

4 -2 b Changes in Prices of Other Goods • - Substitutes Goods that can be used to replace one another Example - American cars and Japanese cars An increase in the price of a good’s substitute increases the demand for the other • Complements - Goods that are used in combination - Example - Cars and gas - An increase in the price of a good’s complement decreases the demand for the good © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12

4 -2 c. Changes in Consumer Expectations • Income expectations – Expect future income to increase • Increase the current demand • Price expectations – Expect future price to increase • Increase current demand © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13

4 -2 d. Number of Consumers • Increase in number of consumers – Increases demand © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14

4 -2 e Changes in Consumer Tastes • Tastes – Likes and dislikes in consumption • Change in tastes – change the demand © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15

Market demand • Market demand – Horizontal sum of the individual demand curves in the market – Or sum all quantity demanded at the same price © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16

Classroom Activity • Mia’s demand for pizza © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17

4 -3 Supply • Supply – How much producers are willing and able to offer for sale period at each possible price, other things constant. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18

Law of supply • Law of supply – Higher price: higher quantity supplied • Higher price -> • Higher profit -> • more willing to increase quantity supplied © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19

4 -3 a The Supply Schedule and Curve • Supply schedule (supply in table form) – Possible prices – Quantity supplied at each price • Supply curve (supply in a graph) – Possible prices – Quantity supplied at each price – Upward slope © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20

Exhibit 3 The Supply Schedule and Supply Curve for Pizza $15 12 9 6 3 Quantity Supplied Per week (millions) 50 40 30 20 10 S $15 Price per pizza Market supply curve S shows the quantity of pizza supplied, at various prices, by all pizza makers. Price and quantity supplied are directly related. 12 9 6 3 0 10 20 30 40 50 Millions of pizzas per week © 2015 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21

The Supply Schedule and Curve • A change in price => change in quantity supplied => movement along the supply curve • Individual supply – An individual producer is willing and able to sell period © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22

The Supply Schedule and Curve • Market supply – Horizontal sum of all individual producer’s supply curve – Or, sum all quantity supplied at the same price © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23

4 -4 Shifts of the Supply Curve a. b. c. d. e. f. State of technology Prices of relevant resources Prices of alternative goods Producer expectations Number of producers in the market Disasters © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24

a. Changes in Technology • Better technology – Decrease production costs – Increase profit – Increase supply – Rightward shift © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25

b. Prices of Relevant Resources • Relevant resources – resources employed in the production • Decrease in price of relevant resources – Decrease production costs – Increase profit – Increase supply – Rightward shift © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26

c. Prices of Other Goods • Decrease in price of alternative goods – Increase supply – Example: corn or peanut? – Same resources (except the seeds) – If price of corn decreases, while price of peanuts unchanged, – Supply of peanut increases © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27

d. Changes in Producer Expectations • Expect higher price in the future – future profits – store goods now – reduce current supply – current supply curve shifts left © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28

e. Changes in Number of Producers • Number of producers increase – Increase supply © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29

f. Disaster • Disasters, natural or man-made, - Destroy resources - Supply decreases © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30

4 -5 Demand supply create a market • Markets – Demand supply create a market of a particular good • Adam Smith – The “invisible hand” – http: //www. investopedia. com/terms/i/invis iblehand. asp © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31

Exhibit 5 Equilibrium in the Pizza Market (a) Price Quantity demanded Quantity supplied $15 10 30 $10 20 20 $5 30 10 Market condition Pressure on price © 2015 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32

Exhibit 5 Equilibrium in the Pizza Market (b) S Price per pizza Surplus $15 10 c 5 Shortage 0 10 D 20 30 Millions of pizzas per week Market equilibrium occurs at the price where quantity demanded equals quantity supplied. This is shown at point c. Above the equilibrium price, quantity supplied exceeds quantity demanded. This creates a surplus, which puts downward pressure on the price. Below the equilibrium price, quantity demanded exceeds quantity supplied. The resulting shortage puts upward pressure on the price. © 2015 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33

Market disequilibrium • Shortage: excess demand - Upward pressure on price • Surplus: excess supply - downward pressure on price © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34

Market Equilibrium • • Quantity demanded = Quantity supplied Plans of buyers and sellers match Equilibrium point is at where demand supply intersect In the example above, equilibrium quantity = 20 In the example above, equilibrium price = $10 Market clears No pressure on price ‘X marks the spot’ © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 35

4 -6 Changes in equilibrium P and Q Case 1. Students are back to school in a college town. How would this affect the local restaurants? • Number of consumers increases -> Increase in D -> Rightward shift -> Shortage; Upward pressure on P -> New equilibrium: Increase in P and Q © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36

Case 2. During recession, people’s income decrease. How would this affect the new car market? • Consumer income decreases -> decrease in D -> D shifts left -> surplus; downward pressure on P -> New equilibrium: decrease in P and Q © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 37

Case 3. Check the crude oil price here: http: //www. macrotrends. net/1369/crude-oil-price-historychart Question: how would this affect the gasoline market? Decrease in the price of relevant resources -> increase in supply -> S shifts right -> Surplus; Downward pressure on P -> New equilibrium: P decreases; Q increases © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 38

Case 4. Bird flu 2015 http: //www. cnbc. com/2015/04/21/cnbc-explains-avian-influenza-or-bird-flu. html How would the bird flu affect the egg market? Disaster -> decrease in supply -> leftward shift of S -> New equilibrium: P increases; Q decreases © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 39

Simultaneous Shifts of D and S Case 1. Both S and D increase: – – D shifts more: P increases, Q increases D shifts less: P decreases, Q increases D and S shifts the same: P unchanged, Q increase Result: P ambiguous, Q increases © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 40

Simultaneous Shifts of D and S Case 2. Both S and D decrease: – D shifts more: P decreases, Q decreases – D shifts less: P increases , Q decreases – D and S shift the same: P unchanged , Q decreases • Result: P ambiguous, Q decreases © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41

Simultaneous Shifts Case 3. S increases; D decreases – – D shifts more: P decreases, Q decreases D shifts less: P decreases, Q increases D and S shifts the same: P decreases, Q unchanged Result: P decreases, Q ambiguous © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 42

Simultaneous Shifts Case 4. S decreases; D increases – D shifts more: P increases, Q increases – D shifts less: P increases, Q decreases – D and S shifts the same: P increases, Q unchanged Result: P increases, Q ambiguous © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 43

Disequilibrium • Disequilibrium a) Temporary mismatch between quantity supplied and quantity demanded, • as the market seeks equilibrium • Can last a while b) Result of government intervention – Price floors – Price ceilings © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 44

Disequilibrium • Price Floors – – – Minimum legal price set above the equilibrium price Example: milk Problem: surplus How to solve? To have an impact, it must be set above the equilibrium price © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 45

Disequilibrium • Price Ceilings – – – Maximum legal price set below equilibrium price Example: Rent control Problem: shortage How to solve? To have an impact, it must be set below the equilibrium price © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 46