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Supply and Demand
Supply and Demand
Overview
1. 2. 3. 4.
Markets
In economics, a market is not a place but rather a
group of buyers and sellers with the potential to trade with each other
Market is defined not by its location but by its participants First step in an economic analysis is to define and characterize the market or collection of markets to analyze
of individual markets
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highest levels
Macro models lump all consumer goods into the single category consumption goods Macro models will also analyze all capital goods as one market Macroeconomists take an overall view of the economy without getting bogged down in details
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Competition in Markets
In imperfectly competitive markets, individual buyers or
sellers can influence the price of the product In perfectly competitive markets (or just competitive markets), each buyer and seller takes the market price as a given What makes some markets imperfectly competitive and others perfectly competitive?
Perfectly competitive markets have many small buyers and sellers
Each is a small part of the market, and the product is standardized
Imperfectly competitive markets have just a few large buyers and sellers
Or else the product of each seller is unique in some way
Demand
A households quantity demanded of a good Specific amount household would choose to buy over some time period, given
A particular price that must be paid for the good All other constraints on the household
demanded) is the specific amount of a good that all buyers in the market would choose to buy over some time period, given
A particular price they must pay for the good All other constraints on households
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Quantity Demanded
Implies a choice
How much households would like to buy when they take into account the opportunity cost of their decisions?
Is hypothetical
Makes no assumptions about availability of the good How much would households want to buy, at a specific price, given real-world limits on their spending power?
Stresses price
Price of the good is one variable among many that influences quantity demanded Well assume that all other influences on demand are held constant, so we can explore the relationship between price and quantity demanded
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else remains the same, the quantity of the good demanded will fall
The words, everything else remains the same are important
In the real world many variables change simultaneously However, in order to understand the economy we must first understand each variable separately Thus we assume that, everything else remains the same, in order to understand how demand reacts to price
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curve) shows the relationship between the price of a good and the quantity demanded , holding constant all other variables that influence demand
Each point on the curve shows the total buyers would choose to buy at a specific price
2.00
40,000
60,000
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P3
Q2
Q1
Q3
Quantity
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60,000
80,000
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for a normal good, and decrease the demand for an inferior good Normal good and inferior good are defined by the relation between demand and income
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total value of everything you own minus the total dollar amount you owe - Example An increase in wealth will
Increase demand (shift the curve rightward) for a normal good Decrease demand (shift the curve leftward) for an inferior good
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some other good and that fulfills more or less the same purpose
Example A rise in the price of a substitute increases the demand for a good, shifting the demand curve to the right
interested in
Example A rise in the price of a complement decreases the demand for a good, shifting the demand curve to the left
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Expected Price
An expectation that price will rise (fall) in the future shifts the current demand curve rightward (leftward)
Tastes
Combination of all the personal factors that go into determining how a buyer feels about a good When tastes change toward a good, demand increases, and the demand curve shifts to the right When tastes change away from a good, demand decreases, and the demand curve shifts to the left
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or inferior) Wealth (depends on goods nature) Prices of substitutes (positively related) Prices of complements (negatively related) Population (positively related) Expected price (positively related) Tastes (positively related)
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D2
D1 Quantity
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D1 D2 Quantity
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Supply
A firms quantity supplied of a good is the specific
amount its managers would choose to sell over some time period, given
A particular price for the good All other constraints on the firm
the specific amount of a good that all sellers in the market would choose to sell over some time period, given
A particular price for the good All other constraints on firms
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Quantity Supplied
Implies a choice
Quantity that gives firms the highest possible profits when they take account of the constraints presented to them by the real world
Is hypothetical
Does not make assumptions about firms ability to sell the good How much would firms managers want to sell, given the price of the good and all other constraints they must consider?
Stresses price
The price of the good is just one variable among many that influences quantity supplied Well assume that all other influences on supply are held constant, so we can explore the relationship between price and quantity supplied
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and everything else remains the same, the quantity of the good supplied will rise
The words, everything else remains the same are important
In the real world many variables change simultaneously However, in order to understand the economy we must first understand each variable separately We assume everything else remains the same in order to understand how supply reacts to price
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good or service firms would choose to produce and sell at different prices, with all other variables held constant Supply curvegraphical depiction of a supply schedule
Shows quantity of a good or service supplied at various prices, with all other variables held constant
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$4.00
2.00
40,000
60,000
S1
S2
60,000
80,000
Unfavorable weather
Destroys crops Shrinks yields Shifts the supply curve leftward
firms in an area
Causing a leftward shift in the supply curve
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P2
P1 P3
Q3
Q1
Q2
Quantity
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Quantity
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S2
S1
Quantity
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have discussed is far from exhaustive In some cases, even the threat of such events can cause serious effects on production Basic principle is always the same
Anything that makes sellers want to sell more or less of a good at any given price will shift supply curve
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E
$3.00 H
Excess Demand
1.00
J D
Excess Demand
Excess demand At a given price, the excess of quantity demanded over quantity supplied Price of the good will rise as buyers
compete with each other to get more of the good than is available
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K E
D
35,000 50,000 65,000 Number of Bottles per Month
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Excess Supply
Excess Supply At a given price, the excess of quantity supplied over quantity demanded Price of the good will fall as sellers compete
with each other to sell more of the good than buyers want
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equationQ 140 10 P , is quantity demanded, P is the price of the good. Supply is given by Q S 80 5P where Q s is quantity supplied. What is the equilibrium price and quantity?
D
QD where
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Figure 9
Price per Bottle
4. Equilibrium price increases
3. to a new equilibrium.
S 2. moves us along the supply curve . . . 1. An increase in demand . . .
$4.00 3.00 E
F'
D2 D1
5. and equilibrium quantity increases too. 50,000 60,000 Number of Bottles of Maple Syrup per Period
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50
S1
3.00
P2
P1 E
D
Q2 Q1 Barrels of Oil
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F' P4
F P3 D1 D2
Q3
Q4
4. Price decreased . . .
$500
B
$400
5. and quantity decreased as well. 2.45 3.33 D2002 D2003 Millions of Handheld PCs per Quarter
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direction of the shift) we can determine the direction that both equilibrium price and quantity will move When both curves shift (and we know the direction of the shifts) we can determine the direction for either price or quantitybut not both
Direction of the other will depend on which curve shifts by more
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chapter 3 in textbook. Demand & Supply Diagram Equilibrium P & Q Why $1000 can not be equilibrium? Effects from a tornado destroying some apartments.
quantity demanded 30 25 22 19
quantity supplied 10 14 17 19
1600
1800
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15
21
22
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Summaries
Through the study of the chapter, you will be able to Characterize a market. Use a demand schedule and a demand curve to demonstrate the law of
demand. Explain the difference between a change in demand (shift of the curve) and a change in quantity demanded (movement along the curve). List the factors that will lead to a change in demand, and give examples of each. Similar analysis for supply side. Explain how equilibrium price and quantity are determined in a competitive market. Explain what will happen in a competitive market after a shift in the supply curve, the demand curve, or both. Describe the three steps economists take to answer almost any question about the economy.
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