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Demand & Supply
Demand & Supply
Demand & Supply
Market
Market is a place where transactions take place.
Visible supermarket Invisible - internet (Amazon, Ebay)
Parties in a market
Consumer (Demand) Producer (Supply)
Assumptions: All firms are price-taker
Demand
Demand: a consumer wants and able to buy something. Example: I have $10000
Pen ($10) Book ($200) Computer ($6000) Car ($100000) Flat ($2M)
Demand
Want
Demand
There are many factors affecting consumers decision to buy the goods/services. Functions Example
Own price factors
Pric e
Appearance Income Price of other phones Expectation of future Price Brand name Consumer preference
Demand function
A mathematical way to represent the relationship between the Quantity Demanded and the factors affecting it. Qdx = f( Px Py ,I , Pe . ) , Qdx = quantity demanded for good.. x
Px = the own price of good x Py = the price of good y I = Income of the consumer Pe = Expectation of future Price
Demand Curve
Question: Qdx = -10Px + 6Py + 12I Can we draw the demand function on the following graph?
Px
Qdx
Demand Curve
Ceteris Paribus: holding other factors constant Qdx = -10Px + 6Py + 12I
Py = 50 I = 100Qdx = -10Px + 6(50) +
Demand Curve
Demand (schedule) Px
Qdx
Px 150 100 50
50 1000
0 1500
500
1000
1500
Demand Curve
The demand curve shows how price change affects the quantity demanded. The demand curve is downward sloping.
Price and Qd are negatively related. Price decreases, Qd increases Price increases, Qd decreases The Law of Demand: the lower the price of a good, the larger the quantity demanded, Ceteris Paribus (and vice versa).
Change in Qd
Q: How to represent a change in own price factor in the graph?
Px Qdx Px 150 100 50 150 0 100 500 50 1000 0 1500
Change in Quantity Demanded Moving along the curve Demand Curve 500 1000
1500
Qdx
Change in Demand
Q: How to represent a change in non-own price factor in the graph, higher income? Qdx = -10Px + 6Py + 12I
Py = 50, I = 100 Increase in Demand
Px Qdx
150 0
100 500
50 1000
0 1500
Change in Demand
Px Py = 50, I = 150 150 100 50 0
Qdx
Px 150 100 50
600
1100
1600
2100
Change in Demand
Non-Own price factors:
Price of Substitutes (goods replacing each others)
Iphone vs HTC
Change in Demand
Question: What happen to the demand for Iphone if the price of HTC drop?
HTC Iphone PHTC Drop, consumers switch from Iphone to HTC Demand for Iphone Drop
p
substitute
Qd
Change in Demand
Question: What happen to the demand for Iphone if the 3G monthly charge reduce?
Monthly charge Iphone Monthly charge Drop, consumers total price drop Demand for Iphone Increase
p
complement
Qd
Qd vs Demand
Changes Own Price Change in Quantity Demanded Moving along the curve
p
Qd
Qd
Market Demand
Market demand is the horizontal summation of the individual demand
p
$10
Consumer A
Consumer B
Market (A+B)
Qd
Qd
Qd
Supply
Supply: a producer wants and able to sell something. There are many factors affecting producers decision to sell a good/service.
Own price factor Price Cost Technology Non-Own price Price of related goods factors Expectation of future price etc
Supply function
A mathematical way to represent the relationship between the Quantity Supplied and the factors affecting it. Qsx = f( Px Py ,C , Pe .) , Qsx = quantity supplied of good x ..
Px = the own price of good x Py = the price of good y C = Cost of production Pe = Expectation of future Price
Supply Curve
Question: Qsx = 5Px 2C +100 Can we draw the supply function on the following graph?
Px
Qsx
Supply Curve
Ceteris Paribus: holding other factors constant Qsx = 5Px 2C +100
C = 50
Supply Curve
Qsx = 5Px
Supply (schedule) Px
Qsx
Px 150 100 50
150 750
100 500
50 250
0 0
Supply Curve
250
500
750
Qsx
Supply Curve
The supply curve shows how price change affects the quantity supplied. The supply curve is upward sloping.
Price and Qs are positively related. Price decreases, Qs decreases Price increases, Qs increases The Law of Supply: the lower the price of a good, the smaller the quantity supplied, Ceteris Paribus (and vice versa).
Change in Qs
Q: How to represent a change in own price Change in Quantity Supplied factor in the graph?
Px Qsx Px 150 100 150 750 100 500 50 250 0 0
Supply Curve
50
250
500
750
Change in Supply
Q: How to represent a change in non-own price factor in the graph, lower Cost? Qsx = 5Px 2C +100
C = 50 Increase in Supply
Px Qsx
150 750
100 500
C = 10
50 250
0 0
Px Qsx
150 830
100 580
50 330
0 80
Change in Supply
Px 150 C = 10 100 50 0
Qsx
Px 150
830
580
330
Sold S new
80
50
80 250 330 500580 750 830 Qsx
Change in Supply
Non-Own price factors:
Price of inputs (Cost)
Lunch box and rice
Qd vs Demand
Changes Own Price Change in Quantity Supplied Moving along the curve
p
Qs
Qs
Market Supply
Market Supply is the horizontal summation of the individual supply.
p
$10
Producer A
Producer B
Market (A+B)
10
Qd
Qd
15
Qd
Equilibrium
Equilibrium is a situation that both price and quantity have no tendency to change. Demand and Supply jointly give the equilibrium price and quantity. The equilibrium tells the producers how much they can sell. The equilibrium tells the consumers how much they can buy.
Equilibrium
Which level the price will stay at? A) 50 B) 100 C) 150
Px Excess supply S 150 100 50
Excess demand
D Qx 1500
At $150, Qd<Qs, stock accumulates, P drops to clear the stock. At $100, Qd=Qs, no more competition, P stays. At $50, Qd>Qs, consumers compete for the good, producers raise P make more profit.
Equilibrium
Implication: If the consumers are willing to pay $100, they can buy up to 500 units of x. Total expenditure = P x Qtransacted = $50000 If the sellers are willing to sell at $100, they can sell at most 500 units of x. Total revenue = P x Qtransacted = $50000 If the market is not in equilibrium, the price will adjust to restore back to the equilibrium.
Equilibrium
Question: Will the price remain at $100 forever?
Comparative Static
Question: What happen to the market of EF3440A if Mr. Ho is replaced by ?
P
S
Students like Mr. Ho more than Andy Lau
$6300 $6000 D 10 14
Remark: compare the two equilibriums to see the change of price and Qd.
D Demand Drops Q
Comparative Static
How do the spread of H1N1 affect the price of face mask? S P
P2 P1 D D Q1 Q2 Q
Comparative Static
The price of memory card dropped drastically. How would this affect the price of digital camera? Complement S Pmemory card P P2 P1 D D Q1 Q2 Q
Ddigital camera
Comparative Static
There is a good harvest of Durian this year. How will this affect the price of ? More durian S Pdurian P
S Cost
P1 P2 D Q1 Q2 Q
Supply
Comparative Static
Since last year, Japanese Yen has been appreciated by more than 10%, how the appreciation of Yen affect the price of tour to Japan? CostTour SupplyTour S P S DTour P2 P1
D Q2 Q1
D Q
Government Intervention
Motivation:
affect the price/quantity of a good
Direct control on prices Direct control on quantities Indirect control on prices and quantities
Price Ceiling
Maximum price Sellers cannot set a price higher than the Price Ceiling. S P Price ceiling should set below the equilibrium. P1 Result:
Price drops Excess demand D Quantity transacted drops Q Q2 Q1 Excess demand exists Total Revenue of producer drops Pc
Price Ceiling
What happen if the price ceiling is set above the equilibrium?
P Pc P1 D Q1 S
Price Floor
Minimum price Sellers cannot set a price lower than the Price Floor. P S Excess supply Price ceiling should set Pf above the equilibrium. P1 Result:
Price rises Quantity transacted drops Q2 Q1 Excess supply exists Total Revenue of producer ??? D Q
Price floor
The government is going to legalise the Minimum wage law. Is everyone benefited from this law? wage S Unemployment Min wage wage1 D Q2 Q1
QLabour
No, only those labours are employed better off. Those low skill labours are worse off as they lost
Price Floor
What happen if the price floor is set below the equilibrium?
P P1 Pf D Q1 Q S
Quota
Maximum quantities Sellers cannot sell more than the Quota. Quota should set below the equilibrium P Quota S quantity. P2 Result:
P1 Price rises Quantity transacted drops Total Revenue of producer ???
Q2 Q1
Quota
What should the new supply curve look like? P Quota S
P1
Snew
P2
P3 P4 Q4Q1 D Q
Tax
Two types of taxes:
Per unit tax Ad valorem tax
Indirect tax: Producers can shift the burden to consumers. Tax likes another cost of production. Adding tax will lower the supply of a good.
Tax
Government set a per unit tax = t Supply shifts up vertically P by t P2 Results: tax
S2
t S1
D
Q
Subsidy
The opposition of tax
Per unit subsidy
Subsidy functions to reduce the cost of production. Providing subsidy will increase the supply of a good.
Tax
Government provide a per unit subsidy = s Supply shifts down vertically P S1 by s s S2 Results:
Price drops Quantity increases Government subsidy expenditure = s x Q2
Government P1 subsidy expenditure
P2
D Q1 Q2
Concept Map
Scarcity Make Choice Conflict Competition Price Competition Opportunity Cost
Non-Price Competition
(Order)
Market Economy
P S How market work? P1 D Q1 Q
Command Economy
Mathematical Approach
Market Demand: Qd = 300 10p
Market Supply:
Qs = 100 + 10P What is the equilibrium price and quantity? In equilibrium, Qd = Qs = Qe 300 10Pe = 100 + 10Pe 200 = 20Pe Pe = 10, Qe = 200