Bec doms ppt on demand & supply demand & supply

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Demand & Supply Demand Supply Market Equilibrium Examples Price ceiling/floor

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Bec doms ppt on demand & supply demand & supply

Transcript of Bec doms ppt on demand & supply demand & supply

Page 1: Bec doms ppt on demand & supply demand & supply

Demand & Supply

Demand Supply Market Equilibrium Examples Price ceiling/floor

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Build a model

buyers sellers & their interaction

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Use the model

to predict the impact of changes

to explain changes that occur

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Demand

behavior of buyers relationship between

quantity demanded of a good price holding other factors constant

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quantity demanded (Qd)

amount of good or service unit of measure

per unit of time “2 bottles of water per day”

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Law of Demand

If the price of a good

then the Qd

holding other things constant!!!

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Why?

higher price makes you feel poorer income effect

higher price on one good,

substitute other goods. substitution effect

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Example: bottles of water per day

Describe demand in 2 ways: Demand schedule

a list of Qd

at each price

Demand curve a graph of demand schedule

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Demand Schedule

P QdPrice = $/bottle

Qd = bottles/day

$2.00 0$1.50 1

$1.00 2$.50 3

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Demand curveP

Qd

0 1 2 3 4

2

1.5

1

.5D

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individual demand demand curve for 1 buyer

market demand** demand curve for all buyers add up individual Qd for each price

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Changes in Demand

recall our assumption hold other things constant allow only price to change

but what if other factors do change? change in demand shift to a new demand curve

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increase in demand

increase in Qd at every price demand curve shifts to the right

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P

Qd0 1 2 3 4

2

1.5

1

.5 DD’

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decrease in demand

decrease in Qd at every price demand curve shifts to the left

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P

Qd

DD’’

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Factors affecting demand

income prices of related goods buyer expectations # of buyers preferences

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income

for normal goods,an increase in income will increase demand

examples:CDs, bottled water,eating out,

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for inferior goods,

an increase in income will

decrease the demand examples:

ramen noodles,

check-cashing service

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Prices of related goods

what are related goods?• substitutes

e.g. Snapple, Coke

• complements

goods consumed with water

e.g. pretzels

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substitutes

if price of Snapple rises, people switch to water increase in demand for water

if price of Snapple falls, people switch from water

to Snapple decrease in demand for water

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complements

if price of pretzels rises eat fewer pretzels,

so drink less water, demand for water falls

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buyer expectations

buyers can expect change in future income future prices

and act to change demand today

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expect price of water to rise next month, buy a case today, increase demand today

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# of buyers

size of population demographics

age gender race

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if there are more buyers increase market demand for water could be due to

more people overall

more people who like water

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preferences

what do we want to buy? change in our likes/dislikes

acid washed jeans? tattoos?

change in technology 5 1/4” floppies? DVDs?

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if drinking more water

beneficial to health, increase in demand for bottled water

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Important!!

Change in demand-- occurs when other factors change-- shift to a new demand curve

change in demand NOT caused by change in price of

the good

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Change in quantity demanded-- occurs when prices change

-- movement along existing demand curve

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Change in QdP

Qd

D

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Change in DemandP

Qd

DD

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Supply

behavior of sellers relationship between

quantity supplied of a good price holding other factors constant

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Law of Supply

If the price of a good

then the Qs

holding other things constant!!!

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Why?

Holding costs constant higher price means higher profit margin

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Supply Schedule

P QsPrice = $/bottle

Qs = bottles/day

$2.00 3$1.50 2

$1.00 1$.50 0

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S

Supply curveP

Qs0 1 2 3 4

2

1.5

1

.5

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Individual supply supply curve for 1 supply

market supply** supply curve for all sellers add up individual Qs for each price

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Changes in Supply

if other factors do change, change in supply shift to a new supply curve

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increase in supply

increase in Qs at every price supply curve shifts to the right

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P

Qs

S

S’

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decrease in supply

decrease in Qs at every price supply curve shifts to the left

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P

Qs

S

S’’

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Factors affecting supply

Cost of inputs prices of related goods seller expectations # of seller productivity

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Cost of inputs

As input prices get higher,

supply decreases example: increase in cost of

bottles labor electricity

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Prices of related goods

Substitutes in production a good that can be made instead

of bottled water

e.g. bottled tea

If price of bottled tea increases,

switch to tea production,

supply of bottled water falls

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Complements in production good that is produced with other good

e.g. Beef & leather if price of beef rises,

Qs of beef rises,

& supply of leather rises

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Seller expectations

Expect input prices to rise in future increase supply today

expect price of good to rise in future decrease supply today

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# of sellers

As more sellers supply good, market supply increases

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Productivity

Amount of output per unit of input bottles of water per hour of labor

Increase in productivity lowers cost increases supply

what makes productivity increase? Technology human capital

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Important!!

Change in supply-- occurs when other factors change-- shift to a new supply curve

(right or left) change in supply

-- NOT caused by change in price ofthe good

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Change in quantity supplied-- occurs when prices change

-- movement along existing supply curve

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Change in QsP

Qs

S

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P

Qs

S

S’’

Change in Supply

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Market Equilibrium

What will be the price of bottled water? Price at which Qs = Qd

-- equilibrium price

-- equilibrium quantities

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Market for Bottled WaterP

(millions bottles per day)

Q

D

S

$10

10

Equilibrium

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Why is this an equilibrium?

If Qs > Qd surplus price falls until Qs = Qd

If Qs < Qd shortage price rises until Qs = Qd

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Changes in equilibrium

If supply and/or demand changes

(shifts left or right),

then equilibrium will change too.

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Example 1

Market for bottled water price of plastic bottles rises what happens to equilibrium?

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Which curve is affected?

buyers or sellers? Supply curve

bottles are an input

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Increase or decrease in supply?

Increase in cost of input supply decreases

shift LEFT

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P

(millions bottles per day)

S

Q

D

$10

10

S’

Equilibrium:

P

Q

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note

Change in supply causes

change in equilibrium price

BUT Change in price does NOT cause a

change in supply

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Example 2

Market for bottled water sugar is found to be harmful to health what happens to equilibrium?

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Which curve is affected?

Demand curve health concerns increase

preferences for water

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Increase or decrease in demand?

Increase in preference for water demand increases

shift RIGHT

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P

(millions bottles per day)

S

Q

D

$10

10

D’

Equilibrium:

P

Q

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Example 3

Market for bottled water incomes fall &

sellers expect utilities to rise

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Which curve is affected?

Demand curve income falls

Supply curve seller expectations change expect costs to rise

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Increase or decrease?

Demand decreases (left) income falls &

bottled water is normal good

Supply increases (right) make more water today before

costs go up

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P

(millions bottles per day)

S

Q

DD’

Equilibrium:

P

Q ?

S’

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Example 4: Leather sandals

Market for leather sandals

A. Mad cow disease

-- must destroy 20% of herds

what happens to equilibrium

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P

Q

S

D

S’

Supply decreases

Q decreases

P increases

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B.

PETA campaign against leather products what happens to equilibrium?

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P

Q

S

DD’

demand decreases

Q decreases

P decreases

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Example 5: Natural Gas Prices

Winter 2000-2001

prices increased over 100% why?

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3 possible causes:

1. Supply decreases

or

2. Demand increases

or

3. both

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P

Q

S

D

S’

Decrease in Supply

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Why would S fall?

regulation

-- tougher to drill

-- increase costs hot summer (2000)

-- depletes inventories

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P

Q

S

D

D’

Increase in Demand

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Why would D rise? booming economy (2000) EPA rules

-- fewer coal plants, more gas plants cold winter

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Why did P rise?

both falling supply & rising demand

-- but demand was most important

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Price ceiling

gov’t regulation sets maximum price example: rent control in NYC what happens?

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Rent

Q

S

D

$2500

500

$1200

250 750

rent ceiling = $1200

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Rent

Q

S

D

$2500

500

$1200

250 750

Qd = 750 units

Qs = 250 units

at P = $1200:

SHORTAGE

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who gets housing?

those willing to pay more bogus fees:“key money”

those who look harder loss of time

those who get lucky Monica on Friends

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Result

Price does not ration scarce good too few apt. units lost resources in searching price ceiling is inefficient

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Why have rent control?

intended to help make housing affordable secondary effect

shortage run-down buildings rent-controlled apts. go to the “connected”