Pfs assignment 3

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Chapter 2 & 4

DEMAND, SUPPLY & MARKET

EQUILIBRIUM

Presentation

This presentation is a mash up of 3 sources. They are:•Hariff, A.(2011). Chapter 4, The forces of Supply and Demand.•Kanth, J.(2013). Demand and Supply.•Shin, S.(2011). Chapter 2, Demand and Supply Market Equilibrium.

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Chapter Outline

• 1.1 Introduction: Market and the Circular Flow• 1.2 Demand (DD)• 1.3 Supply (SS)

• 1.4 Market Equilibrium• 1.5 Change in Equilibrium

(SS & DD)• 1.6 SS/DD Analysis:

Example

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1.1 INTRODUCTION1.1 INTRODUCTION

Demand & supply

interaction

Economics decision-making units

Market & the circulation flow

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Markets

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1.2 DEMAND1.2 DEMAND

• Quantity consumers are both willing and able to buy at each possible price during a given time period, other things constant.

• can be defined as the purchase of product

How many packs of ‘ai yu bing’ will student buy at a price of RM2? What if the price is RM1.50?

Relationship between price & quantity demanded

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Law of Demand– Says that quantity demanded varies inversely, or

negatively, to the price, other things constant.– Negative relationship between price and quantity

demanded.– The higher the price, the smaller the quantity

demanded.

Figure: Price & Quantity Demanded: The Law of Demand

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Demand Schedule & Demand Curve

– The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

– The demand curve is a graph of the relationship between the price of a good and the quantity demanded.

• Downward sloping & to the right because law of demand.

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May’s Demand Schedule and May’s Demand Schedule and Demand CurveDemand Curve

Price ofIce-Cream Cone

0

2.50

2.00

1.50

1.00

0.50

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

1. A decrease in price ...

2. ... increases quantity of cones demanded.

Example

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Individual Demand & Market demand

– The individual demand is the relationship between the quantity demanded by a single buyer and its prices

– The market demand is the relationship between the total quantity demanded by all consumers in the market and its price.

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Changes in Quantity Demanded Changes in Quantity Demanded & Changes in Demand& Changes in Demand

– Changes in quantity demanded result in movement along the demand curve due a change in price while other factors remain constant. (upward/downward movement)

– Change in demand is the shift of the demand curve due a change in other factors while price remains constant. (leftward/ rightward shift)

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D

Price of Ice-Cream Cones

Quantity of Ice-Cream Cones

A tax on sellers of ice-cream cones raises

the price of ice-cream cones and results in a movement along the

demand curve.

A

B

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1.00

$2.00

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Changes in Quantity Changes in Quantity DemandedDemanded

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Change in DemandChange in Demand

• A shift in the demand curve either to the left or right caused by any changes that alters the quantity demanded at every price. Such as: Income Prices of related goods Tastes Expectations Number of buyers

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Shifts in The Demand Shifts in The Demand CurveCurve

Price ofIce-Cream

Cone

Quantity ofIce-Cream Cones

Increasein demand

Decreasein demand

Demand curve, D3

Demandcurve, D1

Demandcurve, D2

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Substitution Effect

• Substitution Effect:• - When the price of a good rises,

consumers will substitute away to other goods

• - Holding real purchasing power constant, an increase in the price of a good relative to others, raises the opportunity cost of consuming that good, and therefore demand strictly decreases

• - for ALL goods then: ↑ own price, SE sees ↓ quantity demanded

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Changes in Consumer Income

• Goods can be classified into two broad categories: Normal goods: the demand

increases when income increases and decreases when income decreases

Inferior goods: the demand decreases when income increases and increases when income decreases

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Changes in Price of Related Good

(i) Substitute Goods- A product that can be used in

place of another product- A change in the price of

substitute products affect the demand for the product in the same direction in which the price change.

- E.g: tea vs coffee; a bus ride vs an LRT ride

( Pcoffee↑ Qdd coffee↓ DDtea↑)

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Changes in Price of Related Good

(ii) Complementary Goods- A product that is used in

conjunction with another product.

- The change in the price of a complementary product affects the demand for the product in the opposite direction to the change price.

- E.g: a disk and computer, pen and ink.

( Ppen↑ Qdd pen↓ DDink↓ )

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Taste & PreferenceTaste & Preference

– Tastes and preferences of consumers change significantly.

– If a product become more fashionable, the demand for it will increase and if the same product becomes outdated, the demand for it will fall.

– E.g: Changes in music, apparel or recreation.

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ExpectationsExpectations

– The higher the expected future price of a product, the higher the current demand for that product and vice versa.

– E.g: When the government plans to increase the price of sugar the following week, the demand for sugar will immediately increase.

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Population or Number of Population or Number of BuyersBuyers

– A larger population with a high rate of growth creates greater demand for goods and services.

– E.g: An increase in the population of UTAR would increase the demand for houses, F & B, and other goods and services.

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1.31.3 SUPPLYSUPPLY

• Supply indicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant

• Law of supply states that the quantity supplied is usually directly related to its price, other things constant The lower the price, the smaller the quantity

supplied The higher the price, the greater the quantity

supplied

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Supply Schedule & Supply Curve

– The supply schedule is a table that showing how much of a product firms will set at different prices.

– The supply curve is a graph illustrating how much of a product a firm will set at different prices.

• Upward slopping & to the right due to the law of supply.

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Ben’s Supply Schedule and Supply Curve

Price ofIce-Cream

Cone

0

2.50

2.00

1.50

1.00

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

0.50

1. Anincrease in price ...

2. ... increases quantity of cones supplied.

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Individual Supply & Market Supply

– The individual supply is the relationship between price of good and the quantity an individual producer is willing and able to sell per period, other things constant.

– The market supply is the sum of all that is supplied each period by all producers of a single product.

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Market Supply CurveMarket Supply Curve

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Price of Ice-Cream Cone

Quantity of Ice-Cream Cones0

S

1.00A

C$3.00 A rise in the price

of ice cream cones results in a movement alongmovement along the supply curve.

Change in Quantity Change in Quantity SuppliedSupplied

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Changed in SupplyChanged in Supply

• A shift of the supply curve, either to the left or right.

• Determinants of supply other than the price of the good Technology Prices of related goods Expectation Number of sellers

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Shifts in The Supply Shifts in The Supply CurveCurve

Price ofIce-Cream

Cone

Quantity ofIce-Cream Cones

Increasein supply

Decreasein supply

Supplycurve, S1

Supplycurve, S3

0

Supplycurve, S2

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TechnologyTechnology– Represents the economy’s knowledge

about how to combine resources efficiently.

– If a better technology is discovered, production costs will fall. Thus, suppliers will be more willing & able to supply the good at each price.

– Example: when new technology are introduced in the production of sushi, supply of sushi will increase and shift the supply curve.

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Price of Related GoodsPrice of Related Goods– Substitutes Goods

• If there is an increase in the price of substitute goods in production, supply of a good will decrease.

• Example: Pepsi and Coke

( Ppepsi ↑QSS pepsi↑ SScoke↓ )

– Complementary Goods• An increase in the price of complementary

goods will increase the supply of a good & vice versa.

• Example: Pen and Ink

( Ppen ↑QSS pen↑ SSink ↑ )

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ExpectationsExpectations– Expectation of price in the

future could either increase or decrease current supply.

– Example: when government announced an increase in the price of petrol, current supply will decrease because the supplier wants to sell after the price hike to gain profit with new price.

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Number of SellersNumber of Sellers– Market supply sums the amount

supplied at each price by all producers, market supply depends on the number producers in the market.

– Example: if there are more than one economic rice shop at New Town, there will be more economic rice supplied.

Shift of SS curve

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DD & SS Interaction

Output (Product) MarketOutput (Product) Market

1.4 MARKET EQUILIBRIUM1.4 MARKET EQUILIBRIUM

3 set of market condition / effect:

(a) The quantity demanded equal the quantity supplied at the current price. This situation called “equilibrium”

(b) The quantity demanded exceeds the quantity supplied at the current price. This situation called “excess demand” or “shortage”

(c) The quantity supplied exceeds the quantity demanded at the current price. This situation called “excess supply” or “surplus”

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EquilibriumEquilibrium

Price ofIce-Cream

Cone

0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones

13

Equilibriumquantity

Equilibrium price Equilibrium

Supply

Demand

$2.00

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1.5 CHANGE IN 1.5 CHANGE IN EQUILIBRIUMEQUILIBRIUM

• The market equilibrium will change when there is a shift in the demand or supply curve.

• We will see what happens when:The demand curve shifts and

supply remains constant.The supply curve shifts and

demand remains constant.Both the demand and supply

curves shift.

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Effect of Change in Effect of Change in DemandDemand

• Change in DD can arise from a number of factors; change in income, tastes, etc.

Quantity

PriceSS

D0 D1

E0

E1

•Suppose there is an increase in the demand for ‘Pilot’ pens, the demand curve will demand curve will shift rightwardsshift rightwards, to D1.

• Equilibrium price will Equilibrium price will increaseincrease, and equilibrium equilibrium quantity will also increase.quantity will also increase.

Note: If there is a decrease in the demand, the effect will be vice versa.

References

This presentation is a mash up of 3 sources.•Kanth, J.(2013). Demand and supply.http://www.slideshare.net/jnchandrakanth/demand-and-supply-29294711Accessed 06 March 2014•Shin, S.(2011).Chapter 2, Demand and Supply, Market Equilibrium. http://www.slideshare.net/SusuJie/chap2-7165119Accessed 06 March 2014•Hariff, A.(2011). The market forces of Demand and Supply.http://www.slideshare.net/AminHanif/lecture-4-10007901Accessed 06 March 2014

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Pfs assignment 3

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