Report 2 [Followed] Supply and Demand

8/11/2019 Report 2 [Followed] Supply and Demand

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Supply and Demand>>

chapter:

3

Krugman/WellsEconomics

2009 Worth Publishers


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WHAT YOU WILL LEARN IN THIS CHAPTER

What a competitive market is and how it is

described by the supply and demand model

What the demand curve and supply curve are

The difference between movements along a

curve and shifts of a curve How the supply and demand curves determine a

markets equilibrium price and equilibriumquantity

In the case of a shortage or surplus, how pricemoves the market back to equilibrium


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Supply and Demand

A competitive market:

Many buyers and sellers Same good or service

The supply and demandmodelis a model of howa competitive market works.

Five key elements:

Demand curve

Supply curve

Demand and supply curve shifts Market equilibrium

Changes in the market equilibrium


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Demand Schedule

A demand schedule

shows how much ofa good or serviceconsumers will wantto buy at different

prices.

7.1

7.5

8.1

8.9

10.0

11.5

14.2

Price of coffeebeans (per

pound)

Quantity of coffeebeans demanded

(billions of pounds)

1.75

1.50

1.25

1.00

0.75

0.50

$2.00

Demand Schedule for Coffee Beans


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Demand Curve

A demand curveis the graphicalrepresentation of the demand schedule;it shows how much of a good or serviceconsumers want to buy at any givenprice.

70 9 11 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Price ofcoffee bean(per gallon)

Quantity of coffee beans(billions of pounds)

Demand

curve, D

As price rises,

the quantitydemanded falls


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GLOBALCOMPARISON

Pay More, Pump Less

Because of high taxes, gasoline anddiesel fuel are more than twice as

expensive in most Europeancountries as in the United States.

According to the law of demand,Europeans should buy less gasolinethan Americans, and they do:

Europeans consume less than halfas much fuel as Americans, mainlybecause they drive smaller cars withbetter mileage.

1.0 1.40.60.2

$8

7

6

5

4

3

Price ofgasoline

(per gallon)

0

ItalyFrance

Canada

United States

Japan

Germany

Spain

United Kingdom

Consumption of gasoline(gallons per day per capita)


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An Increase in Demand

An increase in thepopulation and other

factors generate anincrease in demanda rise in the quantitydemanded at any given

price. This is represented by

the two demandschedules - oneshowing demand in

2002, before the rise inpopulation, the othershowing demand in2006, after the rise in

population.

7.1

7.5

8.1

8.9

10.011.5

14.2

8.5

9.0

9.7

10.7

12.013.8

17.0

in 2002 in 2006

$2.00

1.75

1.50

1.25

1.000.75

0.50


pound)

Quantity of coffeebeans demanded

(billions of pounds)

Demand Schedules for Coffee Beans


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An Increase in Demand

A shift of the demand curve is a change in the quantity demanded at anygiven price, represented by the change of the original demand curve to a newposition, denoted by a new demand curve.

Increase inpopulation

more coffee

drinkers

Price ofcoffee beans(per gallon)

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$2.00

1.75

1.50

1.25

1.00

0.75

0.50 D1

D2

Demand curvein 2006

Demand curvein 2002



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Movement Along the Demand Curve

7 8.1 9.70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50D1 D2

A C

B

A shift of the

demand curve

is not the samething as a movementalong the demand

curve

Price ofcoffee

beans (pergallon)

Quantity of coffeebeans (billions of

pounds)

A movement along the demandcurve is a change in the

quantity demanded of a goodthat is the result of a change inthat goods price.


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Shifts of the Demand Curve

A decrease in demand,

means a leftwardshift ofthe demand curve: at anygiven price, consumersdemand a smaller quantitythan before. (D1D3)

Price

Quantity

D3

D1

D2

Increase indemand

Decrease indemand

An increase in demand

means a rightwardshift ofthe demand curve: at anygiven price, consumersdemand a larger quantitythan before. (D1D2)


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What Causes a Demand Curve to Shift?

Changes in the Prices of Related Goods

Substitutes: Two goods are subst i tutesif a fall in theprice of one of the goods makes consumers less willing

to buy the other good.

Complements: Two goods are complementsif a fall inthe price of one good makes people more willing to buy

the other good.


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What Causes a Demand Curve to Shift?

Changes in Income

Normal Goods: When a rise in income increases thedemand for a good - the normal case - we say that the

good is a normalgood.

Inferior Goods:When a rise in income decreases the

demand for a good, it is an in fer ior good. Changes in Tastes

Changes in Expectations

I di id l D d C d th M k t D d


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Individual Demand Curve and the Market DemandCurve

The market demand curve is the horizontal sum of theindividual demand curves of all consumers in that market.

DDarla DDino

0 0 10 203020 0

$2

1

$2

1

$2

1

30 40 50

DMarket

(a)

Darlas IndividualDemand Curve

(b)

Dinos IndividualDemand Curve

(c)

Market Demand Curve

Price ofcoffee

beans (perpound)

Price ofcoffee

beans (perpound)

Price ofcoffee

beans (perpound)

Quantity of coffeebeans (pounds)




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Supply Schedule

A supply schedule

shows how much of agood or servicewould be supplied atdifferent prices.

Supp ly Schedu le for Coffee Beans

Price ofcoffee beans(per pound)

Quantity ofcoffee beans

supplied(billions ofpounds)

$2.00 11.6

1.75 11.5

1.50 11.2

1.25 10.7

1.00 10.0

0.75 9.1

0.50 8.0


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Supply Curve

Quantity of coffee beans (billions of pounds)

Price of coffeebeans (per pound)

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$2.00

1.75

1.50

1.25

1.00

0.75

0.50

As price rises, thequantity supplied rises.

A supply curveshows

graphically how much of agood or service peopleare willing to sell at anygiven price.

Supplycurve, S


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An Increase in Supply

A shift of the supply curve is a change in the quantity supplied of a good at anygiven price.

Vietnam enterscoffee beanbusiness

more coffeeproducers

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$2.00

1.75

1.50

1.25

1.00

0.75

0.50

S1

S2


pound)


is not thesame thing as ashift of thesupply curve

A movementalong the supplycurve


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Movement Along the Supply Curve

A movement along the supply curve is a change in the quantity supplied of agood that is the result of a change in that goods price.

70 10 11.2 12 15 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

S1 S2

AC

B


pound)


is not thesame thing asa shift of thesupply curve

A movementalong the supplycurve


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Any increase insupply means a

rightward shift of thesupply curve: at anygiven price, there is anincrease in thequantity supplied.(S1S2)

Shifts of the Supply Curve

S3

S1

S2

Price

Quantity

Decrease insupply

Increase insupply

Any decrease insupply means a

leftward shift of thesupply curve: at anygiven price, there is adecrease in thequantity supplied.(S1S3)


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Changes in input prices

An inputis a good that is used to produceanother good.

Changes in the prices of related goods and

services Changes in technology

Changes in expectations

Changes in the number of producers

What Causes a Supply Curve to Shift?

Individual Supply Curve and the Market Supply


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Individual Supply Curve and the Market SupplyCurve

The market supply curve is the horizontal sum of the individualsupply curves of all firms in that market.

SFigueroa SBien Pho

1 2 31 22 31 4 500 0

$2

1

$2

1

$2

1

SMarket

(a)

Mr. FigueroasIndividual Supply Curve

(b)

Mr. Bien Phos IndividualSupply Curve

(c)

Market Supply CurvePrice ofcoffee

beans (perpound)

Price ofcoffee

beans (perpound)

Price ofcoffee

beans (perpound)




S


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Supply, Demand and Equilibrium

Equilibriumin a competitive market: when the quantity

demanded of a good equals the quantity supplied ofthat good.

The price at which this takes place is the equilibrium

price (a.k.a. market-clearing price):

Every buyer finds a seller and vice versa.

The quantity of the good bought and sold at that price is theequilibrium quantity.

M k t E ilib i


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Market equilibriumoccurs at point E,where the supplycurve and the demandcurve intersect.

Price ofcoffee beans

(per pound)


70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

E EquilibriumEquilibriumprice

Equilibriumquantity

Market Equilibrium

S l


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There is a surplus of agood when the quantitysupplied exceeds thequantity demanded.Surpluses occur when

the price is above itsequilibrium level.

70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

8.1 11.2

E

Surplus

Quantitydemanded

Quantitysupplied

Price of coffeebeans (per pound)


Surplus

Sh t


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70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

9.1 11.5

E

Shortage

Quantitydemanded

Quantitysupplied

Price ofcoffee beans(per pound)


There is a shortageof a

good when the quantitydemanded exceeds thequantity supplied.Shortages occur when

the price is below itsequilibrium level.

Shortage

ECONOMICS IN ACTION


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ECONOMICS IN ACTION

The Price of Admission:

Compare the box office price for a recent Justin Timberlake

concert in Miami, Florida, to the StubHub.com price for seatsin the same location: $88.50 versus $155.

Why is there such a big differencein prices? For majorevents, buying tickets from the box office means waiting in

very long lines. Ticket buyers who use Internet resellers havedecided that the opportunity costof their time is too high tospend waiting in line. For those major events with online boxoffices selling tickets at face value, tickets often sell out

within minutes. In this case, some people who want to go to the concert

badly but have missed out on the opportunity to buy cheapertickets from the online box office are willing to pay the higherInternet reseller price.

E ilib i d Shift f th D d C


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Equilibrium and Shifts of the Demand Curve

Q2

Q1

P2

P1

D2

Supply

D1

E2

E1

Price of coffeebeans

Quantity of coffee beans

Pricerises

Quantity rises

An increase indemand

leads to a

movement along thesupply curve due to ahigher equilibrium priceand higher equilibrium

quantity

E ilib i d Shift f th S l C


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Equilibrium and Shifts of the Supply Curve

P2

P1

Q1

Q2

Demand

E1

S1S2

E2

Price ofcoffee beans

Quantity of coffee beans

Pricerises

Quantity falls

A decreasein supply

leads to a movementalong the demand curvedue to a higherequilibrium price andlower equilibrium quantity

T h l Shift f th S l C


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Technology Shifts of the Supply Curve

Price

Quant i ty

S1

Demand

E1

E2

An increase insupply

P2

P1

Q1

Q2

leads to a movementalong the demand curve to

a lower equilibrium priceand higher equilibriumquantity.

Pricefalls

Quantity increases

S2

Technological innovation: In the early1970s, engineers learned how to put

microscopic electronic componentsonto a silicon chip; progress in thetechnique has allowed ever morecomponents to be put on each chip.

Si lt Shift f S l d D d


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Simultaneous Shifts of Supply and Demand

Two opposing forces

determining theequilibrium quantity.

The increase in

demand dominates thedecrease in supply.

Quantity of coffeeQ2Q

1

P 2

P1

S2

D2

D1

S1

E1

E2

(a) One possible outcome: Price Rises, Quantity Rises

Price of coffee Small decreasein supply

Large increasein demand



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Two opposing forcesdetermining theequilibrium quantity.

Q1

Q2

P2

P1

S2

D2

D1

S1

E1

E2

(b) Another Possibility Outcome: Price Rises, Quantity Falls

Price of coffee

Quantity of coffee

Largedecreasein supply

Small increasein demand



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We can make the following predictions about the outcome whenthe supply and demand curves shift simultaneously:

Simul taneous

Shi f ts of

Supply and

Demand

Supply Increases Supply Decreases

Demand

Increases

Price: ambiguous

Quantity: up

Price: up

Quantity: ambiguous

Demand

Decreases

Price: down

Quantity: ambiguous

Price: ambiguous

Quantity: down

O Q G S


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FOR INQUIRING MINDS

The ease of transmitting photos over the Internet and therelatively low cost of international travel beautiful youngwomen from all over the world, eagerly trying to make it asmodels = influx of aspiring models from around the

world

In addition the tastes of many of those who hire modelshave changed they prefer celebrities

What happened to the equilibrium price of a young (not acelebrity) fashion model? Use your supply and demandcurves to determine the salaries of Americas Next Best

Models

Your Turn on the Runway: An Exercise of Supply, Demandand Supermodels


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Demand and Supply Shifts at Work in the Global


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A recent drought in Australiareduced the amount of grass

on which Australian dairy cows could feed, thus limiting theamount of milk these cows produced for export.

At the same time, a new tax levied by the government of

Argentinaraised the price of the milk the country exported,thereby decreasing Argentine milk sales worldwide.

These two developments produced a supply shortage in the

world market, which dairy farmers in Europe couldnt fillbecause of strict production quotas set by the EuropeanUnion.

Demand and Supply Shifts at Work in the GlobalEconomy

Demand and Supply Shifts at Work in the Global


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In China, meanwhile, demand for milk and milk

products increased, as rising income levels drovehigher per-capita consumption.

All these occurrences resulted in a strong upwardpressure on the price of milk everywhere in 2007.

Demand and Supply Shifts at Work in the GlobalEconomy

SUMMARY


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SUMMARY

1. The supply and demand model illustrates how acompetitive marketworks.

2. The demand schedule shows the quantity demanded ateach price and is represented graphically by a demandcurve. The law of demand says that demand curves slopedownward.

3. A movement along the demand curve occurs when aprice change leads to a change in the quantity demanded.When economists talk of increasing or decreasing demand,they mean shifts of the demand curvea change in the

quantity demanded at any given price.

SUMMARY


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SUMMARY

4. There are five main factors that shift the demand curve: A change in the prices of related goods or services A change in income A change in tastes A change in expectations A change in the number of consumers

5. The market demand curve for a good or service is thehorizontal sum of the individual demand curves of allconsumers in the market.

6. The supply schedule shows the quantity supplied at

each price and is represented graphically by a supplycurve. Supply curves usually slope upward.

SUMMARY


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SUMMARY

7. A movement along the supply curve occurs when a pricechange leads to a change in the quantity supplied. Wheneconomists talk of increasing or decreasing supply, theymean shifts of the supply curvea change in thequantity supplied at any given price.

8. There are five main factors that shift the supply curve:

A change in input prices A change in the prices of related goods and services A change in technology A change in expectations

A change in the number of producers9. The market supply curve for a good or service is the

horizontal sum of the individual supply curves of allproducers in the market.

SUMMARY


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SUMMARY

10. The supply and demand model is based on the principlethat the price in a market moves to its equilibrium price,or market-clearing price, the price at which the quantitydemanded is equal to the quantity supplied. This quantityis the equilibrium quantity. When the price is above itsmarket-clearing level, there is a surplus that pushes the

price down. When the price is below its market-clearinglevel, there is a shortage that pushes the price up.

11. An increase in demand increases both the equilibriumprice and the equilibrium quantity; a decrease in demand

has the opposite effect. An increase in supply reduces theequilibrium price and increases the equilibrium quantity; adecrease in supply has the opposite effect.

12. Shifts of the demand curve and the supply curve can

happen simultaneously.


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Coming attraction

Chapter 4:

The Market Strikes Back

The End of Chapter 3

Report 2 [Followed] Supply and Demand

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