Supply and Demand. Chapter 3

Transcription

1 upply and emand Chapter 3 1

2 emand A demand curve shows the amount of a good consumers wish to purchase at specified prices. emand curve is downward sloping emand refers to the whole schedule of prices and quantity demanded. Quantity demanded is the amount demanded at a particular price.

3 emand Below is mith s demand curve for lobsters: Price($/gram) Quantity (1000 gram/month) 3

4 Horizontal interpretation of the demand curve If mith faces a price of $0.4/gram of lobster, he will wish to purchase 4kg lobsters a month. Price($/gram) Quantity (1000 gram/month) 4

5 Vertical interpretation of the demand curve If mith is currently buying 4kg lobsters a month, the demand curve tells us that he would be willing to pay at most 40 cents for one additional gram of lobster. Price($/gram) Quantity (1000 gram/month) 5

6 upply A supply curve shows the amount of some good sellers are willing to offer at various prices. In general, supply curve is upward sloping. upply refers to the whole schedule of prices and quantity supplied. Quantity supplied is the amount supplied at a particular price.

7 The supply of lobsters Below is Candy s supply curve for lobsters: Price($/gram) Quantity (1000 gram/month) 7

8 Horizontal interpretation of the supply curve If Candy faces a price of $0.4/gram of lobster, she will wish to sell 2kg of lobsters a month. Price($/gram) Quantity (1000 gram/month) 8

9 Vertical interpretation of the supply curve If Candy is currently selling 2kg of lobsters a month, the marginal cost of a lobster is $0.4. Price($/gram) Quantity (1000 gram/month) 9

10 upply curves slope upward for one reason The low-hanging-fruit principle. Harvest the lobsters closest to shore first. More generally, as we (as sellers) expand the production of any good, we turn first to those whose opportunity costs of producing that good are lowest, and only then to others with higher opportunity costs. 10

11 Adding Individual emand Curves To Get Market emand Curves (Horizontal Addition) uppose that there only two buyers mith and Jones in the market for lobsters, and that their demand curves are as shown in the following slide. To construct the market demand curve for lobsters, we simply announce a sequence of prices and then add the quantity demanded by each buyer at each price to obtain the total quantity demanded. 11

12 Adding Individual emand Curves To Get Market emand Curves (Horizontal Addition) Price Price Price ($/lb) ($/lb) ($/lb) = Market 6 6 demand curve mith's Jones's Total Quantity Quantity Quantity (lbs/wk) (lbs/wk) (lbs/wk) 12

13 Market upply imilar to the market demand, the quantity that corresponds to any given price on the market supply curve is the horizontal summation of the quantities supplied at that price by all individual sellers in the market. 13

14 Market upply If the supply for lobsters consisted of three suppliers, what would the market supply curve for lobsters look like? P ($/kg) Market supply curve for lobsters Q (kg/month) 14

15 Market Equilibrium Quantity and Price Equilibrium occurs at the price-quantity pair for which both buyers and sellers are satisfied. Price($/kg) At the market equilibrium price of $600 per kg of lobster, buyers and sellers are each able to buy or sell as many lobsters as they wish to Quantity (kg/month) 15

16 Excess upply A situation in which price exceeds its equilibrium value is called one of excess supply, or surplus. Price($/kg) Excess supply At $800, there is an excess supply of 2 kg of lobsters in this market Quantity (kg/month) 16

17 Excess emand A situation in which price lies below its equilibrium value is referred to as one of excess demand, or shortage. Price($/kg) At a price of $400 in this lobster market, there is an excess demand of 2 kg of lobsters Excess demand Quantity (kg/month) 17

18 Zero excess supply and demand Equilibrium occurs at the price-quantity pair for which both buyers and sellers are satisfied. Price($/kg) At the market equilibrium price of $600, both excess demand and excess supply are exactly zero Quantity (kgs/month) 18

19 Applications: Price Control Governments may impose restrictions on prices Price floor: A price floor above the equilibrium price will lead to excess supply minimum wage for HK local workers: ($28 per hour); for foreign domestic workers: HK$3,910 per month Price ceiling: A price ceiling to lower the price will lead to shortage, excess demand E.g., rent control, price ceilings on fuels & food 19

20 Change in demand vs. Change in the quantity demanded Price ' Increase in demand Price 10 8 Increase in the quantity demanded 6 0 ' Quantity Quantity 20

21 Change in supply Price Quantity An increase in supply : At every price, there is an increase in the quantity supplied. 21

22 Change in the quantity supplied Price ($/lobster) Quantity (unit of lobster) An increase in the quantity supplied : For an upward sloping supply curve, an increase in price leads to an increase in the quantity supplied. 22

23 Impact of an increase in demand An increase in demand will lead to an increase in both the equilibrium price and the equilibrium quantity. Price P P Q Q Quantity 23

24 Impact of a decrease in demand A decrease in demand will lead to a reduction in both the equilibrium price and the equilibrium quantity. Price P P Q Q Quantity 24

25 Impact of an increase in supply An increase in supply will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity. P P Q Q Quantity 25

26 Impact of a decrease in supply A decrease in supply will lead to an increase in the equilibrium price and a reduction in the equilibrium quantity. P P Q Q Quantity 26

27 eterminants of emand 1. Incomes For most goods, the quantity demanded at any price will rise with income. Goods that have this property are called normal goods. P 0 1 P 1 0 Q Income rises, normal good Q Income falls, normal good 27

28 eterminants of emand 1. Incomes For inferior goods, the quantity demanded at any price will fall with income. Example: Ground beef with high fat content. P 1 0 Consumers abandon inferior goods in favor of higher quality substitutes (such as leaner grades of meat in the ground beef case) as soon as they can afford to. Q Income rises, inferior good 28

29 eterminants of emand 2. Tastes Example: Following the release of Jurassic Park and The Lost World, tastes in children s toys shifted toward designs involving prehistoric reptiles. P 0 1 Tastes shift in favor Q 29

30 eterminants of emand 3. Prices of substitutes 30

31 eterminants of emand 3. Prices of substitutes Price of tea Price of coffee falls P P Q Q Quantity of tea 31

32 eterminants of emand 3. Prices of substitutes Price of coffee rises Price of tea P P Q Q Quantity of tea 32

33 eterminants of emand 4. Prices of complements 33

34 eterminants of emand 4. Prices of complements Price of coffee Price of cream falls P P Q Q Quantity of coffee 34

35 eterminants of emand 4. Prices of complements Price of coffee Price of cream rises P P Q Q Quantity of coffee 35

36 eterminants of emand A summary Factors That Cause an Increase (rightward or upward shift) in emand 1. A decrease in the price of complements to the good or service 2. An increase in the price of substitutes for the good or service 3. An increase in income (for a normal good) 4. An increased preference by demanders for the good or service 5. An increase in the population of potential buyers 6. An expectation of higher prices in the future 36

37 eterminants of supply 1. Technology Example: A more efficient lobster trap is invented. Price ' A more efficient lobster trap shifts supply to the right Quantity 37

38 eterminants of supply 2. Factor prices Example: The price of gasoline rises. Price ' Quantity Rising factor prices shift supply to the left. 38

39 eterminants of supply A summary Factors That Cause an Increase (rightward or upward shift) in upply A decrease in the cost of materials, labor, or other inputs used in the production of the good or service An improvement in factors that reduces the cost of producing the good or service advancement in technology an improvement in weather, especially for agricultural products an increase in competition, e.g., the number of suppliers An expectation of lower prices in the future 39

40 Example 1 Why do the prices of some goods, like apples, go down during the months of heaviest consumption, while others, like beachfront cottages, go up? 40

41 Example 1 The seasonal consumption increase is the result of a supply increase in the case of apples, a demand increase in the case of cottages. P P w P s w Ps Ps Pw s Q w Q Q w Qs Q w Qs Apples Beachfront Cottages 41

42 Example 2 What will happen to the equilibrium price and quantity in the fresh seafood market if both of the following events occur: a scientific report is issued saying that fish contains mercury, which is toxic to humans; and the price of diesel fuel falls significantly? 42

43 Example 2 The equilibrium price will go down, but the equilibrium quantity may go either up (right panel) or down (left panel) P ' ' ' Q P ' ' ' Q 43

44 Efficiency and equilibrium Buyer s surplus: the difference between the buyer s reservation price and the price he or she actually pays eller s surplus: the difference between the price received by the seller and his or her reservation price Total surplus: the difference between the buyer s reservation price and the seller s reservation price ocially optimal quantity: the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good 44

45 Consumer surplus, producer surplus P Consumer surplus Producer surplus Q 45

46 Consumer surplus, producer surplus P Consumer surplus Price ceiling (e.g., rent control) Producer surplus shortage Q 46

47 Consumer surplus, producer surplus P Consumer surplus Exceed supply Price floor (e.g., min wage) Producer surplus Q 47

48 Cash on the table Efficiency (a.k.a. economic efficiency) occurs when all goods and services are produced and consumed at their respective socially optimal levels. Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice. Is the competitive market outcome efficient? Or does perfect competition achieve efficiency? 48

49 Cash on the table If all costs of producing the good are borne directly by sellers and all benefits from the good accrue directly to buyers, then the equilibrium quantity also maximizes total economic surplus. The equilibrium principle (a.k.a. the No-cash-on-thetable principle); a market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action. 49

50 Factories dump toxic by-product to a nearby river p upply based on social costs upply based on private costs emand based on private benefits q 50

51 End 51